Malaysian banking stocks have recently traded at valuations reminiscent of the most turbulent periods in financial markets, even as the sector’s underlying fundamentals show notable resilience. Kenanga Research points to a disconnect between depressed share prices and robust asset quality, arguing that the market may be pricing in more risk than actually exists given current conditions. The research house highlights that the sector’s price-to-book value ratio, measured against the KL Financial Index, slid to a one-year low of 1.08 times in May 2025, marking only the second occasion this valuation benchmark has breached such a level outside of crisis episodes—the previous spike occurring during the US regional banking turmoil in 2023. Despite the gloom reflected in share prices, Kenanga contends that a combination of healthier balance sheets, prudent provisioning, and generally strong loan portfolios supports a more constructive outlook for banks over time. This article delves into the nuanced factors behind the valuation pullback, the concrete fundamentals underpinning the sector, the regulatory and policy backdrop, Kenanga’s investment stance, and the broader implications for investors navigating the Malaysian banking landscape.
Valuation Trends and Market Sentiment
Kenanga Research has been monitoring valuation metrics with particular focus on the price-to-book value (P/B) of banks as a proxy for how the market prices future profitability relative to the assets banks hold. In May 2025, the P/B ratio for the Malaysian banking sector versus the KL Financial Index dropped to a one-year trough of 1.08 times, a threshold that historically signals heightened skepticism about banks’ ability to generate returns from their asset base. The significance of this figure lies not merely in the numeric value but in the deviation it represents from the broader earnings and capital-adequacy story that banks have consistently delivered over time. The last time such a disconnect appeared outside of systemic crises was during the wake of the U.S. regional banking stress in 2023, which unsettled global risk appetites and rippled through Asia, amplifying concerns about funding costs, liquidity, and the durability of net interest margins (NIMs). Kenanga’s interpretation is that this combination of stress catalysts—macro uncertainty, trade tariff talk, and a fragile risk-on risk-off environment—has compounded price weakness in bank equities, even as the sector’s fundamental pillars remain comparatively sound.
The fallout from these dynamics can be traced to a triad of concerns that investors have focused on in recent months. First, loan growth has shown signs of sluggishness in a climate where borrowers face higher borrowing costs and the demand side for credit cools. Second, banks have contended with persistently tight net interest margins (NIMs), a structural challenge that compresses net income margins for lenders whose earnings hinge on the spread between deposit costs and loan yields. Third, broader market jitters tied to tariff uncertainties and global growth fears have kept risk aversion elevated, impacting equities across sectors, including financials. Yet, despite these adversities in the near term, Kenanga emphasizes that the banking sector sits on a robust asset-quality footing, suggesting that the market’s current discount may be disproportionate to the actual risk profile in the system.
Within this valuation context, Kenanga notes that the sector’s GIL ratios—the gross impaired loan ratios—have remained below the 1.5% mark, a level that is widely interpreted as evidence of healthy asset quality and prudent credit risk management. Moreover, banks’ provisioning strength remains solid, with average loan loss coverage—including regulatory reserves—around 140%. This combination of modest credit impairment indicators and ample reserves points to a cushion against potential stress scenarios, reinforcing the argument that the sector’s fundamentals do not justify the extent of valuation discount currently being observed in the market. In essence, Kenanga’s assessment is that the current environment is healthier in terms of credit quality and loss-absorption capacity than during several prior crises, which historically have wrought more severe disruptions to earnings through elevated loan write-offs and expanded risk provisioning cycles.
The investment firm’s stance towards the sector remains constructive. Kenanga has reinforced its “overweight” call on Malaysian banks, citing a blend of resilient fundamentals, potential multiple expansion as investor sentiment improves, and the possibility of a valuation re-rating should macro conditions stabilize and growth momentum regain traction. As part of its India- and Malaysia-facing coverage, Kenanga identified a portfolio tilt that includes AMMB Holdings Bhd (KL: AMBANK), CIMB Group Holdings Bhd (KL: CIMB), and Malayan Banking Bhd (KL: MAYBANK) as the top three picks for the third quarter of 2025. This selection underscores the belief that these banks offer a balance of strong balance sheets, diversified earnings streams, and the potential to deliver outsized returns if valuation multiples begin to converge toward historical norms as macro risks abate and loan growth stabilizes.
