We maintain our OVERWEIGHT call on the banking sector, albeit with tempered optimism. CY25 is projected to see stable system loan growth at 6% (1.2x GDP multiplier) premised on GDP seeing a flattish trajectory with the construction sector losing out from delays in the MRT3 development, and uncertainty on trade policies under the Trump administration. NIMs are expected to see a long overdue recovery on the backdrop of a steady state 3.00% OPR and stabilising deposits competition. We opine that BNM will continue to keep the monetary policy independent of US Fed trends as we juggle with a wide CY25 inflation target of 2.0%−3.5%. Further, discretionary consumer spending may be affected depending on the magnitude of the upcoming RON95 fuel subsidy rationalisation. With this in mind, we narrow our 1QCY25 top picks to banks that we believe have an edge with regards to earnings quality, being: (i) AMBANK (OP; TP: RM6.40) for its optimisation efforts, and emphasis on earnings sustainability to lift ROE, with higher dividend yield prospects being a bonus (c.6%); and (ii) MAYBANK (OP; TP: RM11.95), which continues to take market share among the big caps and is poised to lead in terms of earnings growth and dividend yield.

CY25 in line with recent trends. From our CY24 GDP target of 5.0% (CY23: 3.7%), we now eye a slightly slower landing of 4.8% in CY25 from shortfalls in the construction space (led by drags in the MRT3 project). This should translate well into an expected CY25 loan growth of 6%, a near repeat of our 5.5%−6.0% target for CY24 on a loan-to-GDP multiplier of 1.2x (10-year average).

Households will remain supportive with demand for mortgage led by new property launches in Klang Valley and Penang although with flattish expectations from hire purchase following the automotive industry's stellar TIV delivery of 800K cars in the last two years (Kenanga's in-house CY25 target is 805K). Given that clarity on the rationalisation of RON95 subsidy is most likely visible in May 2025, we opine that its impact to overall discretionary spending would only be moderately felt. Meanwhile, business loans are sustained by service sectors in the wholesale, retail and hospitality industries. The manufacturing scene is also expected to be fuelled by working capital and expansion-based loans with our domestic E&E industries at the forefront, helped by good FDI, plugging the abovementioned softness in the construction sector (typically making up 10% of total system loans).

Maintain OVERWEIGHT on the banking sector. The sector is expected to see fewer negative surprises to fundamentals with previously distortive provisions and writebacks from pandemic overlays out of the picture, and positive turns hinging on clarity on Johor-Singapore’s Special Economic Zone to bolster domestic industries and FDI injections there that are also spilling over to residential developments. That said, pending global developments that will steer our economic trajectory, we see banks deploying varying strategies to enforce operational resiliency and sustain earnings.

Within our coverage, we like AMBANK on the back of a more solid ROE backbone as the group focuses on stronger earnings drivers as opposed to gaining market share in less profitable segments. Following its recent transition into FIRB, the group’s newly acquired CET-1 levels of c.15% could lead to more generous dividend payouts and make AMBANK one of the leaders in yield prospects (c.6%). This is premised on our anticipated dividend payout of 50% against the group’s more gradual step-up of 45% (from 40%). Among the large cap banks, we like MAYBANK as despite its leading market share, it still holds better-thanindustry asset quality with earnings growth expected to outpace its counterparts.

Banks may continue to see NIM reversion. From 3QCY24’s reporting, most banks were able to expand on their NIMs following better liability management initiatives, including the rationalisation of deposit rates and forex swaps. While 4QCY24 is expected to be compressive of the back of year-end seasonal fixed deposit rate competition, we believe that CY24 may see a lesser drag given that industry LCR remains highly sufficient at 147% as of Oct 2024.

With our view for OPR to remain stable at 3%, banks will have a better position to recalibrate their profit spreads to revitalise NIMs in CY25. However, we do not anticipate wide recoveries (staying in the range of +5 to +10 bps) as competition in asset yields may remain dynamic.

Dividend hunters to support interest. Being the reporting period for the full-year earnings for most banks, a final (mostly second interim) dividend is expected to be announced which may spur yield seekers to flock to certain counters closer to their respective announcements.

Among our model expectations, RHBBANK is expected to lead with a generous 60% payout backed by a hefty CET-1 ratio of c.16%. MAYBANK’s anticipated payout of c.70% is above the typically guided 40%−60% range, although the group has always distributed more than that. We highlight that this also marked the second year which the group did away with dividend reinvestments that kept an implied payout of 80%−90% previously.

Announced outside of reporting season, MBSB’s 2.75 sen dividend (c.55% payout) was above our expected 2.0 sen (40% payout) as we anticipated the group to be conservative with its distributions in favour of capital mobilisation to its business units.

Smaller banks at the forefront. Closing up CY24, all banks have seen share price improvements since the start of the year with 7 out of 10 beating the FBM KLCI. Most saw peak valuations between Aug 2024 and Sep 2024 where foreign preference for Malaysian banks was highest on the back of US Fed trimming interest rates, albeit with a reversion gradually seen as a second Trump presidency shiften attention back to US stocks. CIMB was the leading contender among the large caps (+36% YTD) but was outshone by ABMB (+42%) and AFFIN (+37%) with both seeing a strong boost during the year-end, thanks to inorganic boons, being the rumoured acquisition by DBS Bank as highlighted by Reuters and the materialisation of the Sarawak state’s initiatives, respectively. AMBANK also saw a noteworthy gain (+33%) following the group’s successful uplifting of earnings, and possibly higher dividend payouts, which attracted more observers for the stock.

Source: Kenanga Research - 3 Jan 2025