Sound economic prospects to boost banking sector

PETALING JAYA: The banking sector is entering a new growth phase, buoyed by stronger economic prospects, geopolitical stability and renewed foreign investor interest.

“We have grown a lot more positive on the banking sector’s outlook, as Malaysia’s growth prospects are buoyed by an improved economic outlook and geopolitical stability.

“Solid fundamentals and high dividend yields make us one of the core recipients of emerging market flows,” MBSB Research said.

It noted that with solid fundamentals, resilient earnings and attractive dividend yields, local banks are emerging as core beneficiaries of global emerging market inflows – especially as the gap between the overnight policy rate (OPR) and the US Federal Funds Rate narrows.

The research house said the key catalysts for the banking sector’s upturn are the recovery in business loans, robust non-interest income (NOII), and clarity on regulatory reforms that could unlock excess capital.

Loan growth, once tepid due to global uncertainties, is rebounding strongly, led by business and small and medium enterprises (SMEs) lending as Malaysia’s domestic demand and state-led investments gather momentum.

Johor continues to lead loan expansion, with Penang and Sarawak expected to follow suit as major “corridor of growth” states.

MBSB Research said the upcoming Visit Malaysia 2026 campaign could further stimulate lending in tourism-driven states such as Sabah and Terengganu, as SME activity picks up in tandem with visitor arrivals.

Meanwhile, it pointed out that banks are shifting focus from the low-margin retail loan segment toward higher-yielding business loans.

This rebalancing is expected to sustain net interest margins (NIMs) even as deposit competition intensifies in 2026 amid rising loan demand.

While the anticipated 25-basis-point OPR cut in 2025 could compress short-term margins, most banks are expected to offset this through loan or deposit optimisation and reallocation of funds from pricier fixed deposits.

The research house believes the sector’s dividend outlook is positive.

It explained that greater regulatory clarity on Basel IV and Bank Negara Malaysia’s new credit risk framework has given banks confidence to release excess capital, potentially through higher dividend payouts or special dividends by end-2025.

Large and medium banks such as RHB Bank Bhd and Public Bank Bhd, both rated “buy” with target prices of RM7.94 and RM5.05 respectively, are expected to lead in capital distribution.

“We expect large and medium banks to continue gradually upping their dividend payouts, while smaller banks could experience constraints from high growth levels,” MBSB Research added.

It expects NOII will remain a crucial earnings driver, with wealth management, bancassurance and debt capital market activities benefiting from lower bond yields and foreign exchange volatility.

Although investment-related windfalls may normalise in 2026, current liquidity levels remain ample.

Elevated liquidity ratios provide flexibility for banks to optimise funding structures and mitigate NIM compression in the coming quarters.

It reckoned that provisioning trends are also turning favourable, as recoveries from past loan impairments gather pace.

The research house pointed out that many banks are operating comfortably at lower loan loss coverage ratios, signalling confidence in asset quality.

Nonetheless, it cautioned that potential asset quality issues could surface in late 2026, particularly in SME segments affected by higher tariffs and inventory overhangs.

Operating expenditure remained elevated across the sector, driven by ongoing technology investments and expansion initiatives.

Smaller banks such as Alliance Bank Malaysia Bhd, Bank Islam Malaysia Bhd and Affin Bank Bhd are undergoing aggressive branch expansions and digital transformations, which could sustain cost growth into 2026.

However, with multiple return on equity drivers in play – ranging from capital release to NOII strength – analysts believe cost-cutting is not an immediate priority.

Overall, the outlook for Malaysia’s banking sector remains positive.

Improved macroeconomic conditions, stronger loan growth, and higher dividend visibility are reshaping investor sentiment.