Looking ahead, Kenanga’s base-case scenario assumes Bank Negara Malaysia (BNM) will maintain a steady hold on the overnight policy rate (OPR) at 3% for the remainder of the year, bucking expectations among some economists for potential monetary easing or a rate path adjustment. The rationale for this view hinges on a balanced assessment of domestic inflation dynamics, macro resilience, and the need to anchor expectations to preserve financial stability. However, even with a stable policy rate environment, Kenanga argues that banks could face continued pressure on NIMs from weaker asset yields. The research house quantifies the risk by estimating that every 25-basis-point (bp) cut in rates could translate into a 1–3 bp reduction in sector NIMs, which, over time, could manifest as an approximate 2% decline in earnings per share or overall profitability, depending on the bank’s asset mix, funding costs, and hedging strategies. Such a scenario highlights the sensitivity of banks’ earnings to rate movements, even when asset quality remains solid and provisioning buffers stay intact.
In summary, the valuation narrative presented by Kenanga Research is that the market’s current pricing of Malaysian banks appears misaligned with the objective, observable health of the sector’s assets and earnings capacity. The disconnect arises from a confluence of near-term macro angst, concerns about growth trajectories, and a risk-off posture adopted by investors, while the longer-term earnings fundamentals—driven by stable credit quality and prudent capitalization—offer a more supportive backdrop for a potential re-rating as conditions normalize. The takeaway for investors, according to Kenanga, is not to disregard shorter-term headwinds but to recognize that the structural strengths embedded in the Malaysian banking system still provide compelling medium- to longer-term upside potential, especially for blue-chip franchises with diversified earnings, prudent risk management cultures, and efficient cost bases. Investors are thus advised to assess risk-adjusted returns with a disciplined lens, weighing the likelihood of a gradual grind higher in valuations against the probability of continued volatility driven by external shocks and domestic policy shifts.
Fundamentals Under Pressure: Asset Quality, NIMs, and Coverage
Beyond the headline valuation metrics, Kenanga Research emphasizes that the core financial health of Malaysian banks remains anchored by asset quality, prudent provisioning, and a disciplined approach to balance sheet management. The portfolio quality narrative in this environment hinges on several interrelated factors that collectively influence earnings stability and the ability to absorb potential shocks. First, the gross impaired loan (GIL) ratio—an aggregate measure of loans that are non-performing or in distress—has consistently remained below critical distress thresholds, signaling that borrowers across the system have not reached levels of delinquency that would threaten the sector’s credit quality. The GIL ratio’s sub-1.5% reading is notable in a period characterized by a soft loan growth environment, where the incentive to maintain high asset quality remains strong due to regulatory expectations and the recurring need to pool adequate loan-loss reserves. When loan portfolios maintain such resilience, banks can allocate capital more confidently toward growth initiatives and digital transformation, rather than chasing yield by taking on riskier credits.
Second, provisioning remains a central piece of the earnings safety net. Kenanga notes that the banks’ provisioning buffers—encompassing loan-loss reserves and regulatory reserves—are substantial, with an overall coverage ratio around 140%. This figure captures not only the banks’ own stand-alone provisions against potential losses but also the regulatory reserves designed to reinforce resilience during cyclic downturns. The presence of ample coverage means that the sector is better positioned to weather potential deterioration in asset quality, should economic conditions deteriorate or if external shocks arise. The implication for investors is that earnings volatility may be tempered relative to peers or markets where provisioning is leaner. The cushion acts as a stabilizing mechanism during periods of stress and suggests a lower probability of aggressive earnings downgrades purely on credit risk concerns.
Third, loan growth, while slowing, remains a key variable in driving the sector’s earnings trajectory. The downturn in loan growth contributes directly to revenue headwinds through slower loan volume generation and narrower net interest income growth. In a market where deposits still provide the funding backbone, the challenge for banks is to optimize the deployment of those deposits to majors like consumer lending, mortgages, corporate lending, and trade finance, while maintaining healthy spreads. The current environment places a premium on effective balance sheet management, including product mix optimization, pricing discipline, and risk-adjusted returns on new credit extensions. Kenanga suggests that the combination of a cautious appetite for new lending and a need to guard margins will test banks’ ability to sustain earnings growth in 2025 and beyond.
