PETALING JAYA: Analysts remain largely sanguine in their outlook for the banking industry, supported by stable dividend yields, limited downside risk to sector earnings and a conducive operating environment in 2025, among other factors.
RHB Research noted that market volatility is likely to persist, given uncertainties with respect to US policies and the US federal funds rate’s trajectory.
In this context, the research house viewed Malaysian banks as a strong defensive option for investors to navigate external uncertainties.
It also highlighted favourable valuations for AMMB Holdings Bhd
(AmBank) and Alliance Bank Malaysia Bhd (ABMB), as well as capital management potential for AmBank and CIMB Group Holdings Bhd.
Additionally, it favours Hong Leong Bank Bhd for its defensiveness.
“Sector earnings should prove defensive, with Malaysian banking stocks under our coverage being largely neutral to US federal fund cuts and foreign-exchange (forex) movements.
“In the past, the key drags to sector earnings growth tended to be net interest margin (NIM) and/or credit cost.
“Banks managed NIM well in 2024 on liquidity and funding cost management, but with the sector loan to deposit ratio (LDR) creeping up, with the latest sector and system LDR at 93%and 88%, respectively, there may not be much room for them to trim deposit rates if loan demand is robust,” it explained.
However, RHB Research noted that with a stable asset quality outlook and several banks maintaining healthy management overlays, there may be continued reversals of these overlays to help mitigate potential NIM pressure and support bottom-line growth.
In addition, the research house pointed out that the banking sector offers a projected dividend yield of over 5% for 2025, which it deems attractive, with potential room for yields to compress further.
“Amid a stable macroeconomic outlook, better visibility on Basel III reforms, and strong capital generation by some banks, these would be positive for dividend payouts and capital management initiatives.”
RHB Research also noted that the sector provides investors with leverage to foreign institutional investor inflows, as banks, being liquid and large-cap stocks, are likely to benefit.
Meanwhile, CIMB Securities reported that the share prices of all banks have appreciated year-to-date, with the largest gains seen in ABMB, which rose by 44.8%, followed by CIMB with a 39.9% increase, and Affin Bank Bhd and AmBank, both seeing share price growth of 34.4%.
It noted that the latest net earnings for the third quarter of 2024 (3Q24) had surprised on the upside, driven by strong non-interest income (NOII), which reached a new peak of RM6.2bil in 3Q24.
This surpassed the RM6bil mark for the first time and significantly exceeded the 2023 range of RM4bil to RM5bil.
“In essence, the 3Q24 results suggest the positive impact on NOII may be just beginning to materialise, spurred by the external rate cut.
“Healthy equity and debt capital markets are likely to trigger more fund-raising activities in 2025.
“We are projecting sector net earnings growth of 10% year-on-year (y-o-y) for 2024 and 6.4% for 2025,” it said.
CIMB Securities added that the key earnings drivers include stronger net interest income, driven by a 5.4% loan growth and an increase in NIM.
Key catalysts include stronger-than-expected NOII and higher-than-anticipated loan growth.
Concurring with most banking analysts, Tradeview Capital chief investment officer Nixon Wong noted that the banking industry is looking positive overall, with growth driven by NOII and NIM improvement.
“Sector net earnings growth was stronger at 4.7% in 3Q24, up from 2.4% in 2Q24. On a y-o-y basis, sector net earnings growth accelerated to 10.8% in 3Q24, from 9.7% in 2Q24.
“Loan growth picked up again to 6.0% y-o-y in October, from 5.6% y-o-y in September, supported by the household and corporate segments,” he said.
Looking ahead, Wong told StarBiz that he expects the positive impact on NOII to continue, leading to healthy equity and treasury markets.
He also projected that more fund-raising activities are likely, supported by positive domestic economic growth, which is expected to sustain a healthy loan growth above 5% as forecasted by other analysts.
“More domestic projects such as the data centre real estate market, Johor-Singapore cross-border banking flows, and developments in Johor and Sarawak are also helping to drive loan growth,” he added.
Moreover, Wong foresees asset quality improving further with lower impaired loans, reflecting a steady economy that would be further bolstered by a benign interest-rate environment
However, he cautioned that downside risks include increased market-wide deposits competition, as he believes banks could be shoring up liquidity in 2025.
Meanwhile, Maybank Investment Bank (Maybank IB) Research, citing a gross domestic product growth forecast of 4.9%, projected a domestic loan growth of 5.5% in 2025, led particularly by a pick-up in business loans with a slightly softer consumer loan demand.
Like Wong, the research house said deposit competition is expected to persist, but at a more rational level.
“Coupled with easing lending rate pressures and expectations of no cuts in the overnight policy rate in 2025, we expect NIMs to be stable,” it said.
Notably, Maybank IB Research pointed out that after a strong showing in 2024, NOII growth is likely to taper off due to lower volatility in the forex and bond markets, especially since as US Federal Reserve’s rate cuts are expected to be more gradual.
“Credit costs, nevertheless, are expected to remain fairly benign amid sustained economic momentum and the availability of management overlay buffers at most banks,” it added.
Interestingly, bucking the trend, Hong Leong Investment Bank (HLIB) Research maintained its “neutral” stance on banks, expecting softer NIM heading into 4Q24, given the deposit rivalry that typically heats up in the October-December period.
It said banks are generally looking to preserve their NIM by tightening both loan and deposit pricing.
This is although credit growth is seen to chug along and asset quality is expected to stay stable, backed by a resilient and robust economic environment.
“In any case, loan loss coverage for banks continues to be elevated, staying above pre-lockdown levels, thanks to large pre-emptive provisions still sitting in their books that could serve as a profit lever in times of need,” said the research house.
While acknowledging the banking sector’s strong performance in 2024, HLIB Research expected a relatively quiet December with limited window-dressing efforts.
Instead, it said many investors may be incentivised to lock in profits and avoid setting a higher performance benchmark for 2025.
This is particularly as foreign investors continued to be net sellers, capping returns.
“That said, any pull-backs are healthy, in our view, and it presents an opportunity to buy on weakness.
“Besides, we believe there is an upside bias to our NIM estimate for next year, which is a boon for banks,” it said.
It is telling that the research house retained only two “buy” calls under its coverage, namely RHB for its appealing dividend yield and relatively inexpensive position within the FBM KLCI index banking component, and AmBank due to its large bandwidth to pay out more dividends.
