Investment analysts foresee Malaysia’s banking sector to continue its upward momentum underpinned by ongoing loan growth and stabilising net interest margin (NIM), as well as the potential of higher net interest income (NII).

The banking sector will likely continue to benefit from ongoing loan growth, improved gross domestic product (GDP) along with better margin retention, according to Kenanga Research in its monthly highlight report. This will be overshadowing industry headwinds like inflationary pressure and weaker ringgit, it noted.

“The sector remains appealing due to attractive dividend yields 6-7% on most stocks, coupled with lower inherent sector volatility compared to other industries. Significant share price movements have been observed with the influx of foreign investors aiming to acquire major sector stocks,” Kenanga said.

Separately, TA Securities Research flagged the downside risks for the sector may include a decline in asset quality due to concerns over rising inflationary pressures amid ongoing subsidy rationalisation, persistent external shocks, weaker contributions from overseas operations, and consistently high overhead expenses.

“Despite these risks, the sector’s outlook remains positive, supported by strong performance indicators and growth prospects,” it added.

May 2024’s data has shown bank loans growth at 5.8% year-on-year (y-o-y), slightly lower compared to 6% y-o-y in April, which was driven by the household segment (6.5% y-o-y) with loans for the purchase of cars (10% y-o-y) and mortgages (8% y-o-y).

Meanwhile, business loans grew at 4.8% y-o-y with finance growing at (12% y-o-y) and wholesale and retail (10% y-o-y). The decliners include education and health (3% yo-y) and agriculture (4% y-o-y).

The research houses have all maintained their 2024 loan growth forecast with TA Securities projecting the highest at 6.1%, underpinned by consumer and business loan growth of 6.3% and 5.9%. Kenanga projects the loan growth at 5.5-6%, and RHB Bank by 5-5.5% over the same period.

On loan application and loan approvals, May’s growth in loan applications was at 3.1% y-o-y likely from a slight reversion from April 2024’s festive season, while loan approvals contracted by 4.9% off a higher base last year led by softer business and consumer loan approvals.    

May 2024 also see system deposits grew at 4.9% y-o-y as households and businesses may once again be in a saving capacity post-heavy spending seen during festive periods, Kenanga Research said.

On that note, current account-saving account (CASA) levels remained fairly stable at 28.5% y-o-y (April 2024:28.4% y-o-y) as fixed deposits remain commonplace in both segments in spite of their slightly less attractive interest rates.

“With loan growth outpacing deposits, we see industry loans-to-deposits ratio coming off slightly to 86.1% y-o-y (Apr 2024:86.3% y-o-y),” Kenanga said.

Industry gross impaired loans (GIL) remained stable at 1.63% y-o-y (Apr 2024:1.63% y-o-y) with industry loan loss coverage tapering off to 90.8% y-o-y (Apr 2024:91.8% y-o-y).

“We opine remaining stresses could be more SME-centric as they may be more prone to inflationary pressures, which the banks are likely keeping an eye on during 2HCY2024,” Kenanga said. “That said, some relief could be brought with past pandemic-related overlays that can be reallocated to other rising macro concerns,” it added.