PETALING JAYA: Post-results season, analysts reckon the banking sector’s earnings resilience remains, although most banks reported a sequential dip in net interest margins (NIMs), suggesting margin pressures may persist until the first half of financial year 2026.
Kenanga Research noted that system loans in October rose 5.4% year-on-year (y-o-y) (annualised plus 4.7% year-to-date or y-t-d), aligning with its 2025 growth target of about 5.5%, with the remainder of the fourth quarter of financial year 2025 (4Q25) likely to see the usual seasonal uplift across household and business segments.
Deposit growth for the month under review remained modest at 3.7% y-o-y, with depositors likely favouring shorter-tenure fixed deposits ahead of liquidity needs for 1Q26’s festive season, it said.
“We do not expect changes to the 2.75% overnight policy rate across 2026, while projecting a softer loan growth range of 5% to 5.5%.
“This reflects potential headwinds from US tariffs on economic activity, though risks may tilt to the upside if the manufacturing sector proves more resilient, supported by investment inflows,” it told clients.
The research house is maintaining its “overweight” stance on the sector.
Hong Leong Investment Bank Research (HLIB Research) in its report also noted that the banking system’s loan growth remained resilient in October at 5.4% y-o-y, underscoring a resilient lending dynamic despite a softer deposit backdrop underpinned by weaker current account savings accounts and foreign currency inflows.
“However, we noticed leading indicators moderated. Interest spread narrowed further on the back of lower loan yields, and we estimate NIM compression to persist into 4Q25 before elevated deposit costs finally stabilise.
“Overall, our stance on the banking sector remains constructive, supported by undemanding valuations, dividend yields exceeding about 5%, and a favourable risk-reward setup,” HLIB Research said.
The research house said it continued to favour the banking sector, underpinned by attractive valuations and a compelling dividend yield of more than 5%.
It noted that the Finance Index’s y-t-d underperformance relative to the stock market’s benchmark index presents a catch-up opportunity, while its large-cap profile positions it well for foreign inflows amid emerging markets’ rotation.
Against this backdrop, we see a favourable risk-reward setup and recommend broad-based accumulation, said HLIB Research.
It also noted that for the most recent data published, a breather in asset quality was spotted, with the gross impaired loan ratio easing by two basis points on a month-on-month basis to 1.39%, driven primarily by improvements within the business portfolio.
The recovery appears to stem from a more accommodative operating environment, which has facilitated more corporate write-backs, it added.
“Against this backdrop, we see limited downside risk to asset quality despite banks’ proactive build-up of management overlays earlier this year to buffer against any potential uptick in impairments.”
HLIB Research, which also maintained its “overweight” stance on the banking sector, also pointed out that the interest spread narrowed by seven basis points on a month-on-month basis to 2.38%, largely reflecting the slower repricing of three-month board fixed deposit rates in 4Q25 alongside a softer average lending yield following July’s rate reduction.
“Given the typical six to nine-month lag for funding costs to fully recalibrate, we believe margin headwinds could persist into 4Q25, with NIM likely to remain under incremental pressure over the near term,” it added.
