We maintain NEUTRAL on Malaysia Banks due to limited ROE expansion. We expect NIMs to be pressured on expectations that the OPR (overnight policy rate) will be cut by 25bps to 2.75% by 2H25. 2025 loans growth is expected to taper to 4-5% on a potential tariff driven slowdown in exports and risk to consumption spending from the RON 95 rationalisation. We believe asset quality and credit cost will remain stable. Our top pick is CIMB (TP: RM9.50/share) as higher ROEs from improving operating income can support a valuation rerating. We downgrade Maybank to UNDERWEIGHT (from HOLD) on stretched valuations, which has outpaced the prospects of its ROE uplift.

• Advocate selective approach given rerating and moderating earnings growth. FY25 sector P/BV has rerated from 0.9x to 1.1x. We are selective and prefer banks which are liquid and have ROE expansion that will sustain the recent reratings. We have BUYs on CIMB Group (TP: RM9.50/share) and Hong Leong Bank (TP: RM26.90/share). With the recent run-up in share price resulting in limited upside potential, we have downgraded Alliance Bank from BUY to HOLD (TP: RM5.30/share). Our recommendation for Maybank has been downgraded from HOLD to UNDERWEIGHT with a lower TP of RM8.85/share as we see downside risk to valuation. This is based on the stock's stretched valuation of 1.3x P/BV for FY25 with the view that the stock's recent rerating has outpaced the prospects of uplift in ROE from earnings improvement. We see Maybank's FY25F ROE expansion to be limited considering NIM compressions in Malaysia and Singapore as well as a slower growth in treasury and investment income.
• Limited ROE expansion for the sector from 9.4% to 9.7% in 2025. This is based on lower projected calendarised core earnings growth of 6.4% in 2025 (2024: 7%). Operating income is forecasted to grow at 5% in 2025 with a modest growth in net interest income (NII) after factoring in interest rate cut expectations and a mid-single digit growth in NOII with a view of a likely slowdown in trading and investment income.
• NIM of banks to be compressed by interest rate cuts. OPR is expected to remain at 3.00% until end of 2024, with a likelihood of a 25bps cut to 2.75% in 2H25. For domestic banks, every 25bps cut in OPR will see banks' NIMs compressed by an average of 2-3bps, impacting net profits by 3-4%. With the US Federal Funds Rate (FFR) cut cycle, we anticipate the compression of NIM of banks with larger international operations to be higher than banks which are largely operating domestically.
• System loan expansion to taper to 4-5%, while asset quality of banks expected to remain stable. We expect the system loan growth to moderate to 4-5% in 2025 (2024: 5-6%) premised on potentially slower exports and consumption spending. In 2025, we project a mild uptick to 1.7-1.8% from 1.6% in 2024. Moving ahead, we expect banks to continue to still hold onto adequate provision buffers to mitigate against credit risk as repayment behaviors of SMEs in certain sectors and vulnerable low-income households are still being monitored closely. In 2025, we project a credit cost of 25bps vs. 26bps in 2024.

Source: AmInvest Research -