DBS, OCBC shares are setting record highs – are they still a buy?

SINGAPORE – A multi-week spree by Singapore banking stocks has seen the share price of DBS Bank breaking a $58 record and OCBC Bank pushing past $20.

Some analysts think the rally still has legs, with flight to quality and attractive dividend yields expected to push the share prices higher.

Still, some of them projected that earnings are likely to come under pressure in 2026 amid a lower interest rate environment and dividends could fall, dragging the stock value down.

Shares of South-east Asia’s largest bank by assets, DBS, closed 0.98 per cent higher at a record-breaking $58.89 on Jan 15, while OCBC stock closed 1.19 per cent up at a fresh high of $20.37.

UOB shares ended 0.3 per cent lower at $36.40. While the counter has gained in the weeks-long bank share rally, it has not come close to its all-time closing high of $38.67 in March 2025.

Why the rally still has legs

UOB Kay Hian director of research Jonathan Koh said that local banks offer steady profits.

“Banks provide resilient earnings with growth in non-interest income, including wealth management, offsetting negative impact from net interest margin (NIM) compression,” he said.

When interest rates fall, NIMs – the difference between what banks earn on interest-earning assets such as loans and what they pay on interest-bearing liabilities like deposits – can be squeezed.

He noted that the sustainability of the banks’ dividend payouts is supported by resilient earnings, strong capital adequacy and discipline in capital management.

“Banks are attractive yield plays given the current low interest rate environment in Singapore,” he added.

An RHB analyst said investors are flocking to safer, more stable assets such as the local banks amid economic uncertainty, among other factors.

The analyst noted: “We believe a combination of factors such as the flight to quality Singdollar assets, attractive dividend yields, falling risk-free rate and the sector as a potential beneficiary of equity market reforms have helped underpin the sector’s performance.”

Morningstar director of Asia equity research Lorraine Tan noted that quality companies with attractive dividend yields are seen as a proxy to holding Singapore government bonds as interest rates are expected to fall.

The US Federal Reserve closed out 2025 with three interest rate cuts, while projecting at least one more cut in 2026.

She added there is no doubt the banks’ dividend yields, which are around 5 per cent, are attractive at this stage. DBS and OCBC could increase dividends on the back of steady earnings, she noted.

“We also think that DBS and OCBC have room to continue share buybacks, although dividend payouts may stay at the current level. This should still lead to dividend growth as long as earnings are stable,” she said.

Analysts also noted that investors are waiting out for higher dividends from OCBC. CGS International (CGSI) research analyst Tay Wee Kuang said OCBC’s share price outperformance is likely due to investors holding out for second-half 2025 dividends.

“OCBC’s 50 per cent payout in the first half means their committed 60 per cent payout ratio for the financial year of 2025 will be more backloaded into the second half,” he said.

He added that there is also some optimism around new OCBC group chief executive Tan Teck Long, who could unveil the bank’s strategy over the next three years, following his predecessor Helen Wong’s completion of her three-year target of $3 billion in incremental revenue.

Macquarie Capital head of Asean equity research Jayden Vantarakis said investors are hopeful dividends could be raised given that OCBC has similar levels of capital strength as DBS.

The case for caution

RHB said that headroom for further valuation expansion may be limited, resulting in more modest returns for the sector ahead.

“2025 was a good year for Singapore banks but more modest returns are likely for 2026,” the RHB analyst said, adding that the bank expects two US Fed rate cuts of 50 basis points in total for 2026, which are likely to lead to a measured Singapore Overnight Rate Average (SORA) dip.

Macquarie Capital analysts said that the local banks – which form half of the benchmark Straits Times Index (STI) – could be a drag rather than a driver in 2026 amid a lower interest rate environment.

Another consensus view is that the Singapore stock market could see muted performance, with the analysts forecasting the STI at 4,500 by end-2026.

“Following two years of strong performance, we expect lower interest rates to pressure revenues. Though the banks anticipate making up the difference through deposit volume and non-interest income (fees), our analysis suggests at best they will be treading water,” said the analysts.

