PETALING JAYA: Backed by geopolitical and interest rate stability as well as decent economic growth, tailwinds will outweigh headwinds in the banking sector, says MBSB Research.
According to the research house, only a few banks are vulnerable to headwinds, which come in the form of slowing loan growth and heavier operating expenditure (opex).
“Opex growth is a mixed bag and will vary from bank to bank. While we expect further tech efficiencies to come online, tech spend remains the primary cause of drag for most banks.
“Expect further rapid opex growth among rapidly expanding smaller banks,” it told clients in a report.
MBSB Research said the dividend outlook within the sector remains “extremely bright”.
“We think the possibility of special dividends and other forms of capital release remains very high although there may be a delay in announcements.
“While capital is fairly elevated and Basel IV transition should be capital accretive in most cases, most banks want further certainty before pulling the trigger,” it pointed out.
It noted that most banks were very positive on net interest margin (NIM), guiding for expansion on the back of fixed deposit release and interest rate stability.
“On the asset side, expect more aggressive loan rebalancing, favouring higher yielding business loans.”
It said wealth management, bancassurance and debt capital markets are major drivers of the fee side – especially as market performance, loan growth and economic sentiment improve.
Foreign exchange volatility aside, the stabilisation of interest rates should result in some moderation in investment income, MBSB Research added.
It said with most major recoveries already sorted, the system gross impaired loan (GIL) ratio is the best it has ever been – only idiosyncratic shocks expected.
“Further recoveries are expected and several banks’ net credit charge guidance is on the low side. But for now, asset quality issues are largely idiosyncratic and don’t hint towards more insidious trends.”
The research house was “neutral” on loan growth, saying that business loans had been dwindling as working capital continued to weaken particularly within the small and medium enterprise segment.
“Retail loan growth has been on a downward trajectory for several years. For the most part, banks aren’t guiding for very strong local figures either – particularly the large banks.”
On the whole, it is maintaining its “positive” call on the sector, citing downside risks such as weaker-than-expected economic growth, which could lead to slower asset growth and asset quality issues, potential overnight policy rate (OPR) cuts that will compress NIMs in the short term and asset quality flare-ups, which could lead to instances of heavier provisioning.
A banking analyst meanwhile told StarBiz that in uncertain times, banks remained a top pick for investors because of their structure.
“The local mart is very financial-heavy, meaning banks are index heavyweights. Also, lenders are economic proxy plays, and with more economic growth expected, investors should be able to bank on banks, if nothing major happens.”
In its report, Hong Leong Investment Bank (HLIB) Research which had maintained its “overweight” stance on the sector, said January’s system loan growth held steady at 4.7% year-on-year (y-o-y) or down one basis point on a month-on-month basis, anchored by household lending albeit offset by moderation in the business segment.
Despite tapering deposit growth, a robust 26.7% y-o-y surge in approvals and rising current account savings account momentum (8% y-o-y) suggest stabilising NIMs as 2025 OPR repricing lags had subsided, it said.
“Asset quality remains resilient, with the GIL ratio at 1.4% well cushioned by substantial management overlays.
“Following recent profit-taking, we view 2027’s valuations at minus one standard deviation below the five-year mean price to book as a compelling entry point,” said HLIB Research.
