This article first appeared in Capital, The Edge Malaysia Weekly on May 12, 2025 - May 18, 2025

WITH ongoing tariff uncertainties and no thawing yet of US-China trade tensions, one sector that some analysts see as a good defensive play amid the current developments is banking.

Hong Leong Investment Bank (HLIB) Research finds banks to be a more appealing sector in which to take shelter from US President Donald Trump’s trade war, citing attractive dividend yields as a key reason.

“The sector’s robust dividend yield of 5.1% offers a compelling carry proposition, acting as a natural cushion against capital downside and provides an effective price floor amid market volatility. Moreover, valuations are undemanding, while the sector’s earnings outlook remains fairly resilient,” HLIB says in a May 2 report in which it maintained its “overweight” stance on the sector.

The banking sector is trading at an attractive price-to-book value (PBV) of 1.07 times, which is two standard deviations below that of its five-year pre-Covid average, it notes. 

RHB Research estimates trade exposure for Malaysian banks at 3% to 4% of loans, much smaller than the 5% to 10% exposure for Singapore banks.

Malaysia is currently at an early stage of negotiations with the US on reducing the 24% tariff that Trump intends to impose. As for China, it was reported that US and Chinese officials were expected to have started trade talks from May 9 to 12, in an attempt to de-escalate a trade war between the world’s two biggest economies that could send the world into a recession.

While it is still unclear how things will unfold on the tariff front, analysts predict that Malaysian banks could feel the impact indirectly, with weaker loan growth and potential asset-quality issues as the economy slows — both of which could hurt earnings. In addition, with the rising likelihood of a 25 basis point (bps) cut in the overnight policy rate (OPR) by Bank Negara Malaysia this year to support the economy, bank margins could narrow further, contrary to earlier expectations that they would stabilise.

Although Bank Negara decided to inject RM19 billion into the banking system by lowering the statutory reserve requirement (SRR) ratio from 2% to 1% while keeping the OPR at 3% following its monetary policy meeting on May 8, economists are not ruling out the possibility of a rate cut to 2.75% in the second half of the year if conditions worsen.

A 25bps cut in the OPR this year would trim the net profit of the local banking sector by a minimal 0.2% in 2026, according to CGS International. The research house estimates that the earnings of Bank Islam Malaysia Bhd (KL:BIMB) and Alliance Bank Malaysia Bhd (KL:ABMB) are likely to see the most significant earnings impact, with a projected decline of 4.1% and 2.3% respectively, owing to their high exposure to floating-rate loans, CASA (current and savings accounts) and loans in the country.

On the flip side, Affin Bank Bhd (KL:AFFIN) and AMMB Holdings Bhd (KL:AMBANK) could benefit from the OPR cut the most, with a positive impact of 3.3% and 1.2% respectively.

Interestingly, as the expectation for an OPR cut builds, banks are likely to make pre-emptive moves to ensure that their net interest margin (NIM) does not come under too much pressure later when the cut actually comes.

“Looking at Bank Negara’s monthly statistics, it seems like some of the longer-term fixed deposit rates are coming down. You can expect some of the banks to front-run the OPR cut by trimming their longer-term deposit rates, because they wouldn’t want to be caught paying high rates if the OPR is coming down. That can help cushion margin pressure. So, it’s then how fast do you see the impact coming in,” a regional banking analyst tells The Edge.

“It’s the reverse of what happened in 2023, where banks tried to front-run expected hikes in the OPR by raising deposit rates first, on the expectation that they would reprice loans when the OPR actually went up. But the OPR didn’t go up as much as what the market thought, and the pressure on NIMs was tremendous.”

On the asset quality front, even though issues could arise later, analysts note that Malaysia is dealing with the tariff situation from a position of strength. Banks have large pre-emptive provisions, including account management overlays built from the Covid era that still sit in their books, which could act as a buffer to cushion any spike in bad loans.

Bank Negara’s latest statistics show that the banking system’s gross impaired loan (GIL) ratio — an indicator of asset quality — has been improving on a monthly basis. It stood at 1.42% as at end-March, better than the 1.45% a month earlier and the pre-Covid 1.51% (end-December 2019).

Maybank Investment Bank Research cites banking as one of its top sectoral picks while tariff negotiations are ongoing. “Our top picks remain unchanged, with an ‘overweight’ [stance] in key domestic-driven sectors — banks, consumer, healthcare (hospitals),” it said in a report last week.

CGS International also has an “overweight” call on the sector, premised on potential re-rating catalysts from its expectations of write-backs in management overlays and an increase in dividend payout ratios. “The sector is also supported by an attractive dividend yield of 5.8% for 2025. The potential downside risks are material deterioration in loan growth and asset quality,” it says in a May 6 report.

