Net interest margins likely to get higher

PETALING JAYA: The banking sector, which recorded earnings growth of 7.9% year-on-year (y-o-y) in 2024, is expected to see earnings rise by 9% this year, driven by higher net interest margins (NIMs), rising net interest income, and stable credit costs, according to CIMB Research.

The research house said, in a report, that the sector registered a NIM decline of two basis points last year, although this was an improvement from the 23 basis points y-o-y decline in 2023

“Following our revised cost-of-fund assumptions from the second half of last year onwards, the full-year positive impact of eight basis points will span both last year and this year. We are projecting a nine basis points y-o-y increase in NIMs for 2025,” it noted.

The research house forecasts loan growth of 5.3% in 2025 and 5% next year, following 5.6% expansion last year.

It also expects net interest income to grow by 8% this year, up from 5.1% last year.

However, non-interest income growth is projected to slow to 2.2% this year after a robust 16.1% y-o-y increase last year.

On credit costs, CIMB Research forecast an increase to 23 basis points this year.

“The sector posted credit costs of 19 basis points for last year, better than 2023’s 22 basis points,” the research house said.

Among the banking stocks under its coverage, AMMB Holdings Bhd (AmBank), Hong Leong Bank Bhd (HLB), Public Bank Bhd, and RHB Bank Bhd delivered results above expectations in the final quarter of last year (4Q24), benefiting from stronger-than-expected non-interest income and lower loan-loss provisions.

Alliance Bank Malaysia Bhd met expectations, while CIMB Group Holdings Bhd matched consensus forecasts.

In contrast, Affin Bank Bhd and Malayan Banking Bhd (Maybank) fell short due to weaker net interest income.

On a quarterly basis, the sector’s net earnings dipped 3.4% quarter-on-quarter (q-o-q) in 4Q24, following 4.7% q-o-q growth in 3Q24, mainly due to softer non-interest income.

CIMB Research said non-interest income slowed towards the year-end, declining 12.9% q-o-q in 4Q24 but still posted a 3.6% y-o-y increase.

“Non-interest income was slower, but in line with expectations given the seasonally slower fee and treasury activities during the final holiday-season quarter of the year,” it said.

“Note that this was measured against a high base in 3Q24 (12.7% q-o-q and 28.1% y-o-y), which was exceptionally strong, driven by foreign exchange treasury activities and robust investment and trading income.”

In a separate report, CIMB Research noted that loan applications in January grew marginally by 1.5% y-o-y, largely due to the early Chinese New Year holiday.

“Approved loans fell 14% y-o-y in January, again likely due to the early Chinese New Year effect,” it said.

Nonetheless, CIMB Research pointed out that loans started the year on a strong note, rising 5.7% y-o-y in January, led by the auto, residential, and non-residential mortgage segments.

The annualised growth rate stood at 4.7%.

Deposit growth inched up to 3.1% y-o-y in January, with current account and savings account growth at 3.2% y-o-y.

Business deposit growth remained subdued at 0.5% y-o-y, “likely owing to deposit utilisation following a pickup in gross domestic product activity”.

The loan-to-deposit ratio edged up to 88.2% in January, compared with 87.8% last December.

Gross impaired loans rose 1.4% month-on-month (m-o-m), or RM469.3mil, in January, reversing a 3.8% m-o-m decline last December.

The increase came mainly from the residential mortgage, auto, and working-capital segments.

Despite this, the gross impaired loans ratio remained stable at 1.46% in January compared with 1.44% in the previous month, supported by a larger loan base.

Loan-loss coverage stayed resilient at 91.6% in January, up slightly from the 91.4% for last December.

CIMB Research’s top banking picks include HLB, AmBank and RHB Bank.

“We like HLB for its solid book value and potential to raise dividends, while concerns over its China operations are likely to dissipate over time. AmBank’s valuation remains cheap, with earnings strongly geared towards lower credit costs, higher NIM, a pickup in non-interest income, and loan growth.

“RHB Bank’s net earnings are also highly leveraged to better cost of funds, and benign credit costs, while its net dividend yield is the highest among the banks at 6.2% for FY24, 6.4% for FY25, and 6.5% for FY26,” it said.