Fourth, net interest margins remain under pressure as asset yields weaken in the face of macro dynamics and monetary policy shifts. The analysis presents a scenario wherein rate-sensitive assets yield less as benchmark rates trend or hold, compressing the spread banks can simultaneously command on new and existing loan portfolios. This dynamic is particularly relevant given that deposit funding costs may also respond to policy changes, competition, or liquidity considerations, thereby influencing NIMs. Kenanga’s quantitative view suggests that even modest rate adjustments could translate into measurable changes in NIM and, by extension, earnings. The conclusion drawn is that the sector’s profitability is more sensitive to rate movements than some observers might assume, notwithstanding strong balance sheets and positive diagnostic signals in asset quality.
Fifth, the macroeconomic fabric surrounding Malaysian banks adds complexity to the fundamentals. While asset quality threads remain robust, external pressure from global trade tensions, currency volatility, and international capital flows can influence liquidity, funding costs, and customer behavior. The broader economic environment—growth rates, unemployment trends, consumer confidence, and business investment—feeds into the credit risk profile and the demand for bank credit. In this context, banks must balance the need to maintain prudent credit risk controls with the opportunity to support growth in a recovering economy. Kenanga’s view leans toward the possibility that, with the right mix of pricing power, asset quality management, and capital discipline, banks can navigate the current headwinds and deliver stable earnings over the medium term.
In practical terms for investors, the fundamental picture suggests that despite the near-term challenges—slower loan growth, pressure on NIMs, and market volatility—the sector’s core health indicators remain in a favorable zone. The stability of the GIL ratio below 1.5% and the robust provisioning framework act as counterweights to earnings volatility and provide a stronger base for potential re-rating as macro conditions improve. This balanced view underscores Kenanga’s confidence in the sector’s capacity to weather cyclicality and deliver incremental value to shareholders through disciplined capital management, selective growth strategies, and a potential uplift in valuations should market sentiment stabilize and macro risks ease.
Regulatory and Policy Backdrop: Bank Negara Malaysia and the Macro Environment
A central dimension shaping the Malaysian banking sector’s trajectory is the domestic policy environment, particularly the stance of Bank Negara Malaysia (BNM) on monetary policy and macroprudential safeguards. Kenanga’s scenario places emphasis on the expectation that BNM will maintain a steady policy rate path by keeping the overnight policy rate (OPR at 3%) unchanged for the remainder of the year. This assumption reflects a judgement that the central bank will prioritize financial stability, inflation containment, and domestic macro resilience over a more aggressive easing cycle. It also implies confidence that a 3% policy rate can support a favorable environment for banks to operate within while preventing excessive capital misallocation or credit cycles that could fuel asset quality deterioration. Such a stance—if realized—could help banks to stabilize funding costs and preserve some degree of NIM resilience, even as asset yields in a lower-rate regime compress.
Nevertheless, the policy outlook is not without potential risks. Should inflation pressures intensify or external conditions shift more decisively, the market could rally around a different rate trajectory. Investors and bank executives alike will be watching inflation data, labor market dynamics, and external financing conditions to gauge whether the OPR remains at 3% or if a change becomes more likely. Even with a central-bank pause, there is an understood possibility that rates could move later in the year if growth or inflation dynamics require recalibration. In the interim, the market’s attention remains on the balance between the desire to maintain supportive credit conditions and the need to preserve price stability within the economy.
The macro environment also features tailwinds and headwinds that influence the banking sector’s profitability beyond the direct effects of rate movements. Trade policy and tariff uncertainties remain a source of volatility, particularly for banks with significant exposure to cross-border lending, import-export financing, or companies that rely on global supply chains. A slower global growth trajectory could limit demand for financial products and services, potentially reducing loan volume and altering the competitive landscape as banks compete for limited credit demand. The domestic economy’s growth path, consumer spending patterns, and business investment levels will continue to shape credit quality and the risk profiles of loan portfolios. In such a setting, banks must adapt with prudent underwriting standards, refined risk models, and creative product strategies to sustain earnings while preserving capital adequacy.
