KUALA LUMPUR (March 5): Kenanga Research believes the banking sector will be one of the few areas with growth in calendar year 2025 (CY2025), expecting a net positive improvement in returns on equity (ROEs).

In a note post CY2024 results, Kenanga said it believes the sector’s outlook is strong, with healthy loan growth supported by domestic sectors and well-managed interest margins that can offset higher expenses and credit costs.

It said credit costs should remain manageable, considering that the sector's gross impaired loan ratio reached its lowest ever of 1.44% in December 2024.

Kenanga said any drop in share prices presents buying opportunities, especially with dividend yields expected to return to the 6%-7% range for some banks.

Its projections assume the overnight policy rate will stay at 3% throughout CY2025.

Kenanga said banks are focusing on either aggressive loan growth at the expense of net interest margin compression or more targeted growth with profitability in mind in CY2025.

Most expect higher credit costs, except RHB Bank Bhd (KL:RHBBANK) and MBSB Bhd (KL:MBSB), as write-backs on impairments normalise.

However, the sector is still expected to see a net positive improvement in ROEs, presenting a strong growth opportunity.

The research house's top picks are AMMB Holdings Bhd (KL:AMBANK) for its rising ROE and dividend potential, and Malayan Banking Bhd (KL:MAYBANK) for its strong market share, superior asset quality, and earnings growth.

Of the 10 banks within Kenanga’s coverage, Affin Bank Bhd (KL:AFFIN), Bank Islam Malaysia Bhd (KL:BIMB) and MBSB beat expectations in the fourth quarter of CY2024, thanks to better write-backs on impairments.