[MALAYSIA] The banking sector is poised for a solid year ahead, with expectations for strong growth and a stable outlook despite some challenges. In the first quarter of 2025, major banks continue to show resilience, driven by robust loan growth and healthy deposit levels, with analysts forecasting dividends in the range of 5% to 6%. Several investment banks, including Hong Leong Investment Bank Bhd (HLIB) and Kenanga Investment Bank Bhd, have expressed optimism about the sector’s prospects, largely due to its ability to weather external pressures and deliver consistent returns to investors.
Strong Financial Performance in Q1 2025
The Malaysian banking sector’s growth continues to be supported by positive economic indicators. According to HLIB, system loan growth is projected to increase by 5.7% year-on-year (y-o-y), and deposits are expected to hold steady with a growth rate of 3.1% y-o-y. These numbers reflect the banking sector’s strong fundamentals, which are crucial for ensuring stability amidst global economic uncertainties.
Moreover, the first quarter of 2025 is expected to be favorable for banks in terms of net interest margins (NIM), as seasonal fixed deposit competition begins to ease. Banks are anticipated to employ more disciplined strategies for loan expansions, reducing the aggressive push for deposits. This more cautious approach in the face of global uncertainties aligns with broader economic trends but also ensures that the banks remain in a strong position to weather external shocks.
Dividend Expectations for 2025: A Solid Yield
One of the most attractive aspects of investing in Malaysian banks this year is the expected dividend yield. HLIB has noted that many banks are offering an attractive dividend yield of approximately 5.0%, which is anticipated to increase as the year progresses. The banking sector’s capacity to generate strong cash flows while maintaining capital adequacy positions these institutions well to deliver consistent dividends. This is especially appealing for income-focused investors looking for stable returns in a volatile global environment.
Kenanga Investment Bank also shares this positive outlook. The firm projects an industry loan growth of 6.0%, with ongoing development projects, such as Johor's Special Economic Zone and data center projects, contributing to this growth. Despite potential headwinds, such as uncertainties in foreign trade policies and domestic subsidy rationalization, the banking sector remains confident in its ability to maintain a steady dividend payout. With the overnight policy rate (OPR) expected to remain stable at 3.0% throughout 2025, the stability of the interest rate environment provides a further cushion for banks to maintain their financial strength.
Stock Picks and Long-Term Strategy
For investors looking for specific stock recommendations, both HLIB and Kenanga have outlined their top picks for the year. HLIB continues to maintain a bullish stance on major banks, including Affin Bank, CIMB, Maybank, and Public Bank, all of which are expected to benefit from continued growth. Similarly, Kenanga highlights Ambank and Maybank as top picks, noting that these institutions are focused on optimizing their return on equity and ensuring higher dividend payouts.
Ambank, with its target price of RM6.80, is expected to see dividends rise above the 5.0% mark, driven by its strong operational strategies. Maybank, on the other hand, remains the market leader and is predicted to maintain a dividend yield of 6.0%. This is seen as a key differentiator in the market, especially since Maybank's dividend is expected to be entirely in cash, making it a particularly attractive option for yield-seeking investors.
Future Outlook and Potential Risks
Despite the positive outlook, the banking sector is not without its challenges. Both HLIB and Kenanga have pointed out that there are mixed indicators concerning interest margins. While banks remain confident about loan growth, there are concerns about the external environment, including fluctuations in global trade policies and possible domestic economic pressures. These factors could impact consumer appetite for loans, especially as inflationary pressures may lead to more cautious borrowing behavior.
However, these challenges are unlikely to significantly impact the overall bullish sentiment in the banking sector. With loan growth projections still positive and a stable interest rate environment expected to continue, the banking sector remains a reliable pillar of the economy. Additionally, banks’ efforts to adopt more prudent loan growth strategies and focus on discipline over aggressive expansion are seen as prudent measures to ensure long-term sustainability.
The Malaysian banking sector’s performance in 2025 remains strong, with solid growth expected in loans and deposits. The projected dividend yields of 5% to 6% reflect the sector’s financial health, which is backed by a stable operating environment and disciplined growth strategies. Although external risks persist, the outlook for the banking sector remains largely positive. For investors, this is an opportune time to consider banking stocks that offer stable returns and attractive dividend yields, especially those with strong market leadership like Maybank and Ambank.
While global uncertainties and domestic challenges exist, the Malaysian banking sector continues to show resilience. As analysts continue to maintain their "overweight" calls on the sector, it is clear that 2025 will be another strong year for Malaysia’s banks, providing investors with promising returns in the form of dividends and capital appreciation.
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