Softer loan growth prospects for banking sector

PETALING JAYA: Tariffs are set to negatively impact consumption, investment behaviour and supply chains, which in turn could put pressure on earnings of the banking system in the country.

CIMB Research expects earnings of local banks to fall as a result of the ongoing trade war and has thus slashed its earnings growth projection for the sector to 0.7% for 2025 from a 9% growth projected previously. It downgraded the sector to “neutral” from “overweight.”

“Although loans to exporters are not significant (as exporters are generally cash-rich), we expect softer loan growth prospects as investment behaviour is likely to be upended,” the research house stated in a report.

“We foresee indirect spillover knock-on effects on trade-related supply chain vendors and suppliers; this may affect cash flow eventually, and lead to higher credit costs overall,” it added.

The research house expects credit costs of the sector to rise - by how much is uncertain, but this should eat into returns.

CIMB Research is also forecasting a 25 basis points (bps) cut in the interest rate in the second half of the this financial year (2H25) as loan growth projections for the sector were trimmed as well.

“We have downgraded our sector loan growth forecast to 4.5% (from 5.3%) for 2025 and to 4.4% for 2026 (from 5%). As for net margin (NIM), we are now assuming one rate cut of 25 bps in 2H25.

“We estimate sector NIM to be at 2.21% (from 2.23%) for financial year 2025 (FY25) and 2.22% (from 2.23%) for FY26,” it stated.

Although it anticipates trade tariff negotiation will likely be positive, CIMB Research believes it will take some time before consumption and investment behaviours normalise.

While it may have downgraded the sector, the research house has maintained a “buy” rating on Public Bank Bhd (target price (TP) of RM5.10 a share) and RHB Bank Bhd (TP: RM7.50) which are set to see dividend yield support at close to 5%, should credit costs deteriorate further.

It has downgraded to “hold” from “buy” Affin Bank Bhd (TP: RM2.90), ABMB Holdings Bhd (TP: RM5.70), Hong Leong Bank Bhd (TP: RM21.40) and Malayan Banking Bhd (Maybank) (TP: RM9.40).

“We are reviewing our credit cost forecasts for Maybank given the macro uncertainty from external tariffs and Maybank’s higher contribution from overseas loans.

“We now assume credit costs of 49 bps (versus 26 bps previously) for Maybank. This lowers its return on equity to 11.2% (from 12.6%) for FY25,” CIMB Research stated.

In the case of Public Bank, the research house has incorporated slower loan growth, one policy rate cut of 25 bps, and higher credit costs of 22 bps (from 15 bps) for FY25.

It added even in a more stressed scenario whereby the bank’s credit costs reach its pandemic peak of 34 bps, the bank’s dividend yield will likely remain decent at 4.7%.

The cut in AMMB rating was due to a 1% point cut in its loan growth assumption, translating to loan growth of 4.6% (down from 5.6%) for FY26.

CIMB Research also incorporated one rate cut of 25 bps with AMMB’s NIM downgraded to 2.14% from 2.2% for FY26.