3 possible reasons why Malaysian banks are the laggards of the region

They have underperformed significantly vs their Asean peers.

According to Nomura, the market appears to be pricing in: 1) moderating loan growth from  the end 2011 levels of 13%, 2) a potentially worsening outlook on NPLs given the slowing economy and 3) NIM squeeze due to competitive pressures.

Here's more from Nomura:

While loan growth did ease to 10% by end-2012 and NIMs compressed due to the mortgage loan replacement cycle, we are encouraged that asset quality remained robust. In fact, up to the 3Q12, the average credit cost for the sector was at an historical low of <20bps and shows no sign of reversing.

Defensive names like Public Bank and Hong Leong outperformed the index, while beta plays CIMB and RHB Capital lagged. Maybank and AMMB were largely in line. However, looking at a shorter time frame over the last three months, we see the governmentlinked-company (GLC) banks underperforming the market. We suspect this is due to the rising political risk premium created by the imminent national elections.

Malaysia banks are currently trading near mid-cycle valuation levels, which we believe is not expensive, as loan growth should still be decent and asset quality robust. We make minimal changes to our FY13-14F earnings forecasts and rollover our TPs to end-2013 valuation. However, our ROE forecasts are 0.7%-pt below consensus on average as we expect greater earnings retention going forward as the banks start to rebuild their core equity Tier 1 capital ratios.