• Order of preference: Indonesia (IND)>Malaysia (MY)>Singapore (SG). We think market volatility will likely persist amid uncertainties with respect to US policies and US Federal Funds Rate (FFR) trajectory, among others. Closer to home, though, ASEAN domestic economies should remain resilient and help anchor sector earnings. SG's and MY's bank stocks strong performance last year means returns should be more modest this year. Coupled with the ongoing volatility, we advocate investors to adopt a tactical approach and recommend a barbell strategy of IND Banks (growth/laggard play)-SG Banks (defensive).
• Growth or yield? IND Banks were laggards last year amid volatile flows and earnings disappointment (tighter liquidity and asset quality issues faced by certain banks). We expect the situation to stabilise this year, leading to a rebound in earnings growth - highest among the markets we cover. For SG and MY banks, however, mean reversion coupled with a moderation in earnings growth this year suggest returns from SG and MY bank stocks should be more modest. Both offer defensive earnings and attractive dividend yield, and further capital management initiatives should help underpin total returns this year.
• Liquidity and capital management likely key focus in upcoming results. We see liquidity (IND and MY) and capital management (SG and MY) as the two likely key areas of focus in the upcoming results. For IND banks, an improved liquidity outlook will help strengthen the NIM and earnings recovery thesis. In MY, system LDR is approaching previous highs and it remains to be seen if banks have room to manage down further deposit costs. On capital management, SG Banks are expected to provide more details on their plans for excess capital while MY Banks are awaiting clarity on Basel III reforms.
• IND. A rebound in earnings growth and more palatable valuations are key factors underpinning IND as our top regional pick. The Prabowo administration's focus on consumption could prove to be the trigger for a recovery in consumer consumption and broaden underlying economic activities - positive for SME and retail loan demand, as well as liquidity. Flipside, tighter-than-expected liquidity is a key downside risk but the situation appears stable for now.
• MY. MY Banks offer investors earnings safety, similar to SG Banks, but trade on cheaper valuations. Stable domestic macroeconomic conditions, ongoing implementation of various economic masterplans and structural themes should continue to support underlying activities. Better clarity on the impact of Basel III reforms can help banks firm up capital management initiatives to add on to already attractive dividend yields.
• SG. We see SG Banks as the most defensive option - best place to weather the USD strength and should FFR cuts pan out milder than expected. We see earnings risk tilted towards the upside, with four FFR cuts already baked into our earnings model. Dividend yields remain attractive, further supplemented by capital management initiatives now that Basel III reforms have gone live. Muted earnings growth and valuations, however, may cap upside potential.

Source: RHB Research - 8 Jan 2025