Malaysian banking stocks are trading at valuations only seen during major financial crises, even as Kenanga Research notes the sector’s fundamentals remain resilient. The price-to-book value metric, benchmarked against the KL Financial Index, slid to a one-year low of 1.08 times in May 2025, marking only the second time this level has breached crisis-era thresholds outside of a full-blown financial turmoil. The prior occurrence happened during the U.S. regional banking fallout in 2023, underscoring a broad sector-wide mispricing that Kenanga believes does not fully reflect the sector’s healthier underlying condition. While concerns about softer loan growth, persistently tight net interest margins, and wider market jitters tied to trade tariff uncertainty have pressed valuations lower, Kenanga argues that the banks’ asset quality and provisioning strength provide a strong counterweight to near-term headwinds. This sets the stage for a nuanced assessment of cycle timing, risk, and potential upside as the sector recalibrates.
Valuation and Fundamentals: The Oversold Narrative
Valuation Metrics and Crisis Parallels
Kenanga Research highlights a striking disconnect between market prices and bank fundamentals. At the core of this view is the sector’s price-to-book (P/B) ratio, which in May 2025 declined to 1.08 times—an indicator that shares are trading close to, or even below, the level of book value per share. This metric is a widely used gauge of how investors price a bank’s equity relative to its net asset base. When P/B dips toward crisis-era levels, investors often fear deterioration in asset quality, earnings volatility, or weaker balance sheets. Yet Kenanga emphasizes that this decline occurred despite asset quality metrics that remain comparatively robust by historical standards. The only comparable breach of this valuation threshold outside crisis periods, according to Kenanga, occurred during the stress episode following the U.S. regional banking disruption in 2023. The implication is clear: current valuations may reflect not only macroeconomic concerns but also a systemic risk aversion that might be detached from the banks’ actual performance trajectory.
The research house notes that the valuation gap presents a potential upside scenario should conditions stabilize or improve. The key question for investors revolves around whether the market has priced in a prolonged period of margin compression and slow loan growth or whether the sector can sustain earnings momentum despite the headwinds. Kenanga maintains its stance that the sector’s underlying health and earnings resilience can support a re-rating over time, particularly as the macro environment evolves and loan demand normalizes.
Key Drivers of the Downturn
Several macro and sector-specific factors have contributed to the current downturn in valuations, according to Kenanga. First, loan growth across the banking system is perceived to be sluggish. Slow credit expansion can weigh on interest income and fee-based revenues, leading to concerns about future earnings trajectories. Second, net interest margins (NIMs) remain persistently tight. With benchmark rates moving and competition for deposits intensifying, banks face pressure on the margin between lending rates and funding costs. Third, broader market jitters tied to trade tariff uncertainties inject additional volatility and risk aversion into equity prices, which can spill over into financial stocks even when fundamentals hold up relatively well. Taken together, these factors have pressured stock prices, creating an environment where negative sentiment can overshadow a still-solid credit quality profile.
Asset Quality and Provisioning: A Positive Contrast
Against the backdrop of earnings headwinds, Kenanga underscores a fundamental strength: asset quality remains robust. Gross impaired loan (GIL) ratios are reported to stay below 1.5%, a level that signals a relatively healthy loan portfolio with limited exposure to deteriorating credits. Moreover, banks are well provisioned, with average loan loss coverage—including regulatory reserves—around 140%. This indicates a substantial buffer to absorb potential credit losses, reducing the risk of sudden earnings volatility from impairment charges. The combination of a low GIL and ample provisioning suggests a cushion that could help stabilize earnings even if loan growth remains tepid and NIM pressures persist.
Kenanga’s assessment emphasizes that the current environment is far healthier than during recent crises. Asset quality, in particular, is described as a minor concern in the near term. This framing implies that the sector’s risk of a sharp, crisis-like deterioration is lower than investors fear, and that the valuation compression may be disproportionate relative to actual risk. Such a view supports the case for an eventual earnings and valuation recovery should macro conditions improve or stabilize.
Investment Outlook and Sector Rating
Maintaining an overweight stance on the banking sector, Kenanga argues that the robust fundamentals justify a constructive view despite near-term challenges. The firm points to resilient core metrics, including capital adequacy, liquidity positions, and prudent provisioning practices, as core pillars underpinning the sector’s resilience. With valuations at stressed levels relative to historical norms, Kenanga suggests a potential re-rating path if earnings capacity stabilizes and confidence returns to credit markets.