BNM’s regulatory framework also contributes to the resilience observed in bank balance sheets. The regulatory regime fosters prudent provisioning, robust risk governance, and capital adequacy requirements designed to withstand cyclical stress. This environment incentivizes banks to maintain conservative lending practices, diversify revenue streams, and invest in technology and risk management capabilities that improve efficiency and oversight. The net effect is a sector that, despite short-term earnings volatility and valuation fluctuations, possess a foundation that supports stable operation and long-term durability. Kenanga’s assessment implicitly recognizes the importance of a strong regulatory backbone in enabling investors to tolerate near-term earnings pressures in exchange for a more resilient, higher-quality credit book and a credible path to return-on-equity expansion over time.
In light of these dynamics, the regulatory and macro backdrop acts as a potential catalyst for a valuation re-rating, particularly if macro conditions stabilize and banks demonstrate continued discipline in risk management, cost control, and capital deployment. Investors who monitor policy signals and macro indicators may find opportunities to align holdings with a more constructive rate and growth environment, thereby enhancing the potential for earnings growth and a re-pricing of banks’ valuations. Conversely, any deterioration in macro indicators or a shift in policy that unexpectedly tightens financial conditions could reintroduce pressure on earnings and valuations, underscoring the sensitivity of bank stocks to the policy climate and the broader economy.
Investment Thesis: Kenanga’s Overweight Call and Top Picks
Kenanga Research’s overarching investment thesis for the Malaysian banking sector hinges on a combination of resilient fundamentals, a potential re-rating opportunity, and a relatively favorable risk-reward dynamic given current price levels. The firm maintains an “overweight” rating on the sector, arguing that the market’s pessimism has already priced in a disproportionate amount of downside risk relative to what is visible in asset quality and provisioning. The core argument is that the sector’s defensive characteristics—stable collateral quality, strong capital buffers, prudent provisioning practices, and diversified earnings streams—provide a solid foundation for long-term value creation, even if near-term earnings trajectories are pressured by NIM compression and slower loan growth.
Kenanga’s top picks for the third quarter of 2025 reflect a targeted approach to identifying banks with the strongest combination of balance-sheet strength, earnings resilience, and growth prospects. AMMB Holdings Bhd (KL: AMBANK), CIMB Group Holdings Bhd (KL: CIMB), and Malayan Banking Bhd (KL: MAYBANK) have been singled out as anchor ideas. The selection underscores the belief that these banks offer exposure to diversified business models, robust capital adequacy, and the capacity to navigate a challenging rate environment while preserving earnings stability. AMMB, CIMB, and Maybank collectively benefit from diversified geographic and product mix, which can help dampen the impact of slower loan growth in any single segment and provide flexibility in pricing and risk management. Their larger size, scale, and market presence also translate into stronger fee income generation and greater efficiencies from cost discipline, which are essential to sustaining profitability in a climate of NIM pressure.
The nuanced rationale for choosing these banks also includes their relative positioning within the Malaysian financial ecosystem. They possess robust funding profiles and a track record of prudent underwriting, which translates into lower credit-risk metrics and more predictable earnings streams. Additionally, these institutions have demonstrated adaptability to digital transformation and evolving customer behaviors, enabling them to maintain deposit growth and improve cross-selling opportunities, thereby enhancing the overall resilience of their revenue bases. In terms of risk considerations, Kenanga acknowledges that banks operating in a higher-rate environment could experience volatility in earnings, particularly if rate cuts occur more rapidly than expected or if asset yields are slower to reprice. However, the belief remains that the selected banks’ prudent risk practices, solid capital positions, and diversified revenue channels should help them outperform the broader sector in a re-rating scenario.
The overarching stance is that an overweight position in the banking sector is justified by a combination of strong balance sheets, resilient asset quality, and the potential for multiple expansion as macro risks ease. Kenanga expects that a stabilization of loan growth and a gradual improvement in funding costs could lead to earnings stabilization or modest growth, provided that rate movements are orderly and credit quality remains robust. The caveat attached to this call emphasizes that earnings volatility could persist in the near term if NIMs remain pressured or if external shocks reemerge. Nevertheless, the investment house’s thesis centers on a constructive risk-reward balance, one that suggests attractive upside potential in quality franchises such as AMBANK, CIMB, and Maybank, particularly as market sentiment shifts toward a more balanced outlook.
