Will UOB climb higher after its big rebound?

[SINGAPORE] Back in November last year, right after the three Singapore banks reported their Q3 2025 financial results, this column opined that UOB would probably lag behind its peers for some time amid signs of deteriorating asset quality.

This bearish call is not ageing well. Last week, UOB surged 7.5 per cent – which made it the best performing constituent of the Straits Times Index (STI) by a long way. The second biggest gainer for the week was CapitaLand Investment (up 4.5 per cent), while the third biggest was Thai Beverage (up 4.4 per cent).

The market seems to be quickly shrugging off the big increase in general allowances for non-performing assets (NPAs) that crushed UOB’s Q3 2025 earnings. Since UOB reported those shockingly weak numbers two months ago, its shares are up 13.3 per cent.

By comparison, OCBC shares have climbed 24.8 per cent during the same period.

DBS shares have risen a more modest 9.6 per cent. Taking into account dividends totalling S$0.75 per share that were paid in November, DBS shareholders would have seen a total gain of 11 per cent during the period.

Why is UOB rallying so strongly? Should investors chase it?

As the largest constituents of the STI, the three banks are naturally benefitting from investment flows into the local market; and after OCBC’s strong run over the past several weeks, UOB may now be the most attractive “value play” in the sector.

UOB is trading at only 1.39 times its net asset value (NAV). In contrast, OCBC and DBS are trading at 1.64 times and 2.42 times their respective NAVs.

Yet, it remains to be seen if UOB will be able to reposition its business and lift its profitability to levels comparable to its peers; and whether the sector as a whole has the capacity to garner significantly higher valuations going forward.

For the first nine months of 2025, DBS achieved a return on equity (ROE) of 17 per cent. OCBC and UOB reported ROEs of 12.9 per cent and 9 per cent, respectively.

Significant broker upgrade

Macquarie Equity Research said in a report last week that it had upgraded its rating on UOB to “outperform”, and hiked its target price for the stock from S$31.91 to S$41.

“We see potential for a relative value catch-up play,” the research house said. UOB closed last week at S$39.50.

The research house said it expects the headwinds UOB has faced to abate in the coming earnings season. In particular, it expects the lender’s allowances for NPAs to ease.

UOB had set aside nearly S$1.17 billion in Q3 2025, comprising S$687 million of general allowances and S$479 million of specific allowances. In Q3 2024, the bank had set aside only S$296 million in specific allowances, and it had reduced its general allowances by S$15 million.

With the big allowances in Q3 2025, the bank’s NPA coverage ratio increased to 100 per cent, and its unsecured NPA coverage ratio increased 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.

“After taking large one-off provisions in Q3 2025, we expect UOB’s quarterly provisions to normalise,” Macquarie said in its report. “The bank has topped up allowances, and rate movements should have been marginally supportive of collateral values,” it added.

Still, lingering wariness about UOB’s asset quality may weigh on its shares. UOB reported S$838 million in new NPAs in Q3 2025, versus S$472 million in Q2 2025 and only S$212 million in Q3 2024.

While consensus earnings estimates reflect UOB’s guidance for lower provisioning levels, there still appears to be “a degree of scepticism in the market on UOB’s asset quality”, said Macquarie.

Mixed outlook for banks

The broader outlook for the three Singapore banks is rather mixed, too.

Notably, softening interest rates are likely to continue weighing on net interest margins (NIMs) at all three banks till H1 2026, said Macquarie.

On the other hand, loan volumes have been expanding in 2025, supported by resilient economic activity. Macquarie said it expects the three banks to grow their loan books by an average of 4 per cent in 2026.

The research house also warned that investors should brace for seasonally weak non-interest income in the coming reporting season. “Momentum for fees and trading (income) is negative in (the fourth quarter),” it said.

Going by Macquarie’s price targets, DBS and OCBC might struggle to climb much higher in the immediate term.

The research house said last week that it had hiked its target price for DBS from S$46 to S$50; and its price target for OCBC from S$19.90 to S$21.50.

DBS ended last week at S$58.65, while OCBC closed at S$21.29. Macquarie has an “underperform” rating on DBS, and an “outperform” rating on OCBC.

Will valuations converge?

One of the things that has surprised me about the three banks is that they have performed strongly over the last two years, even as their soaring profitability has flattened out in the face of softening interest rates and narrowing NIMs.

The obvious explanation is that lower interest rates also tend to improve the attractiveness of big, blue chip stocks in the eyes of many investors.

Indeed, the three banks performed quite poorly back in 2023, despite their overall profitability increasing significantly following a rapid rise in interest rates. During that calendar year, OCBC rose 6.7 per cent while DBS and UOB fell 1.5 per cent and 7.3 per cent respectively.

It was not until 2024 – amid growing expectations of rate cuts by the Federal Reserve – that the market began responding to the elevated profitability at the three Singapore banks. During that calendar year, DBS was up 43.9 per cent while OCBC and UOB rose 28.4 per cent and 27.7 per cent respectively.

In 2025, as net interest margins narrowed further and UOB hiked its NPA allowances substantially, market sentiment towards the banks diverged. DBS rose 28.9 per cent while OCBC climbed 18.4 per cent. UOB fell 3.5 per cent.

This year, the market seems to be excited about the potential for valuations to rise and converge. Since the beginning of the year, UOB and OCBC are up 12.7 per cent and 7.7 per cent, respectively. DBS is up 4.1 per cent.

“Lower rates are a double-edged sword, pressuring revenues in 2026 but benefiting valuations,” Macquarie noted in its report.

As investors await the Q4 2025 earnings reports from the three banks, they should not lose sight of this big picture. DBS is scheduled to release its results on Feb 9. UOB and OCBC will release their results on Feb 24 and Feb 25, respectively.