In the near term, Kenanga’s portfolio strategy centers on select bank equities that could benefit from a valuation catch-up as macro headwinds subside. The firm identifies top picks for the third quarter of 2025, focusing on those banks with durable earnings profiles and stronger franchise value within a slow-growth credit environment. The recommended names include AMMB Holdings Bhd, CIMB Group Holdings Bhd, and Malayan Banking Bhd, signaling a balanced approach across different segments of the Malaysian banking landscape. Each of these picks reflects a combination of solid balance sheets, deep client relationships, and market positioning that Kenanga believes can withstand, and potentially benefit from, a rebound in lending activity and margin normalization.
Earnings Sensitivity to Rate Movements
A salient feature of Kenanga’s outlook concerns the sensitivity of sector earnings to monetary policy. The research notes that Bank Negara Malaysia (BNM) is expected to keep the overnight policy rate unchanged at 3% for the remainder of the year, a stance that Calibrates the interest rate environment. However, even with a stable benchmark rate, banks are anticipated to face ongoing pressure on NIMs due to weaker asset yields. Kenanga quantifies the impact of potential rate changes, estimating that every 25-basis-point rate cut could reduce sector NIMs by one to three basis points. Translating this into earnings, the firm projects an average earnings decline of about 2% across the sector in response to rate cuts at the margin. This framework helps investors gauge how much of the earnings risk is tied to policy rates versus credit dynamics, and how much room there is for a rebound if rate expectations become more favorable.
Asset Quality and Risk Management: A Hard Look at the Cushion
Asset Quality Strength in a Slower Growth Environment
The key takeaway from Kenanga’s evaluation is that asset quality is showing resilience even as other performance metrics come under pressure. The GIL ratio staying below 1.5% indicates that the proportion of gross loans that are impaired remains limited relative to the total loan book. This metric is critical for investors because it correlates with the level of required impairment charges and the potential volatility of reported earnings. When GIL stays low and loan loss coverage remains high, banks can absorb adverse credit events without a sharp deterioration in earnings, which in turn supports investor confidence in the sector’s stability.
Provisioning and Regulatory Buffers
Another cornerstone of the assessment is the provisioning framework that banks have built up, including regulatory reserves. With average loan loss coverage around 140%, the sector exhibits a substantial cushion to absorb potential loan losses. This level of coverage helps smooth earnings over time and can provide a buffer against incremental impairment charges in the event of economic stress. For investors, this translates into greater predictability in earnings and a lower risk of sudden, outsized negative surprises from credit losses. Kenanga’s emphasis on these metrics underscores the belief that the sector’s risk management discipline remains robust, even as market conditions test revenue lines.
Implications for Banks’ Resilience
The combination of a low GIL ratio and high provisioning coverage implies a conservative risk posture within the Malaysian banking system. In practical terms, this means banks may be better positioned to weather slower loan growth and margin compression without compromising capital adequacy or liquidity. It also supports the argument that the sector’s current sell-off may overstate risk relative to actual credit quality. When market sentiment improves or loan demand stabilizes, these resilience factors could translate into stronger earnings delivery and a more favorable valuation re-rating.
Outlook, Catalysts, and Strategic Picks: Kenanga’s Playbook
The Overweight Call and Fundamental Catalysts
Kenanga’s decision to maintain an overweight stance on Malaysia’s banking sector rests on a combination of robust fundamentals and the potential for valuation normalization. The firm highlights that the sector’s underlying strength—particularly asset quality and provisioning adequacy—creates a favorable platform for a rebound should macro conditions stabilize or improve. The potential catalysts include improved loan growth, stabilization of deposit franchises, and a re-pricing of risk in response to better macro signals. In this framework, the market could revalue banks more aggressively as investors gain visibility into earnings trajectories and risk—reward dynamics shift back toward banks with well-capitalized, well-managed franchises.
Top Picks for the Third Quarter of 2025
Kenanga identifies AMMB Holdings Bhd (AMMB), CIMB Group Holdings Bhd (CIMB), and Malayan Banking Bhd (Maybank) as its top picks for the third quarter of 2025. Each selection reflects a different set of strengths within the Malaysian banking ecosystem:
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AMMB Holdings Bhd: Recognized for a compelling mix of balance sheet quality, earnings potential, and franchise strength in consumer and corporate segments. AMMB’s positioning is seen as a lever for upside exposure to a re-rating if loan demand improves and margins stabilize.
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CIMB Group Holdings Bhd: Positioned as a regional bank with diversified earnings streams and a strong corporate and investment banking footprint, which can help cushion against domestic cyclical headwinds while leveraging growth in trade finance and settlement activities.
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Malayan Banking Bhd (Maybank): As the largest bank in Malaysia by assets and market presence, Maybank’s scale and diversified revenue base can offer resilience and earnings visibility in a volatile macro environment. Its ability to navigate NIM pressures while sustaining strong provisioning buffer is a key part of the rationale.