In parallel with its stock-picking rationale, Kenanga also highlights the potential for sector-wide improvements in valuations as confidence returns and macro indicators stabilize. The expectation is that a more favorable risk perception, supported by credible earnings visibility and capital strength, could drive a re-rating of the sector’s multiple toward historical norms. The combination of stable asset quality, strong provisioning buffers, and a likely path to earnings resilience in a normalized rate environment underpins the optimism. Investors are encouraged to consider the banks’ positioning, strategic initiatives, and capital adequacy within a broader framework of risk management and macro stability when building exposure to the Malaysian banking space.
Earnings implications and the sensitivity to rate movements form an essential part of the forward-looking analysis. Kenanga’s assessment suggests that even with a 25-bp rate cut, sector NIMs might be reduced by approximately 1–3 basis points, with the cumulative effect contributing to about a 2% decline in earnings across the sector. This projection underscores the interplay between monetary policy and profitability, especially for banks with higher share of floating-rate assets or more significant exposure to consumer and corporate lending where spreads can compress quickly as funding costs respond to policy changes. Investors should be mindful of the potential earnings volatility tied to rate adjustments and the timing of such adjustments, as these variables can influence the pace and magnitude of any re-rating in bank equities.
In closing, Kenanga’s investment thesis for Malaysian banks is anchored in a careful assessment of the structural strengths that have underpinned asset quality and capital adequacy, alongside an explicit recognition of near-term earnings headwinds driven by NIM compression and slower loan growth. The top picks—AMMB, CIMB, and Maybank—represent banks with the capacity to balance risk and return through diversified earnings streams, strong capital cushions, and disciplined balance-sheet management. The overarching message for investors is to view the sector through a lens that factors in both the resilience of fundamentals and the potential for valuation re-rating as macro conditions stabilize and growth signals improve, while staying alert to the risks posed by policy shifts, external shocks, or sudden changes in global financial market sentiment.
Earnings Outlook and Potential Scenarios
Looking ahead, the earnings trajectory for Malaysian banks hinges on a confluence of rate dynamics, asset-yield trends, and the ongoing management of credit risk. The central premise of Kenanga’s outlook is that the sector’s earnings could face pressure from NIM compression if rates remain lower for longer or if rate cuts occur abruptly. The sensitivity analysis presented by Kenanga indicates that a 25-basis-point rate reduction could translate into a modest but meaningful erosion of sector NIMs, with a potential knock-on effect of an approximate 2% decline in aggregate earnings. This projection is not a forecast of uniform outcomes across all banks but rather an indication of the direction and magnitude of earnings vulnerabilities that can arise in a shifting rate environment. The variance across banks will depend on how each institution manages its asset mix, funding costs, and pricing strategies, as well as how effectively they deploy digital and process efficiencies to protect margins.
From a practical standpoint, the earnings risk arises from several vectors. First, banks have to contend with the challenge of sustaining spreads in a landscape where new loan volumes may decelerate. A slower pace of loan growth can limit top-line expansion, especially if the pricing environment tightens due to competition or if risk-adjusted returns on new production are recalibrated downward. Second, while provisioning remains robust, the fear of adverse macro scenarios—such as a sharper downturn in consumer spending or a more sudden downturn in corporate investment—could necessitate incremental provisioning or greater credit risk buffers. Third, the potential for policy shifts—whether in the form of an unanticipated rate cut or a policy change altering the cost of funding—could alter the earnings trajectory more quickly than markets anticipate. Each of these factors contributes to a nuanced earnings picture that requires careful monitoring and dynamic risk management.
In a best-case scenario, where macro conditions stabilize and loan demand shows signs of improvement, banks could gradually realize a rebound in NIMs as asset yields begin to reprice in response to policy shifts or improving growth expectations. If this re-pricing aligns with continued robust provisioning levels and solid asset quality, banks could see a return to earnings resilience and even growth, supporting a re-rating of shares to reflect improved profitability prospects. The re-rating, in turn, would be reinforced by strong capital positions, which provide a buffer against negative shocks and enable banks to maintain shareholder-friendly capital management, including potential dividend growth and share buybacks where appropriate.
