KUALA LUMPUR (Feb 12): Dividend upsides will likely come from larger-to-mid-sized banks, as smaller banks are constrained by their aggressive business development, according to MBSB Research. 

It said smaller banks’ need to retain more capital to support growth, and is likely to limit their ability to raise dividends.

The firm in a note on Thursday said the industry’s gross impaired loan (GIL) ratio is at a record low, meaning banks currently have very few bad loans and asset quality is strong. Because credit risk is low, banks may be able to operate with slightly lower common equity Tier 1 (CET1) ratios — the core capital buffer used to absorb losses — without putting financial stability at risk.

At the same time, loan growth has been weaker than expected, largely dragged by weakness in business loans. Slower growth reduces the need for capital to support new lending, creating additional room for capital returns to shareholders — similar to what was seen in calendar year 2025, MBSB Research said. This would, however, be ultimately Bank Negara Malaysia’s decision to make.

Even with slower loan growth, MBSB Research remains positive on the sector, saying how banks manage their capital is becoming the main driver of share price gains.

“We opine that CIMB’s surprise dividend announcement last quarter spurred the rally. With momentum tapering as of late, we look at further dividend allocations and guidance this quarter for other catalysts of a similar nature. Banks we are most optimistic about are CIMB Group Holdings Bhd (KL:CIMB), RHB Bank Bhd (KL:RHBBANK) and AMMB Holdings Bhd (KL:AMMB),” the report read.

MBSB Research said CIMB set the tone after announcing RM2 billion in special dividends to be distributed across 2025 and 2026. The group’s approach combines a sustainable 55% regular payout ratio with a flexible special dividend component, allowing it to release excess capital without permanently committing to a higher base payout. MBSB Research views this structure as a more effective and regulator-friendly mechanism for capital distribution compared with dividend reinvestment plans.

MBSB Research said the banking sector still maintains solid fundamentals, though share valuations are less attractive.