CIMB: Banking Sector Delivers Strong 4Q25 Results, Positive Outlook Maintained

The Malaysian banking sector concluded 2025 on a robust note, with most institutions reporting better-than-expected fourth-quarter earnings. The sector saw a 4% year-on-year growth in quarterly earnings, driven by resilient operating income and favourable credit cost conditions, affirming a positive outlook despite ongoing geopolitical uncertainties.

Performance Review

Seven out of nine banks under review surpassed both consensus and internal expectations for their 4Q25 results. Notably, BIMB exceeded forecasts, largely due to significant gains from property disposals. However, MBSB fell short of expectations, impacted by a substantial financing impairment charge and further net interest margin (NIM) slippage. The reporting period also brought positive dividend surprises, with BIMB and Affin distributing higher-than-anticipated dividends, underpinned by strong earnings and improved payout ratios. Overall, the sector’s projected Profit After Tax and Minority Interests (PATMI) for FY26F-FY27F have been adjusted upwards by 1% per annum, with FY26F PATMI growth anticipated to strengthen to 4% year-on-year, up from 3% in FY25, primarily supported by an increase in operating income.

Operational Efficiencies and NIM Prospects

Optimism surrounding Net Interest Margins (NIMs) remains high, with several banks forecasting stable to improving NIMs for the current year. This positive trend is attributed to ongoing liability management initiatives and the lagged effect of last year’s policy rate cuts on deposit costs, which are filtering through. Operating expenses were well-managed throughout 2025, contributing to a slight improvement in the sector’s Cost-to-Income Ratio (CIR) to 46.8% in 4Q25 from 47.2% in 4Q24, maintaining stability for the full year.

Asset Quality and Loan Growth

The sector’s asset quality is expected to remain stable, with credit costs projected to be well-behaved. Banks are comfortable with existing provision buffers and collateral, even while remaining vigilant over specific portfolios like SMEs and auto loans. Loan growth is generally guided to be stable, although institutions that were previously affected by a stronger Ringgit Malaysia (MYR) are anticipating a pick-up in loan growth.

Capital Position and Future Initiatives

Upcoming changes to the capital framework for credit risk, slated for 2H26, are expected to significantly uplift Common Equity Tier 1 (CET-1) ratios. Smaller banks could see an uplift of up to 50 basis points (bps), while larger banks like Hong Leong Bank (HLBK) and Public Bank (PBK) could experience increases of 60bps to 100bps, respectively. Smaller banks plan to leverage this excess capital for growth, potentially leading to improved dividends. In contrast, larger banks are considering various capital management options to optimize their capital position and Return on Equity (ROE). Furthermore, the new capital market masterplan, aiming to expand Malaysia’s capital market to approximately MYR6 trillion by 2030, presents significant fee income opportunities for banks. However, it also introduces potential competition and disintermediation risks from alternative funding channels.

Outlook and Risks

The investment bank maintains an “Overweight” rating on the banking sector, citing a constructive view amidst positive macroeconomic conditions. Key upside risks to earnings estimates include milder-than-expected deposit competition leading to better NIMs, stronger-than-expected non-interest income, and lower credit costs due to improved asset quality. Conversely, downside risks could arise from weaker NIMs, lower non-interest income, deteriorating asset quality, or higher-than-expected operating expenses due to inflationary pressures, business expansion, or technology investments.