Slowing earnings growth forecast for the financial sector

The financial sector is poised for a year of moderated earnings growth in 2024, reflecting a complex interplay of economic factors and industry-specific challenges. The sector's growth prospects are influenced by robust domestic spending, increased green investments, and a cautious approach to asset quality management.

The anticipated rebound in the domestic economy is a significant driver of the financial sector's performance. As TA Research highlights, "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 is expected to attract renewed foreign interest, bolstered by stable earnings growth, compelling valuations, and attractive dividend yields.

Key Growth Drivers

Domestic Spending: The resurgence in domestic spending is a crucial factor underpinning the sector's growth. With private investment forecasted to rebound significantly at 6.9% in 2024, business loans are expected to gain momentum, reaching around 3.4%, up from 2% in 2023. Consumer loans also demonstrate remarkable resilience, with a projected growth of 6.4% in 2024, supported by an expected 6.6% surge in private consumption.

Green Investments: The government's efforts to stimulate investment activities, particularly in renewable energy under the National Energy Transition Roadmap, are expected to boost domestic activities and attract foreign investments. This focus on green investments aligns with global trends towards sustainability and environmental responsibility.

Foreign Interests: The sector's stable earnings growth and attractive dividend yields are likely to draw renewed foreign interest. As TA Research notes, "This positive outlook may also attract renewed foreign interest," highlighting the sector's potential to benefit from international capital flows.

Challenges and Cautions

Despite the optimistic outlook, the financial sector faces several challenges. Banks remain cautious about asset quality, rising overhead expenses, potentially softer contributions from overseas operations, and ongoing geopolitical tensions. These factors could temper the sector's growth prospects and necessitate careful management.

Sector Performance and Projections

TA Research projects the sector's earnings to grow by 7.3% in 2024, reaching RM35 billion. Valuation-wise, the sector appears to be trading at an appealing 2024 price-to-book value of 0.95 times, with a consistent industry return on equity (ROE) of approximately 10.2% and an average dividend yield of roughly 5.2%. In 2025, the sector's average ROE could widen marginally to roughly 10.3%.

The financial sector's earnings growth prospects for 2024 are moderated by a mix of robust domestic spending, rising green investments, and cautious asset quality management. While challenges persist, the sector remains attractive due to stable earnings, compelling valuations, and appealing dividend yields. Investors and stakeholders should closely monitor these dynamics to navigate the evolving financial landscape effectively.