PETALING JAYA: Malaysian banking stocks are offering an attractive entry point as falling bond yields create room for lenders to recover investment losses, although persistent deposit competition and the risk of another bond yield spike could weigh on earnings, says MBSB Research.
The research house maintained a “positive” stance on the banking sector, noting that dividend yields of mid-to-large-sized banks have climbed to around 6%, above the historical average of about 5%.
“The recent decline in bond yields make the banking sector a lot more attractive at this price point -- even though some damage has already been done.
“The main fear was dividend yield disappointments due to investment losses cutting into dividend yields, but now there’s a chance for this to be reversed. With mid-to-large sized banks boasting approximately 6% yields, it’s a good opportunity to accumulate.
“But judging how equity markets have not rallied simultaneously, be wary that the market is not confident this signals that the worse of bond yields is over,” it added.
Similarly, an analyst told StarBiz that Malaysia’s banking sector points to a growing divide between attractive valuations and dividend yields on one hand, and persistent funding-cost pressures and bond- market volatility on the other.
“We see an opportunity to accumulate banking stocks after the recent sell-off, but remain cautious about the potential for further earnings and valuation pressure,” he said.
MBSB Research said the recent retreat in global and domestic bond yields could support a recovery in investment income in the fourth quarter of 2026 (4Q26), following the sharp increase in yields during 3Q26.
Lower yields would also improve the viability of wholesale funding, offering banks opportunities to optimise their cost of funds.
However, the improvement would not fully reverse the damage caused by intensifying deposit competition, as banks have been forced to offer higher rates to attract corporate deposits amid strong loan demand.
With the festive season approaching, elevated deposit rates are unlikely to return to previous levels in the near term, limiting the recovery in net interest margins.
The research house cautioned that the market remained unconvinced bond yields had peaked, pointing to the lack of a corresponding rally in equities and higher- than-expected US inflation in September, which could increase the risk of further interest rate hikes.
MBSB Research expects banking share prices to remain relatively stable until end-2026, unless bond yields rise again.
While 3Q26 results are likely to be weak, a recovery in investment income could provide some offset in the following quarter.
It also expects business loan growth to remain firm, supported by construction activity and data centre-related investments, while wealth management income should continue to underpin fee income as wealth-related activity shifts from the Middle East to Asean.
Cost pressures have also remained manageable despite concerns over inflation and higher technology spending, suggesting that technology-driven efficiencies are helping banks contain operating expenses.
Nevertheless, the research house warned that the sector’s downside risks could increase if the Iran conflict persists, prolonging inflationary pressures and disrupting economic growth.
Retail loan growth remains weak, while further deterioration in asset quality could lead to higher provisioning.
