PETALING JAYA: Analysts believe local banks’ current reduced valuations present a buying opportunity as the sector remains supported by resilient growth prospects and structural stability that allows banks to pay dividends to investors.
Industry loan growth accelerated to 5.6% year-on-year in April, outperforming previous trends driven largely by a robust 6.2% to 6.3% expansion in the business segment.
This momentum is further underscored by loan applications hitting an all-time high of RM153.4bil during the same period, signalling sustained economic confidence from both households and enterprises.
MBSB Research noted the dividend outlook remains bright as capital levels remain elevated, and Basel transition is capital accretive in most cases.
“A weaker loan growth could imply more capital to release. Several banks have already announced special dividends.”
Despite the ongoing Middle East conflict, the banking system’s gross impaired loan (GIL) ratio has remained remarkably stable and flattish at 1.4%.
Capital buffers meanwhile remain strong with the banking system maintaining a steady Common Equity Tier-1 ratio of 14.1% and a total capital ratio of 17.5%.
These ratios provide enough of a cushion to absorb macroeconomic uncertainties while continuing to support future growth.
Kenanga Research, however, warned potential earnings pressure for the sector could come from continued net interest margin compression and weaker foreign exchange-related income, as the relatively stronger ringgit weighs on treasury and trading performance.
While higher energy prices could lead to a high GIL ratio, CGS International (CGSI) Research noted the acceptance rate for repayment assistance among businesses remains low, at below 10%, reflecting a healthy financial position that is enabling the corporate sector to weather elevated oil prices without major distress.
The sector is also a core beneficiary of emerging market inflows.
The liquidity situation also remains excellent, with more readily available cheap current account savings account deposits in the market and a healthy liquidity coverage ratio of 152.8%.
Top line prospects are further bolstered by robust fee income from wealth management, bancassurance and debt capital markets, recent analyst reports noted.
The sector’s dividend outlook is bright.
According to CGSI Research, some institutions, such as RHB Bank
Bhd, offer dividend yields as high as 6.7% for the financial year 2026 (FY26), the highest in the sector, and yet its 2026 price earnings multiple of 9.7 times is below the sector’s 10.7 times.
“Public Bank Bhd could widen its dividend payout ratios to above 70% in FY26 to FY28 should its non-interest income grow supported by its capital management initiatives.”
Hence, it has retained its “overweight” call on the sector with RHB Bank and Public Bank its top picks with target prices (TPs) of RM10.30 a share and RM6.60 a share respectively.
The same applies to Malayan Banking Bhd with a TP of RM15 a share.
MBSB Research remained positive on the sector, with its top picks being Hong Leong Bank Bhd (buy, TP: RM30.50) and Alliance Bank Malaysia Bhd (buy, TP: RM5.92).
Kenanga Research is also “overweight” on the sector, with Public Bank (TP: RM5.95), CIMB Group Holdings Bhd (TP: RM8.45) and AMMB Holdings Bhd (TP: RM7.45) being its recommended picks.
