Hong Leong Investment Bank Bhd (HLIB) has downgraded the Malaysian banking sector to NEUTRAL from Overweight, saying earnings momentum is expected to weaken amid margin pressure, rising asset quality risks and a potential KLCI expansion overhang.
HLIB retained Buy calls on CIMB Group Holdings Bhd, AMMB Holdings Bhd (AmBank) and Alliance Bank Malaysia Bhd (ABMB), while downgrading Malayan Banking Bhd (Maybank), Public Bank Bhd, RHB Bank Bhd and Affin Bank Bhd to Hold. ABMB was named its top pick for 2H26 due to its resilient earnings outlook and potential inclusion in an expanded KLCI.
HLIB said early optimism surrounding banking stocks faded in the first half of 2026 as expectations for capital management initiatives were not immediately realised, while geopolitical uncertainty triggered foreign fund outflows and pressured valuations.
The research house expects earnings growth to remain constrained by softer non-interest income, persistent deposit competition and the lingering impact of the July 2025 overnight policy rate cut. Banks are also becoming more selective in lending, shifting towards higher-quality corporate borrowers while reducing exposure to riskier small and medium enterprise segments.
HLIB highlighted asset quality as the key risk for the sector, noting that global supply chain disruptions could take around 12 months to affect banks’ gross impaired loan ratios. The research house estimated the sector’s gross impaired loan ratio could rise to around 1.6% by year-end from 1.43% in May 2026.
It also warned that the proposed expansion of the KLCI to 50 constituents could temporarily weigh on banking stocks through lower sector weightage. HLIB estimated the banking sector’s weighting could fall from 43.2% currently to between 36.2% and 36.9% under the proposed framework.
