PETALING JAYA: Following some sluggishness in previous months, loan growth in May saw improvement, accelerating to 5.3% year-on-year compared to a 5.1% increase in April.

May’s increase was driven by a pickup in business loan growth with stronger demand for working capital loans among non-small medium enterprises.

This offset the slight moderation in household loan growth, which remained underpinned by mortgages and auto financing.

In view of the cautious sentiment, Hong Leong Investment Bank (HLIB) Research revised its loan growth forecast slightly lower, from 5.5% to 6% to 5% to 5.5%.

The research house said it took into account the annualised loan growth of circa 3.5% observed year-to-date until May.

“Nevertheless, we continue to expect an uptick in the later part of the year from the implementation of earlier large approved investments.

“Overall, we remain ‘overweight’ on the sector as it offers a good 5.4% dividend yield and attractive valuations,” HLIB Research said in a report.

Among the highlights, it noted that the recent cut in the Statutory Reserve Requirement may have helped ease deposit competition, as short-term fixed deposit rates (one and three-month tenures) fell by two to four basis points (bps). The average lending rate rose two bps month-on-month to 4.94%, breaking a 14-month streak of decline.

“Broadly, we continue to observe a downtrend in promotional and conventional fixed deposit rates since April – which is seen as a proactive step taken by banks to manage its net interest margin (NIM) in view of the potential overnight policy rate (OPR) cut, and possibly signalling easing competition,” it added.

Meanwhile, UOB Kay Hian (UOBKH) Research maintained its 2025 loan growth forecast at 5% to 6%, following a recent downward revision from 6% to 7% due to slower economic growth projections.

It said heavy foreign outflows have pulled sector valuations back to the mean at 1.12 times price-to-book. While current valuations remain appealing, underpinned by robust provision buffers and a solid 5.6% dividend yield, potential headwinds from moderating loan growth and NIM compression amid an anticipated OPR cut could limit overall share price upside.

UOBKH Research expects the sector to perform in line with the broader market and favours defensive plays where stocks are concerned.

Similarly, MIDF Research, which maintains a “neutral” view on the sector, continues to prefer a bottom-up stock-picking approach, favouring more defensive names. This is due to ongoing industry headwinds, while positive catalysts differ across companies.

“A stronger economic outlook could drive a re-rating, but that is not expected in the near term. Sentiment is also dampened by concerns over a possible return of the goods and services tax and the removal of petrol subsidies.”

The research firm said loan outlook is not as strong as it formerly was, while geopolitical uncertainty may keep stock valuations depressed.