KUALA LUMPUR: Malaysia’s banking sector is poised to chart a steady course for the rest of the year, supported by cheaper valuations and rising dividend payout ratios across most lenders.
Analysts remain broadly constructive on the sector, even as they flag near-term headwinds from thinner lending margins and a slight uptick in loan impairments.
Tradeview Capital fund manager Neoh Jia Man said sector net interest margins (NIM) are likely to face pressure following Bank Negara Malaysia’s interest rate cut in July.
“The reduction in interest income from floating-rate loans is almost immediate, while certain funding costs, particularly fixed deposits, will take longer to reprice, creating a temporary squeeze,” he told Business Times.
Echoing this view, Hong Leong Investment Bank Bhd (HLIB) said in a research note that the slip in NIM is mainly due to the lag in repricing between loans and fixed deposits.
LOAN QUALITY CONCERNS
Meanwhile, CGS International Research said the banking industry’s gross impaired loans (GIL) ballooned to RM33.2 billion in July, pushing the GIL ratio marginally to 1.44 per cent.
The research house expects the ratio to edge up to around 1.5 per cent by year-end.
Neoh, however, believes the worst is over. He said the GIL ratio is unlikely to rise further from the 1.4 per cent level recorded at end-July, pointing to moderating leading indicators such as the Stage 2 loan ratio.
“Overall, we maintain a stable outlook for Malaysian banks. That said, risks could emerge from the imposition of US import tariffs and ongoing subsidy rationalisation measures, which may exert stress on SMEs dependent on imports and, to a lesser extent, on certain household loans,” added Neoh.
HLIB Research is also optimistic on the sector’s GIL ratio for the year as it expects improvement in business confidence with more clarity around US tariffs.
“However, we stay watchful of potential asset quality deterioration. In any case, system loan loss coverage remains fairly elevated at 90 per cent vs the start of Covid-19 at 82 per cent, which provides some cushion against any prospective weakening in GIL ratio,” it said.
DIVIDENDS AND TOP PICKS
CGS International Research kept its “Overweight” call on banks, premised on potential re-rating catalysts of ongoing write-backs in management overlay and expectations of increases in the dividend payout ratios for most banks.
“Potential downside risks are material deterioration in loan growth and asset quality,” it said.
The firm added RHB Bank Bhd to its list of top picks, replacing Public Bank Bhd, given RHB’s attractive dividend yield of 6.7 per cent in 2025.
“Re-rating catalysts for RHB Bank would be its above-industry loan growth, improving operating efficiency and our projected return on equity expansion from 9.6 per cent in financial year 2025 (FY25) to 10.6 per cent in FY27,” it added.
HLIB Research also kept an “Overweight” call on the sector, underpinned by inexpensive valuations, alongside an appealing five per cent dividend yield.
“Also, KL Finance Index has underperformed the FTSE Bursa Malaysia KLCI year-to-date,, leaving space for catch-up, while its large-cap stature positions it as prime beneficiary of eventual foreign buying from emerging market rotational play.”
POLICY OUTLOOK STEADY
On the overnight policy rate (OPR), CIMB Research said that Bank Negara is likely to maintain the interest rate at 2.75 per cent during its Monetary Policy Committee (MPC) meeting on Sept 4.
The firm noted that growth risks remain the main factor influencing Bank Negara’s policy decisions.
Malaysia has avoided a steeper tariff hit, securing a reduction from 25 per cent to 19 per cent in line with regional peers, an outcome that keeps GDP growth within Bank Negara’s revised 2025 forecast of 4.0 to 4.8 per cent, CIMB said in a note.
The firm said the central bank has always been “less influenced” by US monetary policy, and a more dovish outlook by the US Federal Reserve in itself is not sufficient to trigger more cuts in the OPR.
Bank Negara is likely to stress data dependence in the September MPC meeting, which will also update forward guidance and its growth assessment, said CIMB Research.
“While a November move cannot be ruled out if the lower bound of Bank Negara’s forecast range is breached, pointing to a deeper trade shock than currently anticipated, a more plausible timeline is early 2026.
“The precedent is January 2020, when Bank Negara delivered a second cut after its initial May 2019 move, in response to persistent export weakness through the second half of 2019,” it added.
TARIFF RISKS AND EXPORT STRAIN
CIMB Research added that while exports performed strongly through July, growth is slowing and the hangover from front-loaded electrical and electronics (E&E) shipments ahead of US tariffs looms.
“The sharp July uptick, driven by a 57.3 per cent YoY surge in E&E exports to Singapore, likely reflected urgency in shifting inventory ahead of early August tariff negotiations,” it said.
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