Banks expected to have a modest and stable year

PETALING JAYA: Banks continue to “provide a shelter for investors” amid geopolitical uncertainties and market volatility, supported by robust earnings and attractive dividend yields, according to RHB Research.

The research house noted that such factors underscore the sector’s resilience, reinforcing its status as a safe haven for investors.

Following engagements with local banks, the research outfit stated that guidance for 2025 suggests a modest and stable year, “as banks remain watchful over external risks” while remaining optimistic about domestic growth prospects.

“Guidance for 2025 points to a modest and stable year, partly in view of the geopolitical uncertainties.

“However, most banks were fairly optimistic on the domestic picture, where Malaysia is expected to drive loan growth for most banks with overseas operations,” RHB Research noted in a recent report.

It said domestically, a resilient gross domestic product and the ongoing execution of various development plans should support loan demand.

However, deposit growth continues to trail loan growth, raising concerns over potential deposit competition to meet funding needs, it added.

For banks with overseas operations, the research house highlighted risks from rate cuts and tighter liquidity conditions, which could pressure net interest margin (NIM).

“On NIM, the banks maintained a cautious stance, especially with respect to potentially tightening liquidity domestically and overseas – guidance was mostly for flat-to-a-slight squeeze in NIM,” the research house said.

Looking ahead, RHB Research has raised its sector net profit forecasts for financial year 2025 (FY25) to FY26 by 1% to 2% after incorporating the latest results.

It expects sector-wide FY25 profit after tax and minority interest to grow by 6%, driven by a similar 6% increase in operating income and slight positive Jaws. (Jaws, also known as Jaws ratio, compares income and operating expenses growth trends.)

However, this growth will be partially offset by higher credit costs amid lower overlay reversals.

“Underlying asset quality should continue to be stable, although banks remain watchful of certain segments, for example, lower-income households and small and medium enterprises, especially with the rationalisation to RON95 subsidies set to kick in this year,” RHB Research said.

RHB Research noted that banks have had a decent start to the year relative to regional peers, particularly on the domestic front.

Year-to-date, it said the sector has remained flat, outperforming the FBM KLCI and FBM100, which have declined 6% and 8%, respectively.

The research firm maintained an “overweight” call on the sector and named AMMB Holdings Bhd, CIMB Group Holdings Bhd, Alliance Bank Malaysia Bhd and Hong Leong Bank Bhd as its top picks.

RHB Research pointed out that the fourth quarter of 2024 (4Q24) earnings season saw the sector’s net profit dip by 3% quarter-on-quarter due to seasonal factors affecting NIM, non-interest income and operating expenses.

However, full-year sector earnings rose by 10%, driven by robust income growth, neutral JAWs and moderating credit costs, reflecting improved asset quality.

“Of the eight banks we cover, six posted results that were within our and consensus forecasts, while Affin Bank Bhd and Bank Islam Malaysia Bhd beat (expectations) on stronger-than-expected net loan impairment writebacks in 4Q24,” RHB Research said.