PETALING JAYA: The banking sector is expected to remain muted, with near-term re-rating catalysts limited despite steady loan growth and strengthening business lending momentum, according to Hong Leong Investment Bank (HLIB) Research.
The research house maintained its “neutral” stance on the sector following the latest July banking statistics, citing renewed funding cost pressure and a recently announced KLCI expansion that could create a transitory overhang.
Nevertheless, HLIB Research said business lending is increasingly driving sector growth, with the loan pipeline strengthening further in July.
“Business lending takes the wheel,” it said, pointing to a sharp increase in business loan applications and approvals.
Business loan applications surged 37.7% year-on-year (y-o-y), while approvals jumped 51.9% y-o-y, up from 45.9% and 35.3% in June, respectively.
The business loan approval rate also improved to 65.2% from 60.8%.
HLIB Research said the momentum was driven by the manufacturing and services sectors, with business loans growing 7.5% y-o-y in July, compared with 7.3% in June.
Overall system loan growth was broadly stable at 5.6%, while household loan growth remained relatively flat at 5%.
Household demand, meanwhile, remained subdued.
Household loan applications grew only 1.7% y-o-y, while approvals fell 2.6%.
Loan disbursement growth nevertheless strengthened to 7.6%, while repayment growth moderated sharply to 6%.
On funding, deposit growth moderated to 5.6% y-o-y in July from 6% in June, while current account and savings account (Casa) growth eased to 7.1% from 7.7%.
However, HLIB Research noted that Casa continued to outpace overall deposit growth, while fixed deposits were broadly flat, suggesting the funding mix remained favourable.
Asset quality also remained resilient, with the system gross impaired loan (GIL) ratio unchanged at 1.43% for the third consecutive month.
Household GIL improved marginally to 1.10%, while business GIL held steady at 1.91%, indicating no signs of emerging stress despite stronger business credit momentum.
However, funding costs are beginning to weigh on lending spreads.
The lending spread narrowed three basis points month-on-month to 2.36%, as the three-month fixed deposit rate rose faster than the average lending rate.
But spreads remained four basis points above May levels, suggesting margin conditions were relatively stable.
Among individual banks, HLIB Research retained Alliance Bank Malaysia Bhd
as its second half of financial year 2026 top pick, citing its resilient earnings outlook and potential inclusion in the expanded KLCI.
It also rated AMMB Holdings Bhd, CIMB Group Holdings Bhd and RHB Bank Bhd “buy”, while Affin Bank Bhd, BIMB Bank Islam Malaysia Bhd, Malayan Banking Bhd and Public Bank Bhd were rated “hold”.
Meanwhile, an analyst’s concern is not loan growth, as he expects 2026 system loan growth of 5% to 5.5% but the deterioration in some underlying credit indicators.
He pointed out that sector and system loan-loss coverage have fallen 16 and 11 percentage points, respectively, since end-2024.
“Banks may, therefore, no longer be able to rely as heavily on benign credit costs to support earnings,” he told StarBiz.
He added that funding costs are another concern.
“Higher wholesale deposit rates are pushing banks to compete more aggressively for retail deposits, while strong loan pipelines and elevated loan-to-deposit ratios could further increase funding pressure.”
