Banking sector likely to remain resilient in 2H25
Industry-wide indicators show manageable risks amid stable credit trends and a modest slowdown in loan growth.
According to CGS International (CGSI) Research, banks are likely to report increased LLP in 2Q25 compared to RM602.3mil in 1Q25, largely due to the absence of a one-off write-back in provisions by Hong Leong Bank Bhd (HLB) earlier in the year.
'We stick to our view that banks' LLP would increase q-o-q in 2Q25, mainly due to the non-recurrence of the write-back of RM399mil in management overlay by HLB in 1Q25,' said the brokerage.
CGSI Research pointed out that total industry provisions rose by RM225.6mil in 2Q25, though the trend is not viewed as alarming.
'We are not overly concerned about our expected q-o-q increase in LLP as 2Q25 LLP would likely to be largely stable year-on-year (y-o-y) and the credit charge-off rate would likely stay low at around 15 basis points (bps).
'This is significantly below the pre-Covid-19 level of 25 bps (the average in 2018 to 2019),' it said.
On the lending front, growth moderated slightly.
Industry loan growth eased from 5.3% y-o-y at end-May 2025 to 5.1% at end-June, mainly driven by slower business loan momentum.
Household loans, however, remained firm at 6% over the same period.
'We believe banks are on track to achieving our projected loan growth of between 4.5% and 5.5% for 2025, although it could come in closer to the lower end of the range, in our view,' CGSI Research stated.
Specific loan segments offered mixed signals.
'The growth in residential mortgages and auto loans stabilised at 6.9% y-o-y and 6.4% y-o-y, respectively, at end-May 2025 and end-June 2025.
'Meanwhile, the growth momentum for credit card receivables eased slightly from 9.1% y-o-y at end-May 2025, to 8.8% y-o-y at end-June 2025,' CGSI Research noted.
It expects auto loan growth to taper to about 5% in 2025, while residential mortgage expansion should remain steady at 6% to 7% y-o-y through the second half.
In terms of asset quality, earlier concerns arising from a sharp rise in gross impaired loans (GIL) in May were allayed by a reversal in June.
'However, banks' GIL reversed course to decline by RM464mil, or minus 1.4% month-on-month, in June 2025,' CGSI Research explained.
'In our view, this seemingly erratic movement in GIL in May to June 2025 was caused by the classification of certain corporate loans as impaired in May 2025, that was rapidly followed by a reclassification back to non-impaired in June 2025 due to the repayment of the amount in arrears by the borrower,' it added.
CGSI Research maintains an 'overweight' stance on Malaysian banks, with HLB as its top pick.
Its optimistic view on the banking sector is premised on potential re-rating catalysts of ongoing write-backs in management overlay and expectations of increases in the dividend payout ratios for most banks.
However, CGSI Research also warned of risks including weaker economic growth, rising inflation, and a resurgence in deposit competition.
'Any defaults of loan repayments by these companies could lift banks' GIL and LLP in 2025 to 2026,' it added.
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