Optimistic view on banks

PETALING JAYA: MBSB Research has maintained its “positive” outlook on Malaysia’s banking sector.

This is despite expecting a weak second-quarter of financial year 2026 (2Q26) earnings season, saying resilient loan growth, healthy dividends and strong capital positions should outweigh near-term pressures from deposit competition, provisioning and geopolitical uncertainty.

The research house said it expects banks to navigate a challenging 2Q26 reporting season marked by softer profitability and more cautious management guidance, but believes the sector’s longer-term prospects remain intact.

It added that concerns over the sector appear excessive, noting: “The sector has its share of headwinds, but we think fears may be overblown.

“Profitability for 2026 may come in weaker, but asset growth prospects and dividend yields are intact.”

Moreover, it said a stronger domestic economy is continuing to support lending activity, particularly in business financing, providing an important earnings buffer even as funding costs rise.

The research outfit said banking statistics indicate loan growth has been stronger than anticipated, especially among corporate borrowers, although this has intensified competition for deposits and increased funding costs.

It noted that banks are scrambling to secure liquidity as loan demand exceeded expectations, resulting in elevated fixed deposit rates that could pressure net interest margins (NIMs) over the near term.

Nevertheless, it expects the stronger mix of higher-yielding business loans to support asset yields over time.

Another key risk stems from the possibility of higher US interest rates, with MBSB Research further pointing out that Federal Reserve tightening, prompted by persistent inflation linked to Middle East tensions, would likely hurt investment income by depressing bond prices, although foreign exchange gains could provide some offset.

However, it believes the impact on Malaysian banks could be partly mitigated if regional central banks respond by raising interest rates.

“Possible US interest rate hikes could provide downside to non-fee income, but if overnight policy rate and other regional interest rates follow in a similar direction, we should see some NIM benefit,” said the securities firm.

MBSB Research also expects banks to issue more conservative guidance during the upcoming earnings season, reflecting ongoing pressure from funding costs, rising operating expenses and additional provisioning.

It said the prolonged geopolitical uncertainty has prompted banks to maintain sizeable management overlays despite easing concerns over actual asset quality deterioration.

“We expect a weak 2Q26 results season and several negative guidance revisions.

“Downward pressure comes from continual exacerbation of deposit competition, heavier provisioning due to persistent geopolitical tensions (even though asset quality worries are not that concerning), and minimal room for further dividend upside this quarter,” it noted.

While provisioning remains a concern, MBSB Research said credit quality itself has held up well.

It noted that oil prices have retreated significantly from the peaks recorded during the height of the Middle East conflict, reducing pressure on borrowers compared with banks’ worst-case assumptions used in stress testing.

The research house also anticipates dividend surprises to be limited in the near term because Basel implementation takes effect only from July 1, limiting the immediate release of excess capital.

Still, it believes dividend prospects remain favourable over the medium term as capital ratios stay robust and several banks continue to have flexibility to distribute. Among its preferred stocks, MBSB Research reiterated “buy” calls on Hong Leong Bank Bhd and Alliance Bank Malaysia Bhd.

For Hong Leong Bank, it cited strong loan expansion, best-in-class asset quality and sustained growth in non-interest income driven by regional operations.

For Alliance Bank, the research house expects market share gains to continue on the back of robust loan growth, easing cost pressures following the initial rollout of its ACCELER8 transformation programme and accelerating fee income from wealth management.

Looking beyond the upcoming results season, MBSB Research believes Malaysian banks remain well positioned to benefit from solid economic growth, healthy capitalisation and defensive earnings characteristics.