In a research note today, the investment bank expects banks to continue to still hold onto adequate provision buffers to mitigate against credit risk as repayment behaviours of the small and medium enterprises (SMEs) in certain sectors and vulnerable low-income households are still being monitored closely.

“We project a credit cost of 25 basis points (bps) in 2025 versus 26bps in 2024.

“We project a mild uptick in loan growth to 1.7%-1.8% from 1.6% in 2024. We believe asset quality and credit cost will remain stable,” it added.

AmInvestment said it expects the overnight policy rate (OPR) to remain at 3% until the end of 2024, with a likelihood of a 25bps cut to 2.75% in the second half of 2025.

It expects net interest margin (NIM) to be pressured on expectations that the OPR would be cut by 25bps to 2.75% by the second half of next year.

AmInvestment said that for domestic banks, every 25bps cut in OPR will see banks’ NIMs compressed by an average of 2-3bps, impacting net profits by 3%-4%.

“With the US Federal Funds Rate cut cycle, we anticipate the compression of NIM of banks with larger international operations to be higher than banks which are largely operating domestically,” it added.

The investment bank maintained its ‘neutral’ call on the banking sector due to limited return on equity expansion.