The banking sector has been upgraded to an Overweight rating from Neutral, with AMMB, Public Bank (PBK), Hong Leong Bank (HLBK), and Alliance Bank Malaysia highlighted as preferred picks. The upgrade reflects the view that Malaysian banks could offer a stable refuge during a period of market volatility, influenced by upcoming events such as the US presidential election and potential Federal Funds Rate (FFR) cuts. The sector's stability is supported by large-cap liquidity, ample loan provision buffers, and attractive dividend yields, which should help mitigate near-term volatility.

Analysts have provided various calls for the sector, including an upgrade to OVERWEIGHT with a focus on stability and upside potential from foreign institutional investor (FII) inflows. Despite recent sector valuation reratings, it is believed to remain reasonable. The recent positive revision in earnings expectations, particularly for PBK which has raised its return on equity (ROE) guidance, highlights optimism in the sector's outlook. Anticipated increases in loan growth and net interest margin (NIM), coupled with well-managed credit costs, further support this positive sentiment.

In the second quarter of 2024, six out of eight Malaysian banks delivered results in line with expectations. Notably, HLBK's fourth-quarter results and AMMB's first-quarter performance exceeded forecasts due to lower-than-expected impairments. While the sector's pre-tax income fell slightly by 1% quarter-on-quarter, it increased by 3% year-on-year, primarily due to a drop in non-interest income from lower trading and markets income. Profit after tax and minority interests (PATMI) saw a 2% quarter-on-quarter increase and a 10% year-on-year rise, supported by reduced credit costs and a net write-back in impairments.

For the fiscal years 2024 to 2025, sector net profit projections have been adjusted upwards by 0.5-1%. The main adjustment was a downgrade of CIMB's rating to Neutral from Buy, reflecting a more modest potential upside following strong share price performance. The sector is expected to experience a compound annual growth rate (CAGR) of approximately 6% in PATMI over the next few years, driven by loan and non-interest income growth and stabilisation of NIM and credit costs.