• KLFIN Index Reaches Two-Decade High in August 2024. The KLFIN Index soared to 19,931-point in August 2024, achieving its highest level in 20 years. This was primarily driven by 1) higher interest from foreign investors seeking safer investments amidst concerns of a potential US recession following anticipated rate cuts in September, 2) robust Malaysia loan growth rate of 6% in 1H24 vs. 1H23, and 3) better earnings prospects for Malaysia banks amid steady overnight policy rate (OPR) expected in 2024.

• Malaysia’s Total Loan Growth Accelerated in October 2024. Malaysia’s total loan remained robust in October 2024, up by 6% YoY, reaching RM2.2tn from RM2.1tn in October 2023. The growth was primarily driven by stronger growth in business loans and corporate bonds, supported by heightened economic activity. We anticipate the total loan growth to range between 5-6% in 2024.

• Resilient Loan Growth in 2025 Despite Moderated GDP Forecast. We expect Malaysia’s total loans to remain resilient, growing between 5-6%, despite in-house moderated GDP forecast of 4.7% in 2025, down from 5% in 2024. We anticipate the loan growth in 2025 to be driven by increased loan applications within the household segment, particularly for personal financing, mortgages, and car loans. This will be supported by a 13% salary hike for civil servants effective December 2024 and the increase in the minimum wage to RM1,700/month, effective February 1, 2025.

• Strong Private Demand and Infra Expansion to Drive Business Loan Growth in 2025. We anticipate stronger business loan growth in 2025, underpinned by solid private sector demand, particularly for data centers and property developments. Furthermore, the acceleration of key infrastructure projects in 2025, including the Light Rail Transit (LRT3) Phase 2, Sarawak-Sabah Link Road Phase 2, and the development of new industrial areas like the Johor-Singapore Special Economic Zone (JS-SEZ), is expected to further support business loan expansion.

• Improvement Expected in NIM/NPM with OPR Maintaining at 3% in 2025. We anticipate further improvements in banks’ net interest margin (NIM) or net profit margin (NPM) with the anticipated maintenance of the OPR at 3% in 2025. This would provide greater predictability for banks in managing cost of funds more efficiently, allowing for an optimal spread between the rates charged on the loans and the rates paid on the deposits, thereby supporting profitability.

• Key Risks. Key risks to our view include: 1) a potential slowdown in household loan growth due to concerns on the impact of RON95 subsidy rationalisation, which may increase the cost of goods and dampen consumer spending, 2) slower loan growth within the business/corporate segment could arise from higher operating costs and uncertainty over earnings prospects driven by global economic uncertainty amid Trump’s policies, and 3) an increase in the OPR could elevate banks’ cost of funds, compress NIM/NPM, and negatively impacting earnings.

• Upgrade to OVERWEIGHT on the Financials sector. We upgrade our stance on the Financials sector to OVERWEIGHT (from NEUTRAL) as we grow more optimistic on resilient loan applications projected for 2025, particularly in personal financing, mortgages, and car loans, supported by the salary hike. Additionally, we expect business loans to remain strong underpinned by growing economic activities and sustained infrastructure projects. Furthermore, we foresee an improvement in NIM/NPM, with OPR expected to remain stable at 3%, enabling banks to better manage funding costs and enhance earnings. We maintain a BUY call on Bursa (TP: RM11.10) and a HOLD call on MBSB (TP: RM 0.80).
  
  We are optimistic on Bursa as we expect the company to continue benefiting from higher foreign and domestic direct investments (FDI and DDI), leading to increase project developments and better earnings prospects which should attract investors to the equity market. Although we anticipate that Trump’s policies may pose challenges to corporate earnings, resulting market volatility, we believe this could be a blessing in disguise to Bursa. This may result into greater securities traded value and volume. Our forecast for 2025’s average traded value is RM3.6 trillion, with a market velocity of 43%. However, if the average traded value falls below RM3 trillion, with market velocity around 35%, this would pose earnings risks to Bursa.
  
  For MBSB, while we expect earnings to grow by 46% in 2025F, we believe a more aggressive approach from management is needed to address non-performing loans (as of 3Q24, MBSB’s GIFR stood at 6.7% compared to the banking industry’s 1.5%). A more stringent credit assessment process is essential to ensure the quality of loans and financing. Nevertheless, we expect its Net Profit Margin (NPM) to improve over the 2025- 26F period to 2.11%-2.13%, driven by an increase in CASA deposits and management's efforts to reduce reliance on higher-cost wholesale treasury deposits, shifting towards retail deposits.

Source: BIMB Securities Research - 2 Jan 2025