PETALING JAYA: The race for deposits will impact the net interest margin (NIM) of banks as funding competition remains elevated despite accelerating loan volumes.
System loan growth rose 6.1% year-on-year (y-o-y) in September, compared with a 5.7% y-o-y increase in August, and continues to outpace deposit expansion (plus 5.2% y-o-y).
As a result, system liquidity has tightened, pushing the loan-to-deposit ratio to between 89.8% and 94.6%.
To maintain liquidity buffers and support ongoing loan drawdowns, banks have actively competed for fixed deposits and promotional rates.
Hong Leong Investment Bank (HLIB) Research noted that with loan growth continuing to outpace deposit expansion, system liquidity conditions warrant closer monitoring.
Consequently in September, the average lending rate edged up four basis points month-on-month to 4.54% from 4.5% in August, and a higher cost of funds is expected to cap NIM recovery across the industry.
“We, therefore, expect elevated deposit competition – including potential front- loading of deposit rates – to persist over the medium term, potentially delaying any meaningful NIM recovery,” the research house stated in a report.
The Malaysian banking system demonstrated strong underlying momentum heading into the last few months of the year.
System loan expansion accelerated to 6.1% y-o-y in September supported by non-household business lending (8.8% y-o-y rise versus 8% y-o-y rise in August), driven by working capital requirements alongside infrastructure and utility project financing.
Household loan growth held steady at 5% y-o-y.
After a brief 0.3% y-o-y contraction in August, system loan applications rebounded sharply in September to a 20.2% y-o-y rise.
Similarly, loan approvals surged 31.1% y-o-y in September (hitting an all-time high of RM92.2bil) compared to 13.7% y-o-y in August, backed by a 50.8% y-o-y surge in business approvals.
While NIM recovery remains constrained by deposit pricing pressure, non- interest income (NOII) presented a mixed picture.
Wealth management fee income provided solid topline support, whereas non-fee NOII faced headwinds from Malaysian Government Securities bond yield volatility and global rate movements.
The sector’s asset quality remained strong with the system gross impaired loan ratio improving slightly to 1.42% in Sep-tember (from 1.44% in August), indicating healthy credit quality despite macroeconomic uncertainties.
Brokerages maintained a constructive outlook on the sector, supported by resilient balance sheets and attractive dividend yields.
UOB Kay Hian Research was “overweight” on the local banking sector, citing undemanding sector valuations (approximately one times price-to-book versus about 10% return on equity) and attractive dividend yields of around 5.5%.
Its top sector picks with a “buy” call are Hong Leong Bank Bhd
(HLB) with a target price (TP) of RM24.50 a share and CIMB Group Holdings Bhd with a TP of RM8.80 per share.
CGS International Research also maintained an “overweight” call on the sector, noting solid dividend yields (6.2% to 6.8%) and a potential hike in the overnight policy rate as a catalyst in 2027.
It has “add” calls on Malayan Banking Bhd or Maybank (TP: RM15.20), Public Bank Bhd (TP: RM6.55), and RHB Bank Bhd (TP: RM9.90)
HLIB Research is “neutral” on the sector, commenting that the sector’s fundamental resilience is largely priced in.
The research house’s top pick is Public Bank with a “buy” call and TP of RM5.30 a share, backed by its asset quality defensive strength.
Moreover, RHB Research is “neutral” on the sector, while keeping “buy” calls on AMMB Holdings Bhd (TP: RM7.94), Maybank (TP: RM12.20), and HLB (TP: RM26.20).
