This article first appeared in The Edge Malaysia Weekly on January 20, 2025 - January 26, 2025

REASONABLY strong economic growth, scope for recovery in net interest margin (NIM) and relatively low credit cost are among factors that will keep banking sector earnings resilient this year, after a decent 2024.

Most analysts interviewed by The Edge are optimistic about banks’ prospects. However, they expect the sector’s earnings to grow at a slower pace than last year. This is because non-interest income (NOII), which grew strongly last year and helped prop up bank earnings amid lacklustre NIMs, is not expected to be as robust this year.

“NOII growth is likely to taper off amid lower forex (foreign exchange) and bond market volatility, especially since US Federal Reserve rate cuts are expected to be more gradual. Credit costs, nevertheless, are expected to remain fairly benign amid sustained economic momentum and the availability of management overlay buffers at most banks.

“We forecast aggregate 2025 operating profit and net profit growth of 5.9% respectively [versus 7.1% and 8.2% respectively in 2024], as well as an average ROE (return on equity) of 10.5% [versus 10.4% in 2024],” Maybank Investment Bank (MIB) Research says in a Jan 1 outlook report. Its economics team sees the economy growing at 4.9% this year following an expected 5.2% expansion last year.

A check with eight research houses shows that seven, including MIB Research, have a positive investment recommendation on the sector, while one — Hong Leong Investment Bank (HLIB) Research — has a neutral call on the basis of valuation.

The most cited top stock picks were AMMB Holdings Bhd (KL:AMBANK), Hong Leong Bank Bhd (KL:HLBANK), CIMB Group Holdings Bhd (KL:CIMB), Public Bank Bhd (KL:PBBANK) and Malayan Banking Bhd (KL:MAYBANK).

Of the banks, CIMB in particular will be watched for its new strategic plan under group CEO Novan Amirudin after the previous plan, codenamed Forward23+, came to an end last year. The new plan is likely to be revealed in March. Novan took the helm in July last year.

Investors will also be watching Public Bank for the planned restricted offer for sale (ROS) of shares by the Teh family. Tan Sri Teh Hong Piow’s daughter, Diona Teh, announced last October that the family of the late founder would progressively pare down its 23.41% interest in the bank to 10% over five years through an ROS at a discount to eligible employees and shareholders, details of which would be announced “later”.

The banking sector will have a key role in supporting the development of the Johor-Singapore Special Economic Zone (JS-SEZ). While the project may benefit banks in terms of an increase in cross-border transactions and financing, the impact will likely be felt in a few years rather than this year itself, analysts say.

Here are five things that will be watched in the sector this year.

After having suffered a large NIM compression in 2023, most banks saw their margins stabilise or improve slightly last year (as at end-September), amid an easing in the fierce competition for fixed deposits and strict loan pricing discipline. NIM, a key measure of profitability, indicates how much a bank earns in interest on loans against what it pays out to depositors.

Analysts are mixed on whether NIMs will recover this year, with most of the opinion that it will likely remain stable to slightly lower given continued uncertainties. Most research houses expect Bank Negara Malaysia to keep the overnight policy rate (OPR) — which influences lending rates — unchanged at 3% throughout this year.

“We expect deposit competition to remain heated into 2025, but we do expect some rationality to return to both loan and deposit pricing, as banks moderate their loan growth expectations, and look to preserve profitability. We thus expect NIMs to be stable year on year into 2025, for which we forecast a mere one basis point (bp) recovery y-o-y,” MIB Research says.

HLIB Research believes there is scope for NIM expansion given, among other reasons, that: (i) promotional fixed deposit rates are still fairly high and banks have the headroom to reduce them by at least another 10bps to 20bps; (ii) digital banks are not major threats as they have already dialled back on their savings rates by 40bps to 100bps versus their earlier introductory rates; and (iii) banks are no longer competing aggressively for loan market share and are instead adopting a selective lending strategy to preserve margins.

“For now, we are conservative, keeping and projecting a minor NIM compression of 0-1bps for FY2025/26, while waiting for more forward-looking guidance from banks in February [when they release their 4Q2024 financial results],” the research house says in a Jan 3 report. HLIB estimates that for every 1bps expansion in the sector’s NIM, banks’ profit forecast could be raised by 0.9%.

It notes that Affin Bank Bhd (KL:AFFIN) and Bank Islam Malaysia Bhd (KL:BIMB) have the largest bottom-line sensitivity to NIM movement, while Public bank and CIMB have the smallest.

In December 2024, Bank Negara proposed that banks no longer provide personal loans/financing products where interest/profit charges are computed using a flat rate with the “Rule of 78” method. This method calculates interest for the entire loan tenure based on the original principal.

Instead, the central bank suggested that personal loan/financing be offered based on a fixed rate or floating rate basis, where interest is charged on the remaining principal balance after deducting payments made towards the principal.

Additionally, it proposed reducing the maximum tenure for personal loan/financing to seven years from 10 years, as adopted by some countries such as Singapore and Australia.

Bank Negara is currently seeking public feedback until Feb 14 on these proposed changes.

It remains to be seen if they will be implemented exactly as proposed, but as it stands, analysts think the impact from the proposed changes will be minimal on banks.

“We think that the proposed changes will be negative for banks although the impact would be minimal. Following the abolishment of the Rule of 78 method, borrowers who prepay their loans [earlier than the required repayments under the original loan structure] would enjoy interest savings. However, the other side of the coin is that banks will earn less interest from the whole tenure of the loans in the event of early repayment by the borrowers,” CGS International Research observes in a Jan 2 report.

Analysts that The Edge spoke to seemed more concerned about the impact of a reduction in the maximum loan tenures. This is because it will raise the monthly repayments for certain personal financing, thereby reducing the affordability of such products. This could send potential borrowers to “ah long” and other unfeasible lenders.

However, on the whole, the proposed changes may likely have a minimal impact on the industry given that personal loans/financing account for only a small portion — just 5.3% — of the industry’s overall loans, as per end-November data.

In Malaysia, Basel III rules on operational risk will be implemented on Jan 1 this year. Bank Negara had, in December 2023, issued a policy document that set out the standards and guidance for the calculation of a financial institution’s operational risk-weighted assets.

This will have an impact on banks’ Common Equity Tier-1 (CET-1) ratio, a key capital ratio.

“Malaysia banks will be adopting Basel III reforms for operational risk this year. This is expected to cause a minor but not overly significant impact to capital,” RHB Research said in a Jan 8 report on the sector.

Analysts note that some banks have guided for a small negative impact to their CET-1 ratio. Nevertheless, further clarity on the impact will be sought from lenders in the coming month.

“The bigger concern for banks is the credit risk component [of Basel III] which will take effect in 2026,” one analyst points out.

Better clarity on the impact of Basel III reforms, which are being implemented in stages, can help banks firm up capital management initiatives to add on to already attractive dividend yields, RHB Research says.

It is worth noting that Singapore banks adopted Basel III reforms in 3Q2024 and reported fully phased in CET-1 ratio of 15% to 16%.

Dividends in the sector continue to look attractive, analysts say, with a couple of banks likely to increase their payouts and some looking to scale back in a bid to conserve capital.

“The sector offers a FY2025f dividend yield of over 5%. We think this is attractive, and there could be room for yield to compress further — positive for share prices. Furthermore, there could be upside potential to dividend projection for banks as, with a stable outlook and better visibility on the impact from Basel III reforms, these could be positive for dividend payout and capital management initiatives,” RHB Research says.

Analysts expect better payouts from AMMB and possibly Public Bank. One of AMMB’s targets under its new five-year strategic plan that it unveiled last year was to improve its dividend payout ratio to 50% to 60%, from 40% in the financial year ended March 31, 2024.

As for Public Bank, its acquisition of a 44.15% stake in associate LPI Capital Bhd for RM1.72 billion in cash last month is expected to reduce its CET-1 ratio slightly. However, this is not expected to affect the lender’s dividend payout guidance of 50% to 60%, analysts say. Its CET-1 stood at a comfortable 14.2% as at end-September 2024.

“While the stock may not have the highest dividend yield, the possibility of more than biannual dividend payments could be of interest to selective investors,” Kenanga Research says in a recent report.

On the flip side, Alliance Bank Malaysia Bhd (KL:ABMB) is expected to be more conservative with payouts as it look to preserve capital for growth. Its CET-1 ratio, at 12.4% as at end-September, was the lowest in the sector.

Some analysts are of the view that RHB Bank Bhd (KL:RHBBANK)’s elevated CET-1 ratio of 16.6%, the highest in the sector, provides opportunities for improved dividend payouts and a sleeker capital structure.

There are prospects for M&A this year, with industry sources citing Alliance Bank, Affin Bank and AMMB as banks to keep a watch on for possible activity.

As it is, there are already news reports about Singapore lender DBS Group looking to acquire a sizeable stake in Alliance Bank. On Jan 16, Bloomberg reported — citing sources — that Alliance Bank’s top shareholder Vertical Theme Sdn Bhd was looking to start talks to sell its stake in the bank to DBS.

Vertical Theme holds a roughly 29% stake in Alliance Bank, the country’s smallest banking group by assets. There will be much interest in whether such developments actually pan out at Alliance Bank in the coming months.

Meanwhile, Affin Bank, newly backed by the Sarawak government as its largest shareholder, is widely known in the industry to be seeking opportunities to grow bigger via M&A. The bank is on the hunt for opportunities to acquire complementary or related businesses, which could include asset management, insurance or takaful, The Edge reported last month. It is also open to the possibility of a merger with rival lenders, sources say.

As for AMMB, some analysts are of the view that the possibility of M&A cannot be ruled out given the lender’s relatively smaller size and the fact that there is often talk that its key shareholder — founder Tan Sri Azman Hashim, an octogenarian holding a 11.83% stake — may be open to parting with some of his shares at a good price.

The topic of M&A in Malaysian banking comes up every year, but whether anything actually happens remains to be seen as there is always the question of whether a merger would make sense.

“These days, there are not many revenue synergies to be derived from mergers, only cost synergies — and these could take years to realise. Also, would the Madani government allow for staff cuts in the event of a merger? These are all things that need to be weighed and, frankly, unless there is a push from a shareholder like the Employees Provident Fund (EPF), that may want to consolidate its holdings in banks, I don’t think any bank would want to propose a merger,” a banking analyst tells The Edge.

The EPF holds sizeable stakes in all Malaysian banks, the largest of which is MBSB Bank Bhd (KL:MBSB) (56.48%%) and RHB Bank (39.44%). 

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