KUALA LUMPUR (July 15): Malaysian banks could see a weak second quarter and investors should brace for potential cuts in guidance, MBSB Research cautioned.

Downward pressure comes from worsening deposit competition, heavier provisioning due to persistent geopolitical tensions, and minimal further dividend upside this quarter, the research house said. The main risks would be on the net interest margin and net credit costs, the house noted.

Banks could also revise targets such as their return on equity and cost-to-income ratio given that cost inflation is expected to persist while their top line is affected by elevated cost of funds, MBSB Research said in a note.

The US and Iran have resumed fighting following a brief and fragile ceasefire. Iran closed the critical Strait of Hormuz while the US also announced its own blockade. Geopolitical conflict in the Middle East is also widening as Yemen and Saudi Arabia exchanged strikes.

Malaysian banks have little to zero exposure to the Middle East and asset quality remains largely intact. However, lenders may set aside larger buffers to cushion any potential troubles from borrowers and clients affected by accelerating inflations.

Still, MBSB Research is keeping its ‘positive’ rating on the Malaysian banking sector for its growth prospects and dividend yields. Headwinds will subside by year end, and industry loan growth has been better-than-expected so far, the house noted.

“So far only a few banks have sounded alarm bells for asset quality but do not expect anything overly severe,” MBSB Research said. “However, since geopolitical volatility is here to stay, expect large overlay allocations in subsequent quarters.”

The outlook for dividends remains bright as capital ratios remain elevated, the research house said, noting that some banks have already announced special dividends, though larger-than-expected dividends are unlikely.

“We think dividend surprises, if any, will likely happen in subsequent quarters,” MBSB Research added.