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Broker's take: DBS says 'hold' OCBC, 'buy' UOB for more attractive dividend play

LOAN yields for banks could go on the up in the third quarter of 2018 reflected by an increasing three-month Sibor, said a DBS analyst on Friday morning in a research note.

Analyst Lim Rui Wen expects UOB to see flattish net interest margin (NIM) for the quarter as it focuses on volume growth, supported by a strong funding portfolio, while OCBC could see NIM expansion as it begins repricing Singapore mortgages and phasing out more expensive deposits, and benefits from increasing prime lending rate in Hong Kong.

Still, the analyst for DBS - the third local bank in Singapore - still prefers the UOB stock to OCBC's for the former's more attractive dividend yield play and lesser exposure to wealth and trade on top of its strong capital position.

The analyst said: "Our 'buy' call on UOB is premised on its higher dividend yield with potential upside and continuous loan growth supported by its strong funding portfolio, on top of its strong capital position."

DBS has a "hold" call on OCBC as there are limited catalysts for its share price currently due to OCBC’s bigger exposure to trade and wealth management income, which may moderate on the back of volatile market conditions.  

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The broker has a "buy" call with a target price of S$31.70 for UOB, and a "hold" on OCBC with a target price of S$12.40.

It said that while UOB and OCBC continue to maintain their high single-digit loan growth guidance for the year, UOB is less exposed to trade loans and should should see good loan growth as it continues to drive volumes in Q3 2018.

Banks will benefit from better-than-cycle average credit costs in the year and both OCBC and UOB are likely to surprise on the upside in terms of reporting lower credit costs.

While UOB will benefit strongly from growth in Hong Kong, and OCBC will get a boost from higher prime lending rates in Hong Kong from good loan growth in OCBC Wing Hang, both banks are likely to see NIM pressures due to sustained interest rate hikes as UOB continues to improve its local operations.

Meanwhile, the broker believes that wealth management income peaked in H1 2018.

"Trading income is still likely to be weak, although mark-to-market positions are likely to fare better quarter on quarter as compared to Q2 2018," Ms Lim wrote.

UOB has also said that it would commit to a 50 per cent dividend payout ratio, and Ms Lim thinks "there might be more positives to come for its H2 2018 dividends as UOB has paid (about) 41 per cent of its H1 2018 earnings". 

"On the other hand, OCBC has turned on the scrip dividend scheme in the last quarter in an attempt to shore up more capital and is unlikely to be able to pay more dividends till FY19," Ms Lim said.

Meanwhile, the impact of the latest restrictions by the Urban Redevelopment Authority (URA) on the maximum allowable units in new private and condominium developers outside the central region is "not imminent" for banks, she said.

"Pipeline of property-related loans is likely to see through at least H1 2019. While we expect some slowdown in mortgage growth, we think it is unlikely to see a huge correction," she wrote.

Ms Lim also pointed out that current mortgage growth is at around 4 per cent, while the previous peak, 16 per cent, was in late 2012 when cooling measures were imposed.

Still, the broker will "remain watchful on the Singapore property market".

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