PBK: Banking Sector Maintains Overweight Rating Amid Healthy Loan Indicators

The banking sector has maintained an Overweight rating, with analysts noting healthy loan leading indicators despite a slower start to the year in terms of year-on-year loan growth. While January 2026’s system loan growth of 4.7% YoY fell slightly short of the previous year’s 4.8% YoY, a robust pipeline of approved loans signals an optimistic outlook for the remainder of 2026.

Performance Review

Household loans demonstrated steady growth, increasing by 5.3% YoY, primarily driven by strong demand for auto loans (+7% YoY) and residential mortgages (+5.8% YoY). However, non-household loan growth eased to 3.8% YoY in January 2026, down from 4.1% YoY in December 2025. Within the business segment, growth was notably strong in sectors such as utilities (+31% YoY), transport, storage & communications (+10.5% YoY), and construction (+7% YoY), offsetting declines in primary agriculture and education, health, and other services. The manufacturing sector remained flat.

Future Outlook and Leading Indicators

Despite the initial moderation in growth, leading indicators suggest a pick-up is on the horizon. System loan applications rose by a healthy 6% YoY, while loan approvals surged by 27% YoY. This positive trend was evident across both household and non-household segments, with household applications and approvals up 16% and 14% YoY respectively. Non-household loan applications saw a 4% YoY dip, but approvals for this segment jumped significantly by 42% YoY. This disparity is attributed to delayed drawdowns from pipelines built in the previous year, indicating that stronger loan growth is expected to materialize soon. Analysts project system loan growth to accelerate to 5-5.5% in 2026.

The sector continues to benefit from a positive macroeconomic backdrop, improving earnings momentum, and attractive dividend yields. Capital optimisation initiatives are also expected to provide further boosts. Big-cap banks remain the preferred picks within the sector.

Challenges and Asset Quality

Deposits remained a laggard, growing only 2.8% YoY compared to 3.4% YoY in December 2025. This growth was mainly supported by CASA deposits, which rose 8% YoY, with the system CASA ratio now at 32.4%. The Loan-to-Deposit Ratio (LDR) further increased to 89.7% from 89% in December 2025, while the Liquidity Coverage Ratio (LCR) remained comfortable at 152%.

Asset quality remained stable year-on-year, though Gross Impaired Loans (GILs) increased by 2% month-on-month. The system GIL ratio edged up 3 basis points month-on-month to 1.4% (from 1.37% in 2025), with both household and non-household GILs rising by 3% and 2% respectively. Loan Loss Coverage (LLC) stood at 83.9%, a slight decrease from 84.8% at end 2025.