Earnings Sensitivity and Policy Implications
The policy outlook remains a critical variable for the sector. Kenanga’s view that Bank Negara Malaysia will keep the OPR at 3% for the rest of the year creates a backdrop for steady funding costs with ongoing NIM pressure as asset yields remain weak. The projected earnings impact from modest rate cuts illustrates a measured expectation that even small policy shifts can materially affect banks’ net interest income. The 2% average earnings decline assumption to a 25-basis-point rate cut provides a tangible benchmark for investors assessing valuation scenarios, enabling a clearer view of potential downside risks and upside catalysts.
Strategic Takeaways for Investors
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Focus on asset quality resilience: With GIL below 1.5% and provisioning at roughly 140%, the sector has a robust risk buffer that can underpin steady earnings in uncertain times.
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Valuation-driven upside: P/B valuations near crisis-era levels may present a favorable entry point for selective exposure to well-capitalized banks with strong franchises.
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Selectivity in stock picking: Kenanga’s top picks indicate a preference for banks with diversified earnings streams, strong capital bases, and market-leading positions in key segments such as consumer lending, corporate banking, and regional operations.
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Policy risk management: Understanding the sensitivity of NIMs to rate movements helps frame risk and return expectations. The potential for modest earnings adjustments due to rate changes should factor into investment theses.
Monetary Policy Outlook and Market Realities
Bank Negara Malaysia’s Stance and Implications
Bank Negara Malaysia is anticipated to maintain the overnight policy rate at 3% through the remainder of the year, according to Kenanga. This stance, if realized, suggests a period of policy stability that reduces one dimension of uncertainty for banks and investors. However, stable policy rates do not necessarily translate into stable earnings, given ongoing NIM pressures and the need for banks to optimize funding and asset yields in a competitive environment. The policy stance thus interacts with other macro variables—such as deposit growth, loan demand, and macroeconomic growth—to shape the sector’s earnings trajectory.
NIM Dynamics and Earnings Impacts
Even with a steady policy rate, NIMs in the banking sector are expected to face headwinds from weaker asset yields. Kenanga’s framework indicates that the relationship between rate movements and NIMs is nuanced: a 25-basis-point rate cut could reduce sector NIMs by one to three basis points. The implied earnings impact is a roughly 2% decline on average, underscoring that even modest rate shifts can produce material changes in profitability given the sensitivity of net interest income to funding costs and loan yields. This insight helps investors calibrate risk versus reward, recognizing that the path to profitability is not solely determined by rate direction but also by the mix of assets, the pace of loan growth, and the effectiveness of cost of funds management.
Catalysts and Risks in the Near Term
The near-term catalysts include stabilization or improvement in loan growth, signs of improved consumer and business confidence, and potential re-pricing of risk as macro conditions become clearer. Conversely, downside risks include renewed tariff tensions, adverse global macro developments, and unexpected tightening in liquidity conditions that could further compress NIMs or increase provisioning needs. Kenanga’s view suggests that while the macro backdrop presents challenges, the sector’s fundamental resilience provides a basis for a more constructive risk-reward balance if price levels begin to reflect the stronger underlying fundamentals.
Conclusion
In summary, Kenanga Research presents a nuanced view of the Malaysian banking sector: a market that has oversold despite resilient fundamentals. The sector’s P/B ratio at 1.08 times in May 2025 signals a potential mispricing relative to robust asset quality and substantial provisioning headroom, reinforced by GIL metrics below 1.5% and provisioning coverage around 140%. While near-term headwinds—such as sluggish loan growth, persistent NIM pressures, and tariff-related market jitters—continue to weigh on valuations, Kenanga argues that the environment is markedly healthier than during recent crises. The firm’s overweight stance remains anchored in the belief that fundamentals will support earnings stability and a potential valuation rebound as macro conditions stabilize.
Kenanga maintains its top-pick roster for the third quarter of 2025 with AMMB Holdings, CIMB Group, and Maybank, reflecting expectations of solid franchise value and resilience across different segments of the sector. The anticipated policy path from Bank Negara Malaysia, with rates held at 3% for the remainder of the year, adds a further layer of predictability to the macro backdrop, even as NIM pressure persists. The estimated earnings impact of rate cuts—where a 25-basis-point reduction could shave 1–3 basis points off NIMs and about 2% off earnings—frames a clear risk-reward dynamic for investors.
Overall, the Malaysian banking sector faces a period of calibrations and selective opportunities. The combination of strong asset quality, substantial provisioning coverage, and a potential re-rating catalyst provides a credible case for investors to selectively engage with banks that offer durable earnings power, prudent risk management, and competitive franchises. As market sentiment evolves and lending conditions improve, the valuation gap may begin to close, aligning market prices more closely with the sector’s resilient fundamentals. With careful stock selection and a focus on core strengths, the banking sector could emerge from this oversold phase into a more stable and potentially rewarding growth trajectory.
