Banking sector poised for stronger earnings: HLIB Research
KUALA LUMPUR: The banking sector's earnings momentum is projected to accelerate in the second half of 2025 (2H), following a modest performance in the first quarter.
Hong Leong Investment Bank Bhd (HLIB Research) said the first quarter of 2025 earnings season was broadly in line with expectations, with Bank Islam Malaysia Bhd being the only bank under its coverage to miss estimates due to higher credit costs.
The remaining seven banks it covers, namely Affin Bank Bhd, Alliance Bank Malaysia Bhd, AMMB Holdings Bhd (AmBank), CIMB Group Holdings Bhd, Malayan Banking Bhd (Maybank), Public Bank Bhd and RHB Bank Bhd, delivered results that tracked closely with forecasts.
The firm said the sector earnings rose 4.1 per cent year-on-year (YoY), driven by lower loan impairment provisions, but fell 3.4 per cent quarter-on-quarter on a sequential rise in credit charges.
"Looking ahead, we forecast sector earnings for financial years 2024 to 2026 (FY24-25) to grow at a two-year compound annual growth rate of 3.4 per cent," it said in a note.
HLIB Research anticipates net interest margins of the bank in the second quarter of this year to hold up reasonably well sequentially.
It pointed out three key forces at play, including fresh liquidity from the recent statutory reserve requirement cut, easing deposit competition and a sector-wide pivot to more disciplined loan expansion and funding strategies.
"This proactive stance is already visible, with banks cutting promotional/campaign fixed deposit rates by five to 15 basis points in May, ahead of a potential Overnight Policy Rate cut, though the full margin benefit may only materialise in 2H 2025.
"Beyond margins, the bedrock of asset quality is expected to remain solid, supported by resilient domestic economic conditions and minimal US trade exposure," the firm added.
Recognising risks from the secondary impacts of trade uncertainty, HLIB Research said any potential weakness will be well-contained.
It noted that the sector is significantly more resilient than in previous downturns, primarily due to the formidable provision buffers accumulated over the past five years.
It said the "fortress of provisions" provides a robust defence, capable of absorbing any stress and cushioning the gross impaired loan ratio, which currently stands near historical lows.
HLIB Research maintained its "Overweight" stance on the banking sector and views the KLFIN Index's year-to-date 7.0 per cent decline as a tactical opportunity to accumulate ahead of a potential recovery in the latter part of the year.
The firm's top picks include CIMB with a target price of RM8.80 a share, as well as AmBank (TP: RM6.20) and RHB (TP: RM7.70).
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