Its top stock pick is Hong Leong Bank Bhd (KL:HLBANK), as the bank is deemed to offer “the best of both worlds” in terms of defensiveness against credit risks (with one of the lowest GIL ratios in the sector) and growth prospects (with above-industry loan growth and swift expansion in associate contribution from Bank of Chengdu in China).

Meanwhile, analysts expect banks to post decent earnings in the January-to-March quarter, given that the narrative on trade uncertainties became prominent only towards the end of that quarter. “The first quarter (1Q) is not a good barometer to look at pain points for now,” a local banking analyst tells The Edge.

He says the tariff impact is likely to feature more in the second and third quarters of the year.

“The first quarter, though a seasonally slow quarter because of the festivities and holidays, should be quite decent. I don’t expect any surprises. There was the usual strong competition for deposits at [end-2024] but, going into the new year, Chinese New Year, Ramadan and Hari Raya occurred quite close to each other; so, the competition was still somewhat elevated. So, I don’t expect to see any recovery in terms of NIMs — at best, they will be flat; at worse, just slightly lower,” he notes.

Non-interest income (NOII) should hold up well, however, and prop up banks’ overall earnings. “Income from treasury and markets should be quite good in 1Q, and I think we’ll see some of the smaller banks, such as AMMB and Hong Leong Bank in particular, show strong NOII growth. The growth may not be as big for the large banks, given the high base,” the earlier analyst says.

As for asset quality, analysts expect the GIL ratio to remain relatively benign, as indicated by Bank Negara’s March statistics.

AMMB and Alliance Bank are the two lenders that will be reporting their full-year earnings for the financial year ended March 31, 2025 (FY2025). HLIB Research anticipates AMMB turning in a solid 11% year-on-year (y-o-y) growth in FY2025 core earnings, driven largely by a projected expansion in NIM and supported by well-managed funding costs, aided by the current liquid capital market.

“Despite the recent non-completion of the sale of its insurance arm, AMMB maintains a robust capital position with a CET-1 (common equity Tier 1) ratio of 15.33%. We project a full-year dividend per share of 29.5 sen, representing a 50% payout and 5.8% yield,” it says.

AMMB is one of HLIB Research’s top three stock picks, along with CIMB Group Holdings Bhd (KL:CIMB) and RHB Bank Bhd (KL:RHBBANK).

Meanwhile, Alliance Bank is expected to deliver record-high earnings of RM734 million (up 6.3% y-o-y) with return on equity (ROE)coming in at 10.1%, says AmInvestment Research. “We expect the group to meet all its FY2025 key targets with an interim dividend of 15.8 sen/share declared, resulting in a total dividend payout of 50%,” it says in a March 24 report.

As for CIMB, which met analysts last week, HLIB Research says the group is likely to see stable NIM in 1Q on a quarterly basis, as sequential NIM expansion from its operations in Indonesia and Malaysia is offset by contractions in those in Singapore and Thailand, which were affected by either market or policy rate movements. It also expects CIMB’s NOII to be stronger and credit cost to be steady.

“CIMB remains our top value pick among big-cap banks, trading at just one time FY2026 PBV with a compelling 5.7% dividend yield. We see clear merit in its disciplined strategy to drive ROE, while concerns around its Indonesian operations appeared to be largely priced in,” it said. It has a target price of RM8.80 for CIMB.

Interestingly, Hong Leong Bank is currently one of the most cited stock picks among analysts. Bloomberg data shows 16 “buy”, one “hold” and no “sell” calls on it, with the 12-month average target price at RM24.63, which suggests further upside from its May 7 closing of RM20.

Meanwhile, CIMB Securities was one of at least three research houses that have a “neutral” investment stance on the banking sector. It has a “buy” rating, however, on Alliance Bank, Public Bank and RHB Bank, mainly for dividend yield.

“We expect banks’ share prices to trade range-bound in the next few months until there is greater clarity on the external reciprocal tariff situation,” it says in a May 6 report.

RHB Research too has a “neutral” stance on the sector but counts Malayan Banking Bhd (KL:MAYBANK), Hong Leong Bank and CIMB as its top picks.

Meanwhile, AMMB could replace Hong Leong Financial Group Bhd (KL:HLFG) as a component of the 30-stock bellwether FBM KLCI in the upcoming semi-annual review, says CIMB Research.

This is mainly because the latter may fail the liquidity screening test, which requires a monthly median trading velocity of at least 0.04% in eight of the past 12 months — a threshold it would meet only if it hits the 0.04% mark this month. The final results of the index review will be known on June 5, with changes taking effect only on June 23. 

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