KUALA LUMPUR (July 2): Malaysian banking stocks are now trading at valuations last seen during major financial crises, with Kenanga Research highlighting a disconnect between the sector’s depressed prices and its resilient fundamentals.

According to the research house, the banking sector’s price-to-book value ratio — benchmarked against the KL Financial Index — fell to a one-year low of 1.08 times in May 2025.

Kenanga noted that this is only the second time the sector’s valuation has breached this level outside of crisis periods, with the last instance occurring during the US regional banking fallout in 2023.

It attributed the current downturn to concerns over sluggish loan growth, persistently tight net interest margins (NIMs), and broader market jitters stemming from trade tariff uncertainties.

Despite these challenges, Kenanga pointed out that the sector is supported by historically strong asset quality. Gross impaired loan (GIL) ratios remain below 1.5%, while banks are well provisioned with average loan loss coverage — including regulatory reserves — at around 140%.

“The environment now is far healthier than during recent crises, with asset quality appearing to be a minor concern,” Kenanga said.

Kenanga, which maintained its ‘overweight’ call on the banking sector, cited robust fundamentals and a potential turnaround in valuations, with its top picks for the third quarter of 2025 being AMMB Holdings Bhd (KL:AMBANK), CIMB Group Holdings Bhd (KL:CIMB), and Malayan Banking Bhd (KL:MAYBANK).

Contrary to major economists’ expectations, Kenanga believes Bank Negara Malaysia will keep the overnight policy rate unchanged at 3% for the rest of the year.

Nonetheless, Kenanga expects banks to continue facing pressure on NIMs due to weaker asset yields, estimating that every 25-basis-point rate cut could reduce sector NIMs by one to three basis points, leading to an average 2% drop in earnings.