Broker: CGS International
Date of Report: July 10, 2025

Malaysia Banks Outlook 2025: Profit Growth, Asset Quality, and Top Picks – Full Sector Analysis

Overview: Malaysian Banks Set for Steady Growth in 2025

The Malaysian banking sector is gearing up for a year of moderate but resilient growth in 2025. CGS International projects core net profit to expand by 6.2% for the year, underpinned by healthy net interest income (NII), stable non-interest income (NOII), and prudent cost management. Despite potential headwinds such as US tariffs and stiffer deposit competition, the outlook remains robust with ongoing write-backs in management overlays and potential for higher dividend payouts. The sector remains rated Overweight, with Hong Leong Bank (HLB) standing out as the top pick.

Key Sector Highlights and Forecasts

• 2025F core net profit growth: 6.2%
• 2Q25F core net profit growth: 3-4% year-on-year (yoy)
• Net interest income (NII): Forecasted to rise 4.6% in 2025F
• Non-interest income (NOII): Expected to decline 3.2% in 2025F, but up c.6% yoy in 2Q25F
• Overheads: Projected 4.2% increase in 2025F
• Loan loss provisioning (LLP): Set to normalize at c.RM900m in 2Q25F, up 13.8% for the year
• Dividend payout ratios: Anticipated to rise for most banks

Financial Performance Preview: 2Q25F and 1Q25 Recap

2Q25F Expectations:

• Core net profit: RM9.2bn–RM9.3bn (down 1-2% qoq due to high base from HLB’s 1Q25 write-back)
• Yoy core net profit growth: 3–4%
• NII: Up 2–3% yoy, rebounding qoq
• NOII: Up c.6% yoy, stable qoq at c.RM6bn
• Overheads: Normalized growth c.5% yoy
• LLP: Steady at c.RM900m, credit charge-off rate at c.15bp (well below pre-Covid averages)
• Loan growth: Around 5% yoy at end-Jun 25F
• Gross impaired loan ratio: Around 1.45%

1Q25 Recap:

• Core net profit: RM9.37bn, up 7.2% yoy
• Reported net profit: Up 2.5% yoy (dilution loss at HLB)
• NII: Up 2.1% yoy (but down 1.5% qoq due to seasonality)
• NOII: Up 3.8% yoy, strong qoq growth of 8.6%
• LLP: Down 54.9% yoy to RM602.3m (lowest since 4Q18)
• Cost growth: Narrowest since 2Q22 at 2.7% yoy

Net Interest Income and Margins: Rebounding After a Soft Patch

After a weak 2023, banks’ NII rebounded in the last five quarters. For 2Q25F, NII is expected to climb 1–2% qoq to RM12.2bn–RM12.3bn, translating into a 2–3% yoy gain. This is driven by:

• Qoq loan growth and more days in the quarter
• Additional interest income from the SRR cut (2% to 1% in May 2025, releasing RM19bn liquidity)

Sector Standouts in 1Q25 NII Growth:

• AMMB Holdings: +12.6% yoy (NIM expansion of 17bp to 1.96%)
• Alliance Bank: +8.3% yoy (rapid loan growth)
• Affin Bank: +6.4% yoy (lower cost of funds)

Average sector NIM was stable at 2.03% in 1Q25. For 2Q25F, NIMs are expected to remain stable with an upward bias due to seasonal effects and the SRR cut offsetting ongoing deposit competition.

Non-Interest Income: Insurance and FX Gains Drive Upside

Banks’ NOII surprised on the upside in 1Q25, advancing 3.8% yoy to RM6.12bn, despite a 10.2% yoy drop in equity market trading volumes. Highlights include:

• Strong other income: Maybank’s FX gain (RM914.6m) and insurance/takaful contributions
• Public Bank’s contribution from its acquisition of LPI Capital
• Fee income broadly flat, a good result given weak equity market sentiment

For 2Q25F, NOII is expected to remain stable qoq and rise c.6% yoy, with the NOII ratio climbing above 26%. Maybank leads the sector with a NOII ratio of 31.5%, followed by CIMB (26.7%) and Affin (25.8%). Alliance Bank’s NOII ratio remains the lowest at 8.9% due to its lending focus.

Overheads: Tight Cost Control Pays Off

Cost discipline was a hallmark of 1Q25, with overheads rising just 2.7% yoy—the narrowest since 2Q22. Seven out of nine banks kept overhead growth at or below 5%, with Alliance Bank seeing the highest increase (16.6% yoy) due to its aggressive expansion.

