UOB could be Singapore’s top ‘value-up’ play

[SINGAPORE] During my brokerage days in the 1990s, some of the strongest banks in Malaysia used to make relatively large general provisions. While this reduced their reported earnings, I used to tell investors that it didn’t necessarily change the underlying value of their shares.

The high general provisions essentially masked the true profitability of these banks, and provided them with a buffer to ride through economic downturns. Indeed, the strongest banks usually traded at higher valuations than their peers.

Not everyone accepted this narrative, though. Some investors pushed back, asking why a bank would choose to deflate its earnings with high general provisions, unless it sensed trouble on the horizon. And, if things were about to go south, wouldn’t it be better to avoid being exposed to that bank in the first place?

Last week, UOB’s chief executive Wee Ee Cheong reportedly characterised the steep increase in pre-emptive general allowances that crushed its Q3 2025 earnings as a “very positive” move, and likened it to “buying insurance” in the face of growing macroeconomic uncertainties and emerging headwinds in certain sectors.

UOB was responding to clear signs of weakening asset quality. The lender reported S$838 million in new non-performing assets (NPA) in Q3 2025, versus S$472 million in Q2 2025 and only S$212 million in Q3 2024.

UOB said that it saw looming danger in the commercial property sector in Greater China and the United States. Its non-performing loan (NPL) ratio in Greater China stood at 3.1 per cent in Q3 2025, up from 2.1 per cent at end-2024. Its NPL ratio in the US was 4 per cent in Q3 2025, up from 3.6 per cent at end-2024.

The lender’s overall NPL ratio ticked up to 1.6 per cent in Q3 2025, from 1.5 per cent at the end of last year.

Yet, the sheer size of UOB’s allowances in Q3 2025 suggests it is trying to “kitchen sink” the problem. The lender set aside nearly S$1.17 billion during the quarter, comprising S$687 million of general allowances and S$479 million of specific allowances.

In Q3 2024, UOB had set aside only S$296 million in specific allowances, and it reduced its general allowances by S$15 million.

UOB said the big allowances in Q3 2025 increased its NPA coverage ratio to 100 per cent in Q3 2025, and its unsecured NPA coverage ratio to 240 per cent. In Q2 2025, its NPA coverage ratio was 88 per cent while its unsecured NPA coverage ratio was 209 per cent.

This didn’t seem to impress investors, though. On Friday (Nov 7), UOB closed at S$33.86, down more than 2.3 per cent for the week.

DBS and OCBC , which had also reported their Q3 2025 financial numbers, ended the week up nearly 2 per cent and 4.4 per cent, respectively. The Straits Times Index (STI) was up more than 1.4 per cent.

DBS, OCBC more resilient

Weakening asset quality wasn’t UOB’s only problem in Q3 2025. With softening interest rates, the group also suffered narrower net interest margins (NIMs), which weighed on its revenue.

For Q3 2025, its total income came in at S$3.4 billion, marking an 11.4 per cent fall against Q3 2024. Net interest income was S$2.27 billion, down 7.9 per cent year on year.

UOB said its NIM for Q3 2025 was 1.82 per cent, down 23 basis points against Q3 2024.

After taking account of the big allowances, UOB’s net profit for Q3 2025 was S$443 million, down 72.5 per cent against Q3 2024.

While DBS and OCBC were also affected by narrowing NIMs, their toplines seemed more resilient. For instance, OCBC’s net interest income for Q3 2025 fell 8.5 per cent against Q3 2024 to S$2.23 billion. This reflected a 34 basis point fall in its NIM to 1.84 per cent.

Yet, the lender’s total income for Q3 2025 slipped less than 0.2 per cent, to nearly S$3.8 billion, due to robust non-interest income. With little sign of deteriorating asset quality, OCBC’s net profit for the quarter edged up 0.2 per cent to nearly S$2 billion.

DBS also managed to increase its total income for Q3 2025 by 3.1 per cent to more than S$5.9 billion, despite its group NIM contracting 15 basis points to 1.96 per cent. Its net profit for the quarter slipped 2.4 per cent to nearly S$3 billion.

With this relatively steady financial performance, and the promise of further generous dividend payouts, it is perhaps not surprising that DBS and OCBC rallied last week.

In light of the difficulties that UOB has encountered, some investors might have also been comforted by the fact that DBS and OCBC had NPA coverage ratios of 139 per cent and 160 per cent, respectively.

How much higher could DBS and OCBC climb? Is UOB a bargain yet?

UOB must regain relevance

DBS has risen nearly 25.8 per cent since the beginning of this year, versus the STI’s gain of 18.6 per cent. It is now trading at 2.26 times its net asset value (NAV).

On the other hand, OCBC is up 6.5 per cent while UOB is down 6.8 per cent. They are now trading at 1.37 times and 1.19 times their respective NAVs.

The way I see it, DBS is likely to continue outperforming its peers despite its relatively high market valuation. Over the first nine months of this year, it achieved a return on equity (ROE) of 17 per cent, well above OCBC’s 12.9 per cent and UOB’s 9 per cent.

Even in the face of narrowing NIMs, and the heightened risk of bad loans, DBS seems to have the strongest potential to deliver steadily higher dividend payouts over time. As the largest component of the STI and MSCI Singapore Index, it could also be a magnet for passive investment flows into the local market.

On the other hand, OCBC may have its moment in the sun over the next few months, in my view. Amid all the concerns about UOB, OCBC may come to be viewed as the main value play among the three Singapore banks, attracting rotational interest that gradually lifts its market valuation.

As for UOB, my view is that it may lag behind its peers for some time. To regain its relevance to investors, the lender should perhaps position itself as the pre-eminent “value-up” play in the Singapore market, by communicating a clear and credible strategy to transform its business and lift its ROE over time.

This is much easier said than done, of course. Yet, it is arguably the story investors most want to hear right now.