Upbeat outlook for banks on resilient economy

PETALING JAYA: CIMB Research has revised upwards its expectations for the banking industry’s loan growth, supported by stronger business financing demand and an improved economic outlook.

The research house raised its 2026 loan-growth forecast to 5.5% from 4.8%, alongside an increase in its gross domestic product (GDP) growth projection to 4.8% from 4.3%.

It also lifted its forecasts for 2027 and 2028 to 5.3% and 5.4%, respectively, from 5.2% and 5.3%.

The brokerage said business loan applications increased by 37.7% year-on-year in July, while approvals surged by 51.9%.

“Demand was broad-based across construction, manufacturing, working capital and investment-related financing,” it said.

“This aligns closely with Bank Negara Malaysia or BNM’s post-monetary policy committee assessment that Malaysia remains in an investment upcycle extending through 2027, supported by capital deepening, sustained domestic demand, and stronger external sector prospects,” it added.

However, it noted that the banking system’s loan-to-deposit ratio stood at 87.6% but rose to 101.1% when foreign-currency deposits were excluded.

“This does not imply an immediate funding constraint, but does suggest that the domestic deposit base is already ‘working harder’ than headline liquidity ratios imply, with potential implications for banks’ funding costs,” it said.

CIMB Research expects banks with strong transaction-banking operations, cash-management capabilities and corporate relationships to enjoy a funding advantage.

“Conversely, banks that rely more heavily on retail deposits or wholesale funding may face greater pressure on funding costs and margins should business credit continue to outpace domestic deposit mobilisation,” it said.

The research house added that asset quality remained manageable, with the gross impaired loan ratio at 1.43% in July.

CIMB Research maintained its “overweight” recommendation on banks, favouring Public Bank Bhd, RHB Bank Bhd and Hong Leong Bank Bhd, all of which have “buy” ratings.

Meanwhile, AmBank Research maintained its “overweight” stance on banks, citing undemanding valuations, increasing capital returns and an expanding wealth-management business.

It said Malaysian banks traded at about 0.9 times price-to-book value and offered dividend yields of approximately 6%.

“Malaysian banks have been left out of the regional rally but we see little reason for the disconnect, given same rerating ingredients at home: greater capital returns and wealth growth,” it said.

AmBank Research expects profit growth to accelerate to 3.7% in financial year 2027 from 1.3% this year.

The research house noted that wealth-management fees increased by 43% year-on-year and 9% quarter-on-quarter.

“While Malaysia remains well behind Singapore in scale, the runway is meaningful considering smaller base and scope for Malaysian banks to deepen penetration within their existing customer pool,” it said.

It cautioned of net interest margins which fell by two basis points quarter-on-quarter as deposit competition kept funding costs elevated. However, banks with lower loan-to-deposit ratios had greater flexibility to cushion the pressure.

“Other measures, such as replacing pricier deposits with cheaper funding, can help but take longer to bear fruit,” it said.

It regarded modest asset-quality deterioration as manageable, supported by provisioning buffers.

It has “buy” calls on Hong Leong Financial Group Bhd, CIMB Group Holdings Bhd, Hong Leong Bank and Alliance Bank Malaysia Bhd, with respective target prices of RM33, RM9.80, RM28 and RM5.50.