KUALA LUMPUR (Oct 16): Malaysian banking stocks could see some stability towards the end of 2026 as declining global bond yields provide an opportunity for banks to recover investment losses, said MBSB Research.
However, persistent funding cost pressures and geopolitical uncertainties could continue to limit their recovery, according to a research note on Friday.
Despite the looming factors over the sector, the analyst said the expected dividend yields are still “too attractive to ignore”, noting the 6% yield from medium- to large-sized banks as compared to the usual 5% yield.
“The recent decline in bond yields makes the banking sector a lot more attractive at this price point — even though some damage has already been done. The main fear was dividend yield disappointments due to investment losses cutting into dividend yields, but now there's a chance for this to be reversed,” said MBSB Research.
The research firm noted that the yield on 10-year Malaysian Government Securities (MGS) had retreated to around 3.8% last week, after approaching 4.2% in the preceding month.
The decline could help banks recover some investment losses incurred during the third quarter of 2026 (3Q2026), potentially supporting earnings in the final quarter. Lower bond yields could also make wholesale funding a more attractive alternative to deposits.
However, the research house cautioned that the improvement would not fully reverse the impact of higher funding costs, as competition for deposits has intensified amid strong loan demand and previously elevated bond yields.
Banks are unlikely to lower deposit rates significantly ahead of year-end promotional campaigns, suggesting that pressure on net interest margins could persist despite more favourable bond market conditions.
On earnings, MBSB Research expects 3Q2026 to be relatively weak for banking stocks, although it believes much of the anticipated deterioration has already been reflected in share prices.
The prospect of stronger fourth-quarter earnings could provide some support to banking stocks through year end, provided bond yields do not rise sharply again.
The research house highlighted the muted response in equities despite the recent bond market recovery, suggesting investors remain concerned about corporate earnings and the possibility of further interest rate increases.
Higher-than-expected US inflation in September has also raised concerns that bond yields could reverse course, potentially eroding the expected earnings recovery.
Meanwhile, business lending remains a key source of support for Malaysian banks, particularly from construction activities and data centre-related investments, even as household loan demand continues to weaken.