DBS and OCBC draw positive views, but UOB outlook tempered by provisions in Q3

SINGAPORE - Analysts are positive on DBS Bank and OCBC Bank after the two banks posted strong third-quarter results, but more wary of UOB, whose earnings for the period were hit by higher loan provisions.

They also cautioned that all three banks could face more pressure on lending margins as interest rates fall and earlier hedges expire, even though DBS’ hedging strategy has helped cushion the impact of lower Singapore and Hong Kong benchmark rates so far.

Interest rate hedges are financial contracts that help banks keep earning a steady interest income even when market rates fall.

The analysts added that an earnings rebound at UOB could be on the cards, with its provision buffers now built up and credit costs expected to return to normal.

Singapore’s three largest banks posted mixed third-quarter results last week, with DBS and OCBC beating forecasts, and UOB falling short of expectations on the back of a $1 billion hike in credit provisions.

DBS’ group net interest income (NII) for the quarter was mostly unchanged from a year ago at $3.58 billion, due to strong deposit growth and hedging strategies. This was despite net interest margin (NIM) falling to 1.96 per cent from 2.11 per cent a year earlier.

NIM is the difference between what a bank earns from loans and what it pays on deposits.

DBS shares hit a high of $55.59 on Nov 7. The stock closed down 0.41 per cent at $53.99 on Nov 14.

However, as its hedges roll off, or expire, and interest rates continue to decline, the bank’s NIM is expected to come under pressure going forward, said Morningstar’s director of Asia equity research Lorraine Tan.

This is because banks often use hedges to lock in higher interest rates for a period. But once they expire, the bank is exposed to the current, lower-rate environment, which can squeeze NIMs.

Macquarie Group’s head of Asean equity research Jayden Vantarakis said DBS has a total of $200 billion in fixed rate assets and hedges, with $78 billion rolling off in 2026.

“The rates outlook presents a headwind, especially as the hedge book unwinds,” said Mr Vantarakis.

In 2026, DBS expects total income to be around 2025 levels despite the lower interest rates, while net profit is expected to be slightly below 2025 levels. This is due to group NII forecast to come in slightly below 2025 levels.

Still, Ms Tan of Morningstar said that DBS’ strong wealth franchise could cushion it from interest rate headwinds, while OCBC Investment Research and RHB said that the impact of lower rates and the lower NII projection are expected to be mitigated by deposit growth.

Analysts, however, are mixed on how much further DBS’ share rally can run.

Ms Tan said that DBS shares are “not cheap” and appear “overvalued”.

“We believe DBS’ strength against peers has already been priced in, and shares are now overvalued, trading at a 15 per cent premium to our valuation,” she said, citing a fair value estimate of $48.

Raising its fair value estimate for DBS shares from $54 to $55, head of OCBC Investment Research Carmen Lee said that DBS’ capital return strategy should provide strong share price support.

In 2026, DBS plans to increase its quarterly dividend payout to 81 cents per share, which includes a six cents increase in the ordinary dividend to 66 cents and a 15 cents capital return dividend.

RHB kept its “buy” call on DBS with a target price of $59, saying the bank’s dividend and capital return thesis remains intact.

Mr Vantarakis of Macquarie, however, reckons DBS will underperform, and expects its shares to be worth $46 in 12 months.

At UOB, credit provisions jumped more than fourfold to $1.36 billion from $304 million a year earlier, as the bank bolstered coverage amid ongoing macro and sector-specific headwinds. That lifted its general allowance coverage to 1 per cent of performing loans.

UOB said that its dividend payment would not be affected by the pre-emptive general allowance. Credit costs, which surged to 134 basis points in the third quarter from 36 basis points a year earlier, are expected to fall back to 25 to 30 basis points in the fourth quarter and into 2026.

RHB noted that while the hike in provisions has made a dent in UOB’s profits, 2026 earnings should see a rebound given that the provision buffers are built up and credit costs are expected to return to normal levels. The bank kept its “neutral rating” on the stock at a target price of $36.10.

Mr Vantarakis of Macquarie said the firm believes provisions are now adequate, but added that investors will look out for normalisation.

“It’s clear that a lot of scepticism remains, which means that a couple of quarters of normal provisions will be required for stock outperformance,” he said.

“We upgrade from underperform to neutral as the large provision charge in the third quarter of 2025 clears the decks for better sequential performance,” he added.

CreditSights senior analyst Karen Wu noted that UOB’s pre-tax profits in the first nine months of 2025 would still fall 16 per cent year on year, even after stripping out the impact of the extra general provisions.

UOB’s conservative credit cost guidance of 25 to 30 basis points for the fourth quarter and 2026 – higher than its peers – indicates limited room for general provision write-backs, she added.

Ms Lee from OCBC Investment Research added that UOB’s recent share price drop offers an opportunity to accumulate the stock, which she estimates has a fair value of $38.20.

The stock fell 0.29 per cent to close at $34 on Nov 14.

Meanwhile, OCBC emerged as a standout among the three banks, with analysts citing robust NII and solid wealth momentum that stood out among its peers.

Ms Wu of CreditSights said the bank’s strong non-interest income growth amid exceptionally high net new money inflows, which boosted wealth management fees, more than offset weaker NII and higher provisions at OCBC.

The bank’s third quarter non-interest income rose 15 per cent year on year to $1.57 billion from fee, trading and insurance income growth. This helped keep net profit steady at $1.98 billion, largely unchanged from $1.97 billion a year earlier, and beating a $1.79 billion forecast in a Bloomberg poll.

Mr Vantarakis said that OCBC’s wealth momentum, measured by fee growth and assets under management increase, was the highest among peers, setting a strong base for 2026.

“OCBC is our preference among the Singapore banks, over DBS and UOB. The balance sheet is most defensively positioned in terms of exposure to trade and general allowances.

“Guidance has also been conservative, presenting less risk to the outlook relative to peers,” he said.

The analyst is upgrading OCBC to “outperform” with a 12-month target price of $19.90.

Ms Tan said OCBC’s third-quarter annualised credit cost remains low at 16 basis points, mostly consisting of special provisions, as the bank had already provided for macroeconomic risks related to tariffs earlier in 2025.

“With general allowance coverage of 0.9 per cent, we don’t expect sizeable provisions going forward,” she said.

OCBC shares closed down 0.75 per cent to $18.52 on Nov 14.