MBSB Research maintained a “positive” sector rating, pointing to a confluence of factors that should sustain foreign inflows.
PETALING JAYA: The banking sector is poised for further gains as structural improvements, supportive macro conditions and sustained foreign interest underpin a constructive outlook for the coming years.
Even after a strong rally, valuations are seen as capable of moving higher, supported by resilient fundamentals and a pipeline of catalysts that continue to emerge, according to MBSB Research.
That optimism is grounded in a marked shift in sector dynamics compared with earlier cycles, the research house pointed out.
“The current banking sector differs significantly from both pre-pandemic and pandemic times. This is mostly for the better,” it said in its research note.
“Despite valuations having run up, we are still optimistic on further share price appreciation. Not only is the banking sector arguably the best it is ever been, but it has also transformed in a way that provides multiple opportunities for improvement,” the research house added.
MBSB Research maintained a “positive” sector rating, pointing to a confluence of factors that should sustain foreign inflows.
“There are multiple catalysts to drive foreign inflows – the banking sector’s asset quality and dividend yields are superior to pre-pandemic times, drastic improvements to how liquidity and operating expenditure is being managed, Malaysia’s economic outlook and geopolitical stability is outperforming neighbouring peers and no major headwinds except for some tightening of liquidity,” it stated.
According to MBSB Research, the banking sector is in a good place amid multiple tailwinds, noting the industry is a key beneficiary of emerging market inflows.
“Our robust economic outlook, high dividend yields with upside possibility, excellent asset quality, and superior geopolitical stability make our banks look particularly attractive,” it highlighted.
According to another analyst, investors are increasingly drawn to local banks due to their reliable returns amid the country’s steady growth prospects.
“The combination of strong earnings and healthy capital ratios makes the sector appealing, as returns appear sustainable,” the analyst with a research house told StarBiz.
“This puts our banking stocks in a good position to rally,” he added.
According to MBSB Research, dividends are a key part of the investment case for the banking sector.
With better clarity on Basel IV implementation and Bank Negara Malaysia’s new capital framework on credit risk, excess capital is being released as Common Equity Tier 1 (CET1) ratios ease.
“Dividend outlook is extremely bright, with a possibility of further lowering of industry CET1 ratios,” MBSB Research noted, highlighting that the system gross impaired loan ratio is the best it had been – possibly warranting further pare down, alongside special dividends and higher payout intentions.
On earnings composition, fee income is expected to lead near-term top-line growth, supported by wealth management, bancassurance and debt capital markets, while investment income moderates as interest rates stabilise.
Loan growth is tilting towards higher-yielding segments, with business loans expected to drive growth amid a construction upcycle, recovering working capital and foreign direct investment inflows, the research house pointed out.
Asset quality remained a strength, it noted, with impairments largely idiosyncratic, while margin pressure is easing.
More stability in net interest margin, but upside is capped as banks rebalance towards higher-yielding assets, it added.
Meanwhile, cost trends are mixed, with technology efficiencies offset by wage negotiations, and liquidity is expected to tighten as the system loan-to-deposit ratio sits at a record high, potentially reviving deposit competition even as non-deposit funding gains relevance, it added.
