Kuala Lumpur: Hong Leong Investment Bank Bhd (HLIB) forecasts the banking sector’s earnings to grow at a two-year compound annual growth rate (CAGR) of 3.4 per cent over the financial years of 2024-2026.
According to BERNAMA News Agency, the investment bank noted that the recent first quarter of 2025 (1Q 2025) reporting season generally aligned with its expectations. However, Bank Islam Malaysia Bhd (BIMB) was the only bank under its coverage to miss estimates due to higher credit costs. In response, HLIB has maintained a ‘hold’ stance on BIMB and adjusted its target price (TP) to RM2.40 per share.
In 1Q 2025, the banking sector’s earnings increased by 4.1 per cent year-on-year (y-o-y), driven by lower loan impairment provisions. However, earnings fell by 3.4 per cent quarter-on-quarter (q-o-q) due to a rise in credit charges.
HLIB projects that the net interest margin in the second quarter of 2025 (2Q 2025) will remain stable sequentially. The investment bank identifies three key factors influencing this trend: fresh liquidity from the recent statutory reserve requirement cut, easing deposit competition, and a sector-wide shift towards disciplined loan expansion and funding strategies. Banks have proactively reduced promotional/campaign fixed deposit rates by five to 15 basis points in May, anticipating a potential overnight policy rate cut. The full margin benefit of this strategy might only be realized in the second half of 2025 (2H 2025).
HLIB expects asset quality to remain strong, supported by resilient domestic economic conditions and minimal exposure to United States trade, which constitutes less than 1-4 per cent of total loans. While acknowledging risks from the secondary impacts of trade uncertainty, HLIB believes any potential weakness will be well-contained, citing strong provision buffers accumulated over the past five years as a formidable defense.
Consequently, HLIB maintains its ‘overweight’ stance on the sector and regards the KLFIN (Bursa Malaysia Finance) Index’s seven per cent year-to-date decline as a strategic opportunity for accumulation ahead of a potential recovery in 2H 2025. HLIB’s preferred picks include CIMB Bank Bhd (TP: RM8.80), AMMB Holdings Bhd (AmBank) (TP: RM6.20), and RHB Bank Bhd (TP: RM7.70), with CIMB and AMMB as primary high-beta proxies. It also recommends ‘buy’ calls on Affin Bank Bhd (TP: RM3.00), Alliance Bank Malaysia Bhd (TP: RM5.00), and Public Bank Bhd (TP: RM5.10). Key risks to the ‘overweight’ call include a sharper-than-expected economic slowdown, prolonged deposit pricing pressure, and escalation in global trade tensions.
Meanwhile, Maybank Investment Bank Bhd (Maybank IB) has downgraded banks to a ‘neutral’ call due to prevailing external uncertainties and the prospect of more subdued earnings growth. Maybank IB noted that the 1Q 2025 results season was lackluster for banks, with several banks’ results falling below expectations. In light of slower gross domestic product growth ahead, Maybank IB has trimmed its banks’ earnings forecasts by five per cent for 2025 and four per cent for 2026, now predicting net profit growth of 1.1 per cent in 2025 and 5.0 per cent in 2026. Maybank IB’s top picks are Public Bank and AMMB, based on strong asset quality, proactive funding cost momentum, and higher dividends.