PETALING JAYA: The banking sector is Malaysia is expected to register decent growth in the next few years on anticipation of healthy loan growth and higher net interest income.
Net interest margin (NIM) is also seen as improving in the coming years, according to Phillip Capital Research.
The brokerage initiated coverage on the Malaysian banking sector with an “overweight” rating, noting the sector had seen a strong run-up year to date, with six out of eight banks having outperformed the FBM KLCI.
Phillip Capital is optimistic that the banking sector would see an earnings growth of 6% this year, and 7% for both 2025 and 2026.
The brokerage projected a net interest income growth of 8% for 2024, and 7% for both 2025 and 2026, and loan growth of around 7%, amid stable net credit charges of 22 to 24 basis points, and cost-to-income ratio of 44% to 45%.
“We believe NIM has bottomed and should gradually improve in the coming years, averaging at 2%,” Phillip Capital said. “Non-interest income growth is expected to slow down to around 4% for 2024 to 2026, from 29% in 2023, primarily driven by fee income,” it added.
On stock picks, Phillip Capital recommended a mix of liquid large cap, with a strong Asean footprint, such as CIMB Group
Holdings Bhd; defensive stocks with strong asset quality, such as Public Bank Bhd and Hong Leong Bank Bhd; high-dividend yield plays such as RHB Bank Bhd; and small-cap such as AMMB Holdings Bhd.
“We are positive about the banking sector due to improved sentiment and a favourable operating environment, with limited downside risks to earnings and asset quality,” Phillip Capital explained.
“While return on equity (ROE) has mostly recovered to pre-Covid levels, there is still room for further NIM recovery and non-interest income growth, presenting potential upside risks,” it added.
Phillip Capital noted that the banks under its coverage are currently trading at 1.15 times forward price-to-book (P/B), which is close to their 10-year mean valuation, with a sector ROE of 10.3%.
Excluding Public Bank, which has historically traded at a premium P/B relative to its ROE, the sector is trading at 1.1 times forward P/B, with an ROE of 10.1%.
“Overall, we believe the run-up in banks’ share prices is justified by positive macroeconomic indicators, stable corporate earnings, robust ROE of 10% versus 10-year average of 8.9%, and low levels of provisions, with no significant stresses on asset quality, all supporting a valuation re-rating,” it said.
Phillip Capital noted that the recent run-up in banks’ share prices was driven by the strong second-quarter economic growth, the beginning of an easing US monetary policy cycle and the strengthening of the ringgit, which has attracted foreign investors back to the sector.
Moreover, it added, Malaysia has benefited from favourable policy changes, structural reforms, an influx of foreign direct investments and the implementation of various economic masterplan, all of which are positive for banks in the long term.
In addition, political stability on the local front is expected, with the next general election at least three years away, it said.
