KGI Fraser Securities on Wednesday initiated a coverage on the Singapore banking sector with an overweight rating.
Its top pick is DBS (buy; target price S$22.38), which it said is the main beneficiary of rising interest rates.
Net interest margin (NIM) is expected to go up gradually on the possibility of a rate hike by the US Federal Reserve this year.
"Besides potential NIM upside, DBS's strong private banking business and solid investment banking arm should strengthen its non-interest income revenue streams," KGI said in a report.
It also likes OCBC (buy; target price S$11.63) for the bank's potential synergies and cross-selling opportunities after its acquisition of Wing Hang Bank.
"We are also positive on the potential synergies from integration of OCBC Wing Hang, which will be OCBC's main focus as the bank expands its footprint in Greater China," it said.
However, it initiated a "hold" on UOB with target price of S$23.04, saying a lack of near-term catalyst and possible funding pressure make UOB "unattractive".
It added that potential upswing in non-interest income will be another positive re-rating catalyst for the banks.
Slow deposits growth and increased funding competition may put pressure on banks' funding costs as interest rates move upwards, it said.
As Singapore's economy is expected to slow, banks will need to shift their focus on overseas expansion as they seek to grow their loan book.
Meanwhile, credit costs are expected to increase on the back of higher interest rates, even though all three local banks have relatively strong balance sheet and no systemic issues with current loan books.
The report added that Singapore banks continue to have adequate capital buffer for now.