PETALING JAYA: In the absence of immediate near-term catalysts, analysts believe the banking sector’s current valuation has largely priced in fundamental resilience.
Hong Leong Investment Bank (HLIB) Research said in a report that emerging non-interest income headwinds from the recent Malaysian Government Securities yield shock, coupled with potential transitory flow related to the overhang from the FBM KLCI expansion, could temper further upside.
“We, therefore, remain cautious heading into the fourth quarter of 2026 (4Q26).
“Public Bank Bhd
is our top pick, given its defensive characteristics and relatively resilient asset quality, which should provide better downside protection should macro conditions turn less favourable,” the research house said.
HLIB Research said system loan growth in August remained on a steady trajectory at 5.7% year-on-year (y-o-y).
This was driven by a robust business loan growth of 8% y-o-y, underpinned by stronger demand from the services sector and growing working capital requirements.
Meanwhile, household loan growth remained steadfast at 5% y-o-y, the research firm added.
HLIB Research said overall asset quality remained broadly resilient in August, despite a marginal one-basis-point uptick in the system gross impaired loan ratio to 1.44%.
It reckoned that asset quality warrants closer monitoring heading into 4Q26.
“Our house projects 2026 inflation to average 2%, implying some acceleration from the first eight months of 2026 average of 1.8%,” HLIB Research said.
Should inflationary pressures intensify, this could modestly strain debt-servicing capacity, particularly among more vulnerable small and medium enterprise borrowers, it warned.
HLIB Research noted that system lending spread narrowed marginally to 2.35% as the decline in the average lending rate to 4.5% outpaced the easing in fixed deposit rates to 2.16%.
“With the year-end approaching, renewed deposit competition could emerge from November onwards as banks position their balance sheets for year-end targets.
“As such, we see limited scope for meaningful net interest margin (NIM) recovery in 4Q26, with a more visible improve- ment potentially pushed out to 1Q27,” the research house said.
In addition, it said total deposit growth moderated further to 5.2% y-o-y, partly dragged by a sharp slowdown in foreign savings growth to 6.7% y-o-y.
RHB Research has kept a “neutral” call on the sector.
This is due to NIM pressure from rising funding cost as loan growth continues to outpace deposits growth and high loan-to-deposit levels.
Moreover, higher capital market rates will pressure wholesale deposit rates, which, in turn, will spill over into retail funding costs, the research firm said.
The research house is also concerned about the rise in bond yields, which will negatively impact trading income and mark-to-market valuations, a creeping gross impaired loan ratio, thinning provision buffers, and the absence of strong near-term sector catalysts.
On recent indicators, RHB Research noted that system loan applications rose 13.8% y-o-y (flat month-on-month) in August, with non-households outpacing households.