Macquarie expects the three-month SORA to decline by an average of 100 basis points in 2026, from an estimated 2 per cent in 2025 to 1 per cent in 2026.

But Mr Koh of UOB Kay Hian said the passthrough from upcoming US rate cuts should be limited.

“Recently, overnight SORA recovered to 1.22 per cent in late December. Three-month compounded SORA fell by a massive 188 basis points to 1.19 per cent in 2025, significantly more than the Fed’s three rate cuts totalling 75 basis points,” he said.

CGSI’s Mr Tay said that while the Singapore banks offer decent yields, earnings are likely to come under pressure with the lower interest rate environment. “We could see lower dividends from OCBC and UOB in 2026, especially if there are no plans for further capital return initiatives,” he said.

Mr Tay further noted UOB’s share price has been a laggard among the banks due to lingering credit cost concerns. “But we think investors could be relooking at UOB’s valuations at this point, especially if they are able to show that their guidance for financial year 2026 is intact over the next one to two quarters,” he added.

Mr Vantarakis said the concern around UOB is broadly asset quality, which covers US or Greater China commercial real estate, customer selection, as well as the Thai retail exposure the group has.

He also noted that the market is placing a lot of weight on dividend yields at present.

“DBS’ special capital return dividends of 60 cents per annum are committed for 2026 and 2027. Investors will have to contemplate what sustainable levels of dividends will be on offer in the medium term,” he said, adding that Macquarie expects lower dividend levels for DBS as revenue remains challenging in 2026.

DBS looks to step up quarterly dividends by 6 cents to 66 cents in 2026. It means an additional 24 cents for 2026. Furthermore, there is an additional 15 cents per share to be paid in capital return dividend, which has been committed up to financial year 2027, making up a total of 81 cents per quarter.

Ms Tan of Morningstar noted that DBS and OCBC shares look expensive based on intrinsic valuation. The firm prefers Singapore real estate investment trusts, or S-REITS, over the banks, as they offer better upside value at this point, she said.

“We like Keppel REIT and Mapletree Industrial Trust in particular. The former should also benefit from a tightening in high-quality office space supply in Singapore, while the latter’s data centre portfolio will enjoy strong secular growth.”

Room to grow

Mr Koh of UOB Kay Hian estimated that the share prices of DBS and OCBC could go even higher in the next 12 months.

UOB Kay Hian’s top pick is DBS, with the firm upgrading the bank to a “buy” with a target price of $68.95 for its 2026 yield of 5.6 per cent.

“We also like OCBC for its focus on trade and investment flows within ASEAN and a defensively low estimated 2026 price-to-book ratio of 1.45x,” the firm said, adding that it has a “buy” rating and a $23.65 price target for OCBC.

The price-to-book ratio compares a company’s market value to its book value, showing how much investors pay for its net assets.

Morningstar noted that UOB is slightly more attractive at this stage on a risk-reward basis and projected its dividend yield to be 5.8 per cent based on its Jan 5 closing price of $35.50.

Macquarie analysts said OCBC is their pick among the banks, as they see room for the stock to re-rate and partially close the gap with DBS on better wealth performance as well as management lifting the dividend payout ratio policy to 60 per cent from 50 per cent.

They are less bullish on DBS, giving it an “underperform” rating. “In our view, the positive capital management the bank is doing is already in the price, and fundamentally a more than 2x price-to-book ratio for 16 per cent return on equity appears rich.”

They hold a 12-month price target of $46 for DBS, $19.90 for OCBC and $31.91 for UOB.

RHB said it prefers DBS for its “in-the-bag” dividend and attractive dividend yield, expecting DBS to reach $59 in the next 12 months. The bank, however, is neutral on OCBC and UOB, with a price target of $18.70 for OCBC and $36.10 for UOB.

“During the third-quarter 2025 results briefing, DBS reiterated its ordinary dividend per share step-up and capital return dividend per share commitment, which underpins our call on the stock,” RHB said.

“For now, UOB has ruled out any further special dividend per share but instead, will continue with its share buyback plan. Investors will need to wait for OCBC’s fourth-quarter 2025 briefing to learn if OCBC will lift the ordinary payout and/or unveil another capital return dividend package.”