A balanced risk scenario would involve a continuation of modest loan growth, stable asset quality, and persistent but manageable NIM pressure. In such a scenario, earnings would grow at a slower pace, but the resilience of provisioning could help mitigate downside risks. Investors would likely focus on banks with diversified income streams—such as wealth management, treasury, and non-interest income sources—that help cushion earnings against net interest income volatility. Operational efficiency improvements, including cost reductions, digital enablement, and process optimization, would also be critical in preserving profitability in a slower growth environment. The ability to extract efficiency gains, maintain stable funding costs, and manage risk exposure would be central to sustaining earnings performance in this milieu.
The downside scenario would involve a more acute deterioration in credit quality or a sharper decline in loan demand, compounding pressures on NIMs and potentially forcing higher provisioning. In such a context, earnings could fall more noticeably, and valuations could retrace as investors recalibrate expectations. Banks would need to demonstrate rapid and effective risk-management responses, such as tightening underwriting standards, strengthening credit committee governance, and accelerating impairment recognition where needed. Government policy responses and macro stabilization measures would also play a critical role in mitigating downside risk. In this framework, the emphasis on capital adequacy, risk controls, and strategic cost management becomes even more paramount as the sector navigates a challenging environment.
The sector’s overall earnings outlook remains intertwined with the trajectory of the Malaysian economy, global financial conditions, and the policy path set by Bank Negara Malaysia. Kenanga’s position suggests that, despite near-term pressures, the long-term earnings potential for Malaysian banks is favorable given their solid asset-quality metrics, strong provisioning, and the opportunity for multiple expansion as investor sentiment improves and macro risks ease. Investors considering exposure to this sector should balance the potential for earnings resilience and multiple expansion with the understandable risk of fluctuation in rate paths and external shocks. The recommended approach is to maintain a structured, diversified exposure to the sector, focusing on issuers with durable business models, robust capital bases, and a track record of prudent risk management, while staying attuned to shifts in policy and macro indicators.
Conclusion
The Malaysian banking sector stands at a crossroads where depressed valuations reflect a confluence of macro jitters, rate expectations, and cautious market sentiment, even as the sector’s fundamental health appears comparatively robust. Kenanga Research’s analysis underscores a disconnect between the market’s punitive pricing and the sector’s resilient asset quality, ample provisioning, and prudent risk governance. The one-year low of 1.08x P/B in May 2025, against a backdrop of GIL ratios below 1.5% and provisioning around 140%, signals that the downside in bank stocks may have been overextended relative to the actual risk profile. Kenanga’s overweight stance on banks, bolstered by a prioritized trio of picks—AMMB Holdings, CIMB, and Maybank—frames a thesis built on diversified earnings bases, solid capital buffers, and the potential for valuation re-rating as macro conditions stabilize.
Bank Negara Malaysia’s policy stance at a 3% OPR, if sustained through year-end, could offer a degree of stability that supports earnings and funding costs for banks, though the sector remains sensitive to rate changes and external shocks. The implicit earnings risk from rate cuts—where even a 25 bp adjustment could trim NIMs slightly and depress earnings by around 2%—emphasizes the delicate balance between monetary policy, asset yields, and profitability. For investors, the message is to weigh the compelling long-term fundamentals and the potential rebound in valuations against the near-term earnings headwinds and volatility inherent in a rate-sensitive environment. The Malaysian banking sector’s attractiveness lies in its combination of high-quality assets, resilient provisioning, and scalable franchises that can adapt to evolving customer needs and digital transformations.
As the sector navigates the remainder of 2025 and into 2026, the key catalysts to watch include patterns in loan growth dispersion across segments, the trajectory of NIMs in a gradually evolving rate landscape, and any material policy shifts that could alter funding costs or credit conditions. The interplay between macro stability, regulatory discipline, and banks’ own strategic initiatives will continue to shape earnings momentum and the potential for re-rating. For stakeholders, staying informed about each bank’s balance-sheet strategy, capital management priorities, and risk governance will be essential to capitalizing on opportunities in a market that remains sensitive to external dynamics yet driven by resilient credit fundamentals.
Note: This article synthesizes the information initially reported by Kenanga Research and reflects a broader analysis of the Malaysian banking sector’s valuation, fundamentals, policy environment, and investment outlook as of mid-2025. The insights are intended to provide a comprehensive view of the factors influencing bank equities and are not a recommendation to buy or sell any specific securities. Investors should conduct their own due diligence and consider their risk tolerance, investment horizon, and portfolio objectives before making investment decisions.
