The economic landscape in 2023 posed several challenges, leading to lower-thanexpected growth for loans and advances and, thus, several downward revisions throughout 2023. Nevertheless, in 2024, we foresee the sector's earnings growth of 7.3% to be anchored by three themes, i.e. 1) more robust domestic spending, 2) rising green investments, and 3) a return of foreign interests.

We foresee the government's efforts to stimulate investment activities and potential investments in renewable energy under the National Energy Transition Roadmap (NETR) to boost domestic activities and attract foreign investments. Private investment is forecasted to rebound significantly at 6.9% (2023e: 3.2%). As such, we anticipate business loans to gain momentum in 2024, reaching around 3.4% (from 2% in 2023e). Consumer loans continued to demonstrate remarkable resilience throughout 2023. However, the outlook for consumer loans remains robust, supported by the impending implementation of the progressive wage policy in June 2024. Riding on the coattails of an expected 6.6% surge in private consumption, consumer loans are projected to witness a 6.4% increase in 2024, and with that, we foresee a slightly healthier loan growth of 5.1% for 2024, from around 4.7% in 2023.

The increasing emphasis on sustainable development has prompted a heightened focus on green investments in Malaysia. The government has implemented various initiatives, such as flood mitigation projects and the NETR, reflecting a commitment to addressing environmental challenges. Malaysian banks are actively participating in initiatives promoting sustainability, renewable energy, and environmentally responsible practices. To date, banks under our coverage have collectively assisted industries with sustainable financing/loans totalling approximately RM210bn, or 10% and 6% of their total loans and assets, respectively.

Thirdly, we foresee banks to benefit from a return of foreign interest due to the sector's stable earnings growth, compelling valuations, and attractive dividend yields. Amid these favourable conditions, the political climate, which is now more stable, also emerges as a crucial consideration for foreign investors, in our view.

Nevertheless, we do foresee some potential downside risks to the sector’s earnings, such as 1) underlying fears of a deterioration in asset quality due to significant external shocks, such as a broader regional conflict in the Middle East that could result in a substantial increase in inflationary pressures, 2) potential softer contributions from overseas operations, and 3) sustained elevation in overhead expenses.

We anticipate improved earnings prospects in 2024, driven by a rebound in domestic activities, support from green investments and a more stable political environment. This positive outlook may also attract renewed foreign interest. Despite these potential positive developments, we maintain a Neutral stance on the sector, as banks remain cautious about asset quality, rising overhead expenses, potentially softer contributions from overseas operations and ongoing geopolitical tension.

Source: TA Research - 10 Jan 2024