Banks are expected to face a downturn next year. Analysts suggest reducing shareholding of MAYBANK!

Due to limited expansion of return on equity (roe), coupled with possible interest rate cuts next year, local banks may face pressure on net interest margin. Analysts believe that the prospects of bank stocks are mediocre, especially for the leading Maybank. $MAYBANK (1155.MY)$ Cautioning investors, suggesting reducing holdings!

The latest analysis report from Malaysian investment banks suggests that the banking industry may cool down next year, with a sector rating of only 'neutral'. Maybank, with a high valuation, is likely to be the first to feel the impact, with the target price plummeting from the original 10.80 ringgit to 8.85 ringgit; the rating has also been downgraded to 'shareholding'.

The analyst stated that the reason for slashing the target price of the bank was not only due to the pressure on the return on equity, but also because the stock price of the bank was at a relatively high level compared to its book value.

In addition, the bank's operating income, compared to 6.9% in the 2024 fiscal year, is expected to drop significantly to 3% in the 2025 fiscal year, mainly due to a slowdown in funding and market income.

Therefore, in view of the various downside risks, analysts have lowered the target price and rating of Ma Bank.

Investing in banks with high roe is the strategy.

Overall, in the banking sector, analysts believe that banks with high return on equity and high liquidity will be one of the key investment focuses given the current situation.

Analysts pointed out that by the 2025 fiscal year, the return on equity is expected to increase from 9.4% to 9.7%, mainly due to the core net profit of the banking sector, which is expected to decrease from 7% this year to 6.4%.

In addition, considering the expectations of interest rate cuts and single-digit growth in non-interest income (NOII), it is estimated that operating income in 2025 will increase by 5%, while net interest income will experience moderate growth.

However, there may be pressure on the net interest margin, mainly due to the expected 25 basis points rate cut by the central bank in the second half of 2025. For local banking entities, for every 25 basis points cut in interest rates, the net interest margin will compress by 2 to 3 basis points, while net profit will decline by 3% to 4%.

Facing headwinds next year.

Analysts state that based on the interest rate reduction cycle of the Federal Reserve, local banks with business overseas will face more pressure on profit margins compared to banking entities operating solely in the domestic market.

Furthermore, as exports and consumer spending may slow down, analysts predict that systemic loan expansion will slow to 4% to 5% in 2025. Fortunately, asset quality will remain stable.

Looking ahead, analysts expect banks to continue to maintain ample reserves as buffers to mitigate credit risks, as repayment records of some small and medium-sized enterprises and low-income cohorts are still closely monitored by regulators.

Sing praise for Lian Chang Fenglong.

Overall, analysts continue to be bullish on Lian Chang International. $CIMB (1023.MY)$ and Feng Long Banks $HLBANK (5819.MY)$ issued a 'buy' rating with target prices of 9.50 ringgit and 26.90 ringgit respectively.

As for Alliance Bank $ABMB (2488.MY)$ analysts have downgraded the rating from 'buy' to 'hold', mainly because various bullish factors have already been reflected in the stock price.