Malaysia's banking sector is poised to deliver strong results in the second quarter of 2024, with net profits expected to grow by 5-6% year-on-year. This growth is driven by a reduction in loan loss provisioning (LLP) and robust increases in both interest and non-interest income.

Analysts are maintaining an "Overweight" rating on Malaysia's banking sector, signalling a positive outlook for investors. This recommendation is based on several potential catalysts, including the stabilisation of net interest margins, strong fee income growth from increased economic activities, and the possibility of higher dividend payouts by banks.

The decline in LLP is a key factor in the anticipated profit growth. It is estimated that banks' LLP fell from RM1.41 billion in the first quarter to around RM1.3 billion or even lower in the second quarter, indicating improved financial health among borrowers and fewer bad loans—a positive sign for the industry.

Asset quality has also improved, with the gross impaired loan ratio dropping to 1.6% by the end of June 2024. This improvement occurred alongside a 1.2% increase in overall loan growth during the same period, underscoring the sector's resilience.

In terms of income, the reduction in LLP, combined with a 3-4% increase in net interest income and mid-single-digit growth in non-interest income, is expected to support the banks' net profit growth of 5-6% in the second quarter. This growth is achieved despite rising operational costs, highlighting the strength of the sector.

Loan growth has also gained momentum, particularly in the business loan segment, which grew by 5.6% year-on-year by the end of June 2024, compared to 4.8% in May 2024. This increase is expected to further support the expansion of net interest income, a crucial revenue stream for banks.