Credit demand remains healthy for local banks

PETALING JAYA: Malaysia’s banking sector statistics signal healthy demand for credit despite some moderation in loan growth in February.

Bank Negara’s banking sector statistics for February 2025 showed total system loans grew by 5.2% year-on-year (y-o-y) for the month, but growth was flat on a month-on-month (m-o-m) basis, as both retail and business loans reported weak growth. Deposits expanded at a faster 3.5% y-o-y.

RHB Research, however, is not too concerned and stated system loan applications are up 7% y-o-y year-to-date (y-t-d) mainly thanks to the non-household segment.

“Y-t-d system loan approvals rose by a smaller 1% y-o-y, while disbursements are down 3% y-o-y – we think this is indicative of a step-up in disbursements to come, which is supportive of loan growth down the road,” the research house stated in a report.

Asset quality remained robust as gross impaired loans (GIL) were down 7% y-o-y as of February with improvements observed across the board.

The finance sector did record a 9% y-o-y uptick (plus 3% m-o-m) in absolute GILs, the central bank’s statistics revealed.

Despite a tighter loan to deposit ratio of 87% (plus one percentage point y-o-y), Bank Negara does not believe there is a liquidity crunch in the system, as the liquidity coverage ratio remains at healthy levels, RHB Research added.

With regulatory liquidity indicators also staying healthy in the month and external headwinds from tariffs a concern, analysts have remained “overweight” or “positive” on the sector.

“Stable earnings, solid loan growth prospects and high dividend yields make it an investor’s safe haven given the frequency of geopolitical and economic shocks – especially at current post-sell-down valuations.

“Our house does not expect a full-blown global recession – but ongoing fears of one happening provide the largest downside risk to share prices,” MIDF Research said about the sector.

It’s analyst added that the sector’s loan growth prospects remain buoyed by a combination of major infrastructure projects like the Johor-Singapore Special Economic Zone and renewable energy investments.

Currency fluctuations however provide downside risk to overseas growth figures.

MIDF Research’s top sector picks are CIMB Group Holdings Bhd (“buy”, target price (TP): RM9.15) and Hong Leong Financial Group Bhd (“buy”, TP: RM24.70).

RHB Research meanwhile prefers banking stocks trading at reasonable valuations, with solid earnings and dividends growth prospects.

Its top recommendations are AMMB Holdings Bhd (“buy”, TP: RM6.70), CIMB (“buy”, TP:9.25) and Hong Leong Bank Bhd (“buy”, TP: RM26.60).

Hong Leong Investment Bank Research also remains bullish on the sector on the belief it provides good shelter from Trump 2.0 polices, offers decent dividend yield of 5% and has visible, defensive earnings with scope to perform pre-emptive provision writebacks.

“The sector is inexpensive when compared to its five-year average pre-Covid price to book ratio.

“In addition, we still find banks have a favourable risk-reward profile, after combing through the other sectors under coverage,” it said.

The research house has adopted a broad stock buying strategy with “buy” recommendations on Affin Bank Bhd (TP: RM3.15), AMMB (TP: RM6.30), Bank Islam Malaysia Bhd (TP: RM3.05), CIMB (TP: RM9.20), Malayan Banking Bhd (TP: RM11.35), Public Bank Bhd (TP: RM5.30) and RHB Bank Bhd (TP: RM7.80).