The sector’s cost-to-income ratio was stable at 45.9% in 1Q25, with Public Bank (35%) and HLB (38.8%) remaining the most efficient. Smaller banks like Affin, Bank Islam, and Alliance Bank report ratios above 50% due to lack of scale and business expansion costs.

For 2Q25F, overheads are expected to normalize to c.5% yoy growth, with Public Bank and HLB maintaining cost-to-income ratios below 40%.

Loan Loss Provisioning and Asset Quality: Normalization from Lows

LLP hit a multi-year low in 1Q25 (RM602.3m), mainly due to a RM399m management overlay write-back at HLB. For 2Q25F, LLP is expected to normalize to c.RM900m, with a credit charge-off rate of c.15bp, well below pre-pandemic levels. Net management overlay write-backs are projected at RM700m–800m in 2025F.

Public Bank and HLB are expected to maintain benign charge-off rates below 10bp, while Bank Islam’s should moderate from a peak of 46bp in 1Q25 to 30–40bp in 2Q25F.

Loan Growth: Easing but Stable

Sector loan growth softened to 5.2% yoy at end-Mar 25, with a V-shaped dip and rebound in April and May (5.1% to 5.3%). Household loans remained steady at c.5.9% while business loan growth was more volatile.

Residential mortgage growth is trending lower (6.9% at end-Dec 24 to 6.4% at end-May 25), and auto loan growth is also slowing (8.4% to 6.9% in the same period). Credit card receivables, though showing strong momentum (9.1% yoy), make up just 0.9% of total loans.

Alliance Bank is the sector leader in loan growth (+12% yoy in 1Q25), followed by HLB (+7.2%) and Affin (+7.1%). CIMB (+1.2%) and Maybank (+3.2%) lag, with Maybank’s international loan base weighing on overall growth despite strong domestic expansion (8.1% yoy in Malaysia).

Asset Quality: Impairments Stable, Coverage Remains High

The sector’s gross impaired loan ratio improved to 1.42% at end-Mar 25, with a slight expected uptick to 1.45% at end-Jun 25. Even with US tariff risks, any increase in impaired ratios is expected to be minimal (less than 10bp), with banks ready to provide repayment assistance as needed.

Loan loss coverage remains robust at c.90%, with five banks boasting coverage above 100% in 1Q25. Public Bank leads at 159.9%, while RHB Bank’s reported coverage is lower (76.9%), but rises to 127% when including regulatory reserves.

Public Bank (0.53%) and HLB (0.57%) maintain the lowest gross impaired loan ratios in the sector, with CIMB (2.16%) and Affin (1.84%) at the higher end—but still at comfortable levels.

ESG: Progress and Sector Leaders

Malaysian banks are assessed as low direct ESG risk entities. The sector is increasingly active in enabling ESG improvements across the economy, especially via lending relationships. Maybank stands out as the ESG sector pick due to:

• Early adoption of ESG lending guidelines
• A dedicated ESG task force
• Regional leadership in ESG initiatives

Most banks are expanding green financing targets (e.g., RM80bn for Maybank, RM5bn for Alliance) and enhancing ESG disclosures. Key areas for further focus include climate risk assessment and more granular sectoral ESG exposure reporting.

Potential Risks and Sector Outlook

• Slower-than-expected economic growth could dampen loan growth and increase LLP
• Inflationary pressures may hit both loan demand and asset quality
• Intense deposit competition could pressure NIMs if it escalates
• US tariff impacts are being proactively managed but remain a watch item

Despite these risks, the sector remains Overweight, with positive catalysts from management overlay write-backs and rising dividend payouts. Downside risks are mitigated by strong coverage ratios, cost discipline, and healthy capital buffers.

Top Picks and Detailed Company Analysis

Regional Peers: Comparative Valuation Snapshot

Conclusion: Solid Sector Fundamentals Amid Manageable Risks

The Malaysian banking sector is on track for steady and resilient growth in 2025, supported by stable asset quality, prudent cost control, and robust capital buffers. While macroeconomic and external risks remain, proactive management and strong fundamentals underpin the sector’s Overweight rating. Investors can look to sector leaders like HLB, Public Bank, and Maybank for both defensiveness and growth potential, while monitoring ongoing developments in ESG, digital transformation, and cost efficiency. The sector remains well-positioned to deliver value through earnings growth, solid dividends, and effective risk management in the year ahead.