Singapore Banking Sector Outlook: 1Q25 Analysis, DBS & OCBC Recommendations

UOB Kay Hian

Tuesday, 13 May 2025

Singapore Banks in Q1 2025: Resilient Earnings Amidst Global Uncertainty

Sector Overview: Banking – Singapore

• Singapore’s banking sector demonstrated resilience in the first quarter of 2025, with DBS and OCBC reporting strong sequential earnings growth.
• DBS saw a 15% quarter-on-quarter increase, while OCBC experienced a 12% increase, primarily driven by a rebound in non-interest income [[1]].
• Banks have assessed the direct impact from vulnerable sectors to be manageable, estimating it at 2-3% of total loans [[1]].
• All three banks reaffirmed their commitment to capital management plans announced in February 2025 [[1]].

Investment Recommendations

• OCBC (BUY, Target: S\$19.30): Recommended for its strategic focus on ASEAN [[1]].
• DBS (HOLD, Target: S\$45.45): Recommended for its attractive 2025 yield of 6.9%. Sector upgraded to OVERWEIGHT [[1]].

Analysis of First-Order Direct Impact

• DBS Group Holdings’ exposure to corporations in the automobile, metals & mining, and discretionary consumer goods sectors is about 1-2% of total loans [[1]].
• OCBC’s exposure to manufacturing, international transport & logistics, and metals & mining industries is around 3% of total loans [[1]].
• UOB’s corporate customers exporting to the US market (10-25% of sales) account for 2% of total loans [[1]].
• Banks are more concerned about the second-order negative impact from a broader slowdown in business investment and domestