KUALA LUMPUR (April 21): RHB Investment Bank (RHB IB) has turned bearish on Malaysia's banking sector, as global tariffs are slowing growth and expected to hurt banks' earnings in the short term.

They expect US tariffs to rise to 20% by late 2025, which could cut Malaysia's gross domestic product growth from 5% to 4.5%, or even 3.5 to 4% if tensions worsen. The trade and manufacturing sectors are likely to be hit the hardest.

In a note on Monday, it said although trade loans only make up 3% to 4% of total loans (less than Singapore banks’ 5% to 10%), the uncertain macroeconomic outlook means companies may hold back on spending and investments, reducing demand for investment and working capital loans.

Banks might also slow down lending due to lower risk appetite.

RHB IB said net interest margins (NIMs) could shrink if the central bank cuts interest rates to support the economy — every 25-basis-point cut may lower bank earnings by 1% to 2%.

On top of that, fees from loans, trade, investment banking, and wealth management are also at risk of declining.

RHB IB said banks may partly offset these risks by cutting deposit rates ahead of time, which could help NIMs recover over the next year. Earnings may also benefit from foreign exchange and investment activities, it added.

Despite these mitigating factors, the firm has reduced its financial year 2025 (FY2025) to FY2026 earnings forecasts for the banking sector by 2% to 3%, with FY2025 profit after tax and minority interest growth now expected to be 3.5%, down from 6.1%.

RHB IB identified Malayan Banking Bhd (KL:MAYBANK), Hong Leong Bank Bhd (KL:HLBANK), and CIMB Group Holdings Bhd (KL:CIMB) as its top picks. These large banks are preferred, because they are less affected by rate cuts and trade risks compared to smaller banks.

Until the tariff issue is resolved or market conditions stabilise, RHB believes a 'neutral' outlook for the sector is appropriate.

RHB IB noted that bank share prices are down 10% so far. Based on past events like the eurozone debt crisis (2011) and the commodity crash (2015), prices could drop another 10% if things worsen.

If a global recession happens, share prices could fall by 20% (like during Covid-19), or even 30% (like during the global financial crisis in 2008).