Banking on Asia’s growth

ASIAN banks are expected to offer investors several opportunities for earnings growth and stronger shareholder returns in 2027, supported by improving lending conditions, regional financing demand and wealth-management expansion.

However, the region is far from a uniform investment story, with prospects varying according to lending trends, interest rates, capital management, valuations and credit conditions.

That is the key message from a report co-written by Deutsche Bank chief investment officer for emerging markets Dr Jacky Tang and senior investment strategist Wolf Kisker, who remain constructive on the sector but stress the importance of selective stock picking.

“Asia’s banks offer several routes to stronger earnings and shareholder returns, but they are not a uniform investment story,” the strategists say.

Tand and Kisker point out that “rising lending yields and capital returns are aiding Japanese banks, while strong credit demand and an emerging margin recovery underpin India’s outlook”.

Singapore, meanwhile, “combines regional financing opportunities with an expanding wealth-management franchise”.

The tone is more measured on China, where “stabilising margins meet persistent credit-quality pressures and reduced valuation upside”.

The strategists believe investors should look beyond loan expansion when assessing opportunities across the region.

“The investment case for Asian banks extends beyond faster loan growth. It is the combination of profitable growth, diversified income and disciplined capital allocation,” they say.

Mixed fortunes in the region

Accordingly, Deutsche Bank favours Japanese, Indian and Singaporean banks, while adopting a neutral, income-oriented stance on China.

South Korea and Taiwan also offer opportunities, although the benefits of technology-driven economic growth may take longer to translate into sustainable credit expansion.

It says Japan stands out as a beneficiary of higher interest rates and improving shareholder returns, particularly among the country’s megabanks.

“We favour the megabanks’ combination of rate-driven earnings and capital returns,” the group says, noting that domestic investment is supporting lending.

However, further upside depends more on earnings delivery and distributions than valuation expansion. Regional banks also benefit from higher rates but face greater bond-book exposures and structural growth challenges.

China offers a different investment proposition, with Deutsche Bank recommending a focus on sustainable income rather than broad sector outperformance.

Large state-owned lenders are relatively better positioned because of their stronger capital buffers and policy-supported lending.

Nevertheless, Tang and Kisker caution that “stabilising margins are encouraging, but retail credit stress and reduced re-rating potential keep the overall risk-reward balanced”.

India remains one of their preferred markets, supported by strong credit demand, healthy asset quality and an emerging recovery in net interest margins (NIMs).

“Large private sector banks with strong deposit bases seem to be better placed to turn loan growth into earnings,” Tang and Kisker say.

A substantial discount to historical valuations also provides room for a re-rating if profitability improves. However, funding competition and foreign investor outflows could constrain near-term returns.

Singapore offers investors exposure to regional financing, wealth management and capital generation, providing complementary sources of bank returns despite margin pressure.

The strategists remain constructive but warn that elevated valuations leave less room for disappointment, particularly if wealth-management growth normalises from its recent strong pace.

In South Korea and Taiwan, opportunities extend beyond direct technology lending, as businesses’ expansion creates demand for follow-on investment and banking services.

South Korean banks’ capital-efficiency initiatives provide an additional shareholder-return angle, although their valuation premium to historical levels limits the upside argument.

Taiwanese banks, meanwhile, face relatively high absolute valuations and modest expected earnings growth, requiring clearer evidence of earnings conversion.

Tang and Kisker emphasise that “the investment case should be judged on bank profitability and distributions, not economic growth alone”.

Defensive in Malaysia

Closer to home, Malaysian banks offer a relatively defensive investment proposition, with dividend prospects, resilient earnings and strong balance sheets providing support amid external uncertainties.

UOB Kay Hian (UOBKH) Research maintains an “overweight” recommendation on the domestic banking sector, citing potential dividend upside, attractive valuations and defensive earnings compared with export-oriented industries exposed to tariff risks.

The research house expects dividend yields of around 5.5%, while potential inflows from emerging-market MSCI index rebalancing and strong provision buffers provide additional support.

It says: “We remain constructive on the sector, underpinned by potential dividend upside, supporting attractive yields of around 5.5%; a relatively defensive earnings profile compared with export sectors exposed to tariff risks; potential inflows from emerging market MSCI rebalancing; and strong provision buffers across the sector.”

Valuations also remain undemanding, with Malaysian banks trading at about one times price-to-book (P/B) against a return on equity (ROE) of approximately 10%.

This compares with Singapore banks’ P/B of about 1.65 times, despite delivering only a modestly higher ROE of around 13%.

For stock selection, UOBKH Research adopts a barbell investment approach amid geopolitical uncertainties in the Middle East.

It favours Hong Leong Bank Bhd (HLB) for its defensive earnings profile and potential capital-management upside following the adoption of Basel III reforms in June 2026.

At the other end of the spectrum, it likes CIMB Group Holdings Bhd as a higher-beta, liquid laggard that could recover more quickly once geopolitical tensions ease.

CIMB Research also maintains an “overweight” stance, although it expects Malaysian banks to face near-term earnings and funding challenges.

The brokerage says the sector faces a third-quarter financial year 2026 (3Q26) earnings resilience test amid the global bond selloff and potential mark-to-market–driven losses.

The 4Q26 operating environment is also expected to remain challenging as tighter funding conditions intensify deposit competition and raise incremental funding costs.

CIMB Research expects NIM pressure to persist into 1Q27, before easing towards the end of the quarter, supported by its expectation of a 25-basis-point interest rate hike in March 2027.

Nevertheless, the research house believes banks are entering this period of uncertainty from a position of strength, supported by defensive earnings, sound asset quality and strong capital and liquidity buffers.

For stock selection, the brokerage favours Public Bank Bhd for its defensive earnings and attractive capital returns, RHB Bank Bhd for compelling dividend yields and further capital-management potential, and HLB for resilient profitability, above-industry loan growth, efficiency gains and scope for higher sustainable payouts.