The Malaysian banking sector continues to show signs of improvement, with system liquidity on the rise, as indicated by trends in CASA deposits, the 3-month KLIBOR, and liquidity coverage ratios (LCRs) at Islamic banks. Maybank Stock Broking House maintain a POSITIVE outlook for the sector, with BUY recommendations on AMMB, CIMB, Public Bank (PBK), RHB, Hong Leong Bank (HLBK), and Hong Leong Financial Group (HLFG). The key factor driving this outlook is the potential for net interest margins (NIMs) to surprise on the upside, potentially leading to earnings upgrades of up to 16%.

Pressure on NIMs has eased this year after contracting in 2023. Banks have been guiding for NIMs to fluctuate by +/-5bps from 2023 levels, with an expectation of stability across the board. On average, NIMs for banks covered are anticipated to remain stable year-on-year at around 2.07%. Projections for 2025 foresee a conservative 2bps recovery, which could potentially pave the way for further earnings improvements, particularly if NIMs return to pre-pandemic levels.

System liquidity has been bolstered by improvements in key indicators. CASA deposits, which had contracted year-on-year from January to September 2023, saw a recovery, with a 6.4% year-on-year increase in July 2024. In addition, the 3-month KLIBOR, which had risen to 3.77% in December 2023 due to liquidity constraints, has since eased to hover around 3.50%. Liquidity coverage ratios at Islamic banks, which had dipped to 127% in October 2022, have rebounded to 153%, bringing them back in line with the 150% ratio observed in conventional commercial banks as of July 2024.

Despite the positive outlook, net interest margins across most banks have yet to return to pre-pandemic levels, with variances ranging from 1bp at ABMB to 21bps at RHB. Public Bank stands out as an exception, with NIMs already restored to pre-pandemic levels. If NIMs were to recover further, there could be notable earnings upgrades in FY25/26, with BIMB and RHB potentially seeing the largest revisions, at 14% and 16%, respectively. Public Bank and ABMB, having less room for NIM recovery, are expected to see minimal impact, with the latter possibly experiencing only a 1% earnings change.

Source: Maybank
Title: System liquidity is improving