Broker: UOB Kay Hian
Date of Report: Friday, 01 August 2025

Malaysia Banking Sector 2025 Outlook: Loan Growth Slows Amid Caution, Defensive Banks Lead the Pack

Introduction: Cautious Optimism as Loan Growth Eases

Malaysia’s banking sector is navigating a period of moderated loan growth, with June 2025 data reflecting a softer lending environment. The latest figures show a deceleration in business loan expansion, even as household lending remains resilient. Despite these headwinds, sector valuations remain attractive, especially for defensive banks. UOB Kay Hian maintains a “Market Weight” view, favoring names with strong capital buffers and capital management potential.

Loan Growth Trends: Business Lending Weakens, Households Hold Steady

– Total loan growth in June 2025 slowed to 5.1% year-on-year, down from 5.3% in May. – The deceleration was largely due to weaker business loan growth, which eased to 4.0% (May: 4.4%), driven by a slowdown in working capital loans (4.0% vs. 4.8% in May). – In contrast, household loan growth edged up slightly to 5.9% (May: 5.8%), supported by steady mortgage lending at 6.4%.

Loan Growth Forecast Maintained at 5-6% for 2025

– UOB Kay Hian keeps its 2025 loan growth forecast at 5-6%, recently trimmed from 6-7% due to a softer GDP outlook. – This forecast implies a 1.4x loan-to-GDP growth multiplier, consistent with the historical range of 1.0x-1.7x.

Key Leading Indicators: Loan Applications and Approvals Taper Off

– Loan application growth slowed sharply to 1.3% year-on-year in June (May: 8.6%). – Loan approvals dipped 0.4% year-on-year (May: +15.5%). – The sharpest declines were seen in business loan applications, which grew just 4.4% (May: 25.5%), resulting in a moderation in business loan approvals to 3.2% (May: 34.8%). – Household loan applications and approvals continued to contract, with mortgage applications down 1.4% year-on-year.

Deposit Growth and Funding Profile

– Deposits grew marginally to 2.9% year-on-year in June (May: 2.7%). – Both CASA (+5.2% vs. +3.0% in May) and fixed deposits (+2.8% vs. +2.5%) contributed to the growth. – The sector’s loan-to-deposit ratio increased to 88.7% from 88.3% as loan growth continues to outpace deposit accumulation.

Asset Quality: Stability in Impairments and Loan Loss Coverage

– The gross impaired loan (GIL) ratio improved to 1.42% in June, down from 1.45% in May. – Asset quality gains were seen in both business (1.94% vs. 1.97%) and household segments (1.08% vs. 1.10%). – Banks’ loan loss coverage ratios averaged a healthy 90%, well above the pre-pandemic average of 80%. – Credit costs are expected to remain stable with GIL ratios at near-historical lows.

Investment Strategy: Market Weight with a Tilt to Defensive Plays

– The sector trades at its historical mean price-to-book value (P/BV) of 1.08x. – Attractive valuations are supported by robust provision buffers and a solid 5.6% sector dividend yield. – However, moderating loan growth and persistent net interest margin (NIM) compression, especially if another OPR cut materializes, could cap immediate upside. – Top sector picks focus on defensiveness and capital management: Hong Leong Bank, Public Bank, and AMMB.

Top Bank Picks: Detailed Company Analysis

Public Bank

– Recommendation: BUY – Share Price: RM4.21; Target Price: RM4.90 – 2025F PE: 11.0x; ROE: 12.5%; P/B: 1.4x – Dividend Yield (2025F): 5.4% – Defensive, stable, and attractive valuation with high provision buffers.

Hong Leong Bank

– Recommendation: BUY – Share Price: RM19.00; Target Price: RM23.80 – 2025F PE: 8.1x; ROE: 12.2%; P/B: 1.0x – Dividend Yield (2025F): 5.0% – Known for defensiveness and attractive value, expected to outperform.

AMMB

– Recommendation: BUY – Share Price: RM5.05; Target Price: RM6.08 – 2025F PE: 8.2x; ROE: 9.4%; P/B: 0.8x – Dividend Yield (2025F): 7.3% – Stands out for its capital management upside.

HLFG

– Recommendation: BUY – Share Price: RM16.14; Target Price: RM21.40 – 2025F PE: 5.3x; ROE: 10.6%; P/B: 0.6x – Dividend Yield (2025F): 3.3% – Offers very attractive valuation with solid fundamentals.

Maybank

– Recommendation: HOLD – Share Price: RM9.39; Target Price: RM10.30 – 2025F PE: 10.3x; ROE: 10.6%; P/B: 1.1x – Dividend Yield (2025F): 7.3% – Strong yield but faces sector headwinds.

CIMB Group

– Recommendation: HOLD – Share Price: RM6.55; Target Price: RM7.52 – 2025F PE: 9.0x; ROE: 10.9%; P/B: 1.0x – Dividend Yield (2025F): 6.0% – Attractive dividend but exposure to moderating growth.

RHB Bank

– Recommendation: HOLD – Share Price: RM6.13; Target Price: RM7.30 – 2025F PE: 8.4x; ROE: 9.5%; P/B: 0.8x – Dividend Yield (2025F): 7.8% – Stable outlook, solid dividend, but limited near-term catalysts.

Alliance Bank

– Recommendation: HOLD – Share Price: RM4.49; Target Price: RM4.84 – 2025F PE: 8.7x; ROE: 9.8%; P/B: 0.9x – Dividend Yield (2025F): 5.1% – Reasonable valuation and yield, but moderate growth.

Bank Islam

– Recommendation: HOLD – Share Price: RM2.24; Target Price: RM2.38 – 2025F PE: 8.4x; ROE: 7.0%; P/B: 0.6x – Dividend Yield (2025F): 6.0% – Lower ROE, but good yield and stable outlook.

Affin Bank

– Recommendation: SELL – Share Price: RM2.38; Target Price: RM2.38 – 2025F PE: 10.9x; ROE: 4.5%; P/B: 0.5x – Dividend Yield (2025F): 2.8% – Weak earnings outlook and modest dividends.

Recent Share Price Performance

– Alliance Bank: +12.6% YoY, -4.2% YTD – RHB Bank: +8.6% YoY, -4.3% YTD – Public Bank: +1.9% YoY, -5.9% YTD – Hong Leong Bank: +0.1% YoY, -6.1% YTD – AMMB: +13.1% YoY, -6.9% YTD – Maybank: -7.5% YoY, -7.7% YTD – Bank Islam: -9.6% YoY, -8.9% YTD – HLFG: -6.2% YoY, -12.8% YTD – Affin Bank: -16.9% YoY, -12.9% YTD – CIMB Group: -11.1% YoY, -20.1% YTD

Summary of Key Banking Data (YoY % Change)

Conclusion: Outlook for 2025

Malaysia’s banking sector faces a year of tempered loan growth, led by caution in business lending and persistent external uncertainties. However, strong capital positions, resilient household lending, and attractive dividends position select banks for outperformance. Investors are advised to focus on defensive, well-capitalized banks with capital management upside, notably Hong Leong Bank, Public Bank, and AMMB.