UOB&rsquo s AI-driven strategy, focusing on &ldquo purposeful transformation,&rdquo has increased corporate banking revenue by 5%. The bank uses AI across operations, customer service, and risk management, ensuring ethical implementation and human oversight. UOB combines in-house talent development with strategic partnerships to advance its AI capabilities, aiming to embed AI deeply into its business for long-term success.

 

Sentiment remains largely positive on the sector amid resilient asset quality, steady capital returns

 

[SINGAPORE] The three local banks may be nearing the end of the margin squeeze that has weighed on earnings over the past year, as interest rates stabilise and funding pressures ease, analysts said.

 

Ahead of the banks&rsquo fourth-quarter results, sentiment remains largely positive on the sector, supported by resilient asset quality and steady capital returns, but analysts caution that clear growth drivers for the next stage of growth remain elusive.

 

The banking trio are set to release their fourth-quarter and full-year 2025 results in February, beginning with DBS on the 9th, then UOB on the 24th and OCBC on the 25th.

 

Lim Rui Wen, analyst at DBS Group Research, noted that Singdollar short-term rates appear to be bottoming out, having held steady even as the US delivered further rate cuts in late 2025. 

 

In the longer term, rates may rise as investors rethink the &ldquo sell America&rdquo or &ldquo rebalancing&rdquo trade, she said.

 

&ldquo Coupled with the ongoing repricing of flagship current accounts, wholesale and fixed deposits, we believe these factors will culminate in a turning point for the net interest margin (NIM) downtrend.&rdquo  

 

Funding costs are also set to retreat further in 2026, due to abundant liquidity and the flow-through of deposit-rate cuts against modest loan demand, said Rena Kwok, senior credit analyst at Bloomberg Intelligence (BI).

 

Meanwhile, non-interest income will likely be seasonally softer in Q4, analysts said.

 

Overall trading income should be supported by high levels of volatility, however, especially from client flows, said Maybank Securities&rsquo head of research Thilan Wickramasinghe.

 

Among the three, OCBC may bear the least loss in momentum due to support from loan fees as well as brokerage income, he said. 

 

UOB could also reap improved credit card fees following a low base, he added.

 

Further legs

Lim expects further legs in the rally, as dividends and stable capital returns remain attractive.

 

In 2025, shares of DBS rose 28 per cent and OCBC was up 19 per cent. UOB fell 4 per cent, weighed by earnings disappointment and concerns over asset quality in Q3.

 

Lim said ongoing fund inflows &ndash as a result of the Singdollar being a safe haven &ndash should continue to benefit Singapore banks as earnings remain resilient. 

 

Deployment of Equity Market Development Programme (EQDP) funds are also tailwinds for the sector, she added.

 

BI&rsquo s Kwok added that healthy capital levels through 2026, supported by resilient earnings, could result in more active capital management and shareholder returns.

 

Still, the Singapore research team at RHB expects modest returns for the sector ahead, citing the lack of drivers for higher returns on equity and share price outperformance against peers in Malaysia and Indonesia in 2025.

 

They noted that DBS&rsquo rally was driven by dividend visibility and attractive yields with OCBC, investors were optimistic about its wealth management prospects and room for further capital returns. 

 

DBS&rsquo Lim also warned that it may be premature to conclude that UOB&rsquo s asset-quality issues are entirely resolved.

 

The bank has a relatively larger exposure to US commercial real estate compared to its peers, and the remaining book of Greater China real estate exposures.

 

Even so, the RHB team noted positives for the sector, including a sanguine macroeconomic backdrop, wealth management businesses that should benefit amid a low interest rate environment, positive investor sentiment, continued inflows, and stable asset quality.

 

Looking ahead to 2026, BI&rsquo s Kwok said asset quality should remain sound despite tariff uncertainties and pockets of stress in overseas commercial real estate.

 

This is driven by prudent provisioning, strong underwriting and risk controls, with no signs of major stress among small and medium-sized enterprises, unsecured retail, or commercial real estate portfolios so far. 

 

Meanwhile, non-interest income will likely remain a key driver of operating income, said the RHB analysts.

 

Domestic loans demand will likely &ldquo stay decent&rdquo as a lower rates environment should bode well for mortgages and non-trade corporate loans, while the wealth management business is a key driver for fees, RHB said. 

 

However, a modest loan growth and some NIM pressure should also keep net interest income muted for 2026, it added.

 

On Thursday, shares of DBS closed 0.6 per cent higher at S$59.66, OCBC was up 0.1 per cent to S$21.45, and UOB ended 0.2 per cent higher at S$38.65. 

&bull Downgrade Decision:

JP Morgan shifted UOB from overweight (previously upgraded in Nov 2025 and again on 9 Jan 2026) to underweight/sell.

&bull Reasoning:

&bull UOB&rsquo s stock had surged 13% year-to-date by mid-January, far outpacing peers:

&bull DBS: +4%

&bull OCBC: +8%

&bull Straits Times Index: +5%

&bull The rally was driven by expectations of a quarter-on-quarter improvement in 4Q2025 results, following a S$615 million charge to general provisions in 3Q2025.

&bull Valuation Concerns:

JP Morgan argued that the sharp run-up in UOB&rsquo s share price had stretched valuations, making it less attractive compared to peers.

&bull Price Target:

End-2026 target set at S$34, implying downside risk from current levels.

Softer rates are squeezing NIMs at the 3 Singapore banks, but also spurring excitement about the potential for valuations to rise and converge

[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 &ndash 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&rsquo 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&rsquo s strong run over the past several weeks, UOB may now be the most attractive &ldquo value play&rdquo 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 &ldquo outperform&rdquo , and hiked its target price for the stock from S$31.91 to S$41. 

 

&ldquo We see potential for a relative value catch-up play,&rdquo 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&rsquo 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&rsquo 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.

 

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

 

Still, lingering wariness about UOB&rsquo 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&rsquo s guidance for lower provisioning levels, there still appears to be &ldquo a degree of scepticism in the market on UOB&rsquo s asset quality&rdquo , 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. &ldquo Momentum for fees and trading (income) is negative in (the fourth quarter),&rdquo it said.

 

Going by Macquarie&rsquo 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 &ldquo underperform&rdquo rating on DBS, and an &ldquo outperform&rdquo 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 &ndash amid growing expectations of rate cuts by the Federal Reserve &ndash 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. 

 

&ldquo Lower rates are a double-edged sword, pressuring revenues in 2026 but benefiting valuations,&rdquo 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.

This comes as analysts raise their target prices for both lenders

 

[SINGAPORE] Shares of UOB and OCBC hit record highs on Friday (Jan 23), driving the Straits Times Index (STI) to an all-time peak.

 

  UOB   : U11 +5% surged 5 per cent to a peak of S$39.50 at close, while   OCBC   : O39 +3.4% jumped 3.4 per cent to a high of S$21.29 at the end of the trading day.

 

The lenders&rsquo heavy weighting sent the   STI   : *STI +1.31% up 1.4 per cent to a peak of 4,895.15 points, before it closed 1.3 per cent up at 4,891.45 points.

 

Momentum for UOB started building on Thursday, when it climbed 2.3 per cent. This came as Asian markets tracked Wall Street gains after the easing of tensions over Greenland, alongside a rating upgrade from Macquarie.

 

In a note on Wednesday, Macquarie analyst Jayden Vantarakis said that Singapore banks are poised to benefit from wealth asset management inflows given the city-state&rsquo s &ldquo safe-haven&rdquo status.

 

He also raised his call on UOB to &ldquo outperform&rdquo , with a lifted target price of S$41, and raised OCBC&rsquo s target price to S$21.50. Morgan Stanley expressed similar confidence in UOB, upgrading its target price from S$40.10 to S$40.40.

 

UOB&rsquo s upgrades mark a sharp reversal in sentiment around what was seen as the weakest of the local banks. 

 

At the start of the year, 64.7 per cent of analysts in a Bloomberg consensus had &ldquo hold&rdquo calls on UOB. The bank had been lagging its peers after it took much larger pre-emptive general allowances in its Q3 results, though it has been mounting a recovery since.

 

&ldquo The banks, especially UOB, have been catching up following a period of underperformance relative to   DBS   : D05 +0.98%,&rdquo said Morningstar equity analyst Kathy Chan.

 

She highlighted a brighter picture for interest rates: Markets now expect the US Federal Reserve to hold rates steady in March and April instead of cutting them immediately. 

 

This delay is a boost for banks, including those in Singapore, as it prolongs the period they can earn higher interest on loans.

 

While rate cuts are still expected later in 2026, which usually squeezes lending profits, Chan said that rising fees from wealth management will likely help offset that impact.

 

Adding to the bullish view, Singapore Exchange market strategist Geoff Howie noted that trading turnover for both banks, as well as DBS, picked up in January compared to the preceding six months.

 

He pointed out that the lenders are attracting significant institutional capital, with OCBC topping the local market for net inflows. 

 

Howie added that the three local banks&rsquo fundamentals remain strong, with three years of combined quarterly net interest income of more than S$8 billion, alongside a historic S$5 billion peak in non-interest income in the third quarter of 2025.

 

UOB shares last peaked in March 2025, while OCBC crossed the S$20 mark for the first time on the third day of trading this year.

 

Broader sentiment remains bullish. Earlier this year, analysts forecast that the STI could breach 5,000 points by the end of 2026, supported by policy tailwinds, recovering earnings and a revitalised initial public offering market. 

 

The index crossed the 4,700 level on the third trading day of the year and is now within touching distance of the 4,900 mark.

 

Singapore&rsquo s macroeconomic environment has also been supportive, with the city-state&rsquo s gross domestic product expanding by a higher-than-expected 4.8 per cent in 2025 after a robust fourth quarter.