UOB Kay Hian
Date of Report: Monday, 18 August 2025
Malaysia Banking Sector Poised for Outperformance: Defensive Strength Meets Cyclical Upside

Sector Overview: Turning Bullish Amid Macro Uncertainty

Malaysia’s banking sector is making headlines as a prime beneficiary of a potential soft landing in global markets. UOB Kay Hian has upgraded its view on Malaysian banks to OVERWEIGHT, citing resilient earnings, attractive dividends, and the sector’s unique positioning to benefit from emerging market rotation as the US Federal Reserve signals monetary easing 1. Despite an uncertain backdrop driven by US tariffs and macro headwinds, the sector offers both defensive shelter and upside potential as the global cycle shifts.

Key Catalysts: Rate Cuts, Inflation, and Emerging Market Flows

• US Inflation Remains Manageable: July’s US CPI came in softer than expected, with core CPI only slightly above April levels. The inflationary impact of tariffs has been muted so far, as businesses use inventories purchased at lower tariff rates and absorb costs gradually. Services inflation—which makes up 75% of CPI and PCE—remains subdued, suggesting that overall tariff effects may be less severe than feared.
• Rising Odds of US Rate Cuts: A cooling US labor market is feeding expectations for monetary easing, with futures pricing in a 92% probability of one rate cut in September and a 60% chance of a second cut before year-end 2025. This backdrop sets the stage for emerging market inflows, especially into resilient banking sectors like Malaysia’s.
• Emerging Market Inflows: The narrowing spread between the Fed Funds Rate and Malaysia’s Overnight Policy Rate (OPR), along with resilient macro growth, is likely to attract foreign capital. Malaysian banks, with strong liquidity, robust earnings, solid provision buffers, and dividend yields around 5%, are poised to benefit.

Sector Upgrade and Outlook: OVERWEIGHT with 2026 Recovery

UOB Kay Hian upgrades the banking sector to OVERWEIGHT, anticipating that Malaysian banks will outperform as the market begins to look past potential OPR cuts in 2H25 and focus on Net Interest Margin (NIM) recovery in 2026. Valuations are now rolled forward to 2026 for December FYE banks, while non-December FYE banks are already pegged to FY26. A risk-on sentiment is building as investors seek defensive plays with upside 1.

Top Sector Picks: Company Analysis and Targets

Peer Performance and Valuation Comparison

CIMB Group: Upgraded to BUY, Poised for Recovery

CIMB stands out as a sector laggard, with shares down 10% year-to-date, outperforming only the KLFIN Index’s 3% decline. This has compressed its valuation to a compelling 1.0x 2026 PBV, below the sector average, despite generating a higher ROE (11% vs sector’s 10%). The sell-down was partly due to tighter liquidity in Indonesia impacting CIMB Niaga’s NIMs, but conditions improved in June 2025. A resumption of Fed rate cuts should further improve liquidity. Key catalysts include:

• Improving liquidity in Indonesia, driving NIM recovery
• Stronger-than-expected non-interest income from trading gains

Public Bank: Defensive Play with Upside Potential

Public Bank continues to trade at -1 SD below its historical mean PBV, offering solid provision buffers and greater write-back potential. Its robust loan loss coverage (LLC) supports the possibility of future credit cost write-backs.

Hong Leong Bank: Solid Provision Buffers, Attractive Valuation

Hong Leong Bank maintains conviction as a defensive pick, trading below its historical PBV mean. Its steady asset quality and strong provision buffers make it a safe choice for investors seeking stability.

RHB and AMMB: High-Beta Picks for a Risk-On Market

RHB and AMMB are included among the top picks for their high-beta profiles. AMMB, in particular, offers a high dividend yield (6.7%) and trades at an attractive valuation, supporting its potential for strong performance as market sentiment improves.

Sector Fundamentals: Earnings Visibility, Credit Quality, and NIM Recovery

• Foreign Bond Flows: Robust foreign buying of government bonds has driven the 10-year MGS yield down to 3.37%, below pre-pandemic averages. This trend is expected to spill over into equities—and particularly banks—once macro uncertainties subside.
• Earnings Yield Spread: The banking sector’s earnings yield spread to the 10-year MGS stands at 7ppts, compared to the broader KLCI-MGS spread of 4ppts, reinforcing its appeal as a rotation play.
• OPR Cuts & NIM Impact: A potential 25bp OPR cut in 2H25 to 2.50% is forecasted, with only a modest 2bp NIM impact (~2% of sector earnings) after factoring in a 1ppt statutory reserve requirement cut. A further cut would mark the end of the current cycle, given healthy GDP growth (4.0-4.8%) and benign inflation (1.75%-2.35%).
• NIM Recovery in 2026: If Bank Negara Malaysia front-loads OPR cuts, deposits will reprice lower by 1Q26, setting the stage for sequential NIM recovery as fixed deposits adjust.
• Asset Quality: Sector GIL ratio improved to 1.42% in June 2025, near historical lows, reflecting stronger underwriting, proactive recovery, and a shift to safer mortgage assets (now 36% of loan portfolios).
• Provision Buffers: Higher LLC ratios (90% vs pre-pandemic 80%) and low GILs support stable credit costs; net credit cost assumptions for 2025 are kept flattish (18bps vs 17bps in 2024).
• Non-Interest Income: Trading gains and foreign inflows are boosting FVOCI reserves to 5-year highs, while US dollar weakness supports hedging fees. Wealth management income is expected to recover in 2026.
• Earnings Growth: Sector earnings are projected to grow 4% in 2025 and 6% in 2026, with stronger momentum as NIMs lift and deposits reprice lower.

Other Banks: Performance and Observations

• Maybank: Hold recommendation with resilient dividend yield (7.0%) and solid ROE (10.6%) but subdued price performance (-4.5% yoy).
• Alliance Bank: Hold recommendation, moderate growth outlook, and competitive dividend yield (5.0%).
• Affin Bank: Hold, lagging sector performance, lowest ROE (4.5%), least attractive dividend yield (2.7%).
• Bank Islam: Hold, challenged by declining share price and lower ROE, but still offers a 5.8% dividend yield.
• HLFG: Buy, robust earnings momentum, attractive valuation, and stable asset quality.

Conclusion: Malaysian Banks Set for Resilient Growth and Upside

Malaysia’s banking sector stands at the intersection of macro resilience and cyclical opportunity. With the potential for a soft landing in the US, rate cuts, and robust fundamentals, Malaysian banks are ripe for a defensive rotation and earnings recovery. UOB Kay Hian’s top picks—Public Bank, CIMB, HL Bank, RHB, and AMMB—blend stability with upside, making them attractive plays for investors seeking both safety and growth as market conditions evolve.

Report Coverage

Analyst: Keith Wee Teck Keong Broker: UOB Kay Hian Date: 18 August 2025
For further market insights, investors should closely monitor sector developments, central bank actions, and foreign capital flows to capitalize on the unfolding opportunities in Malaysia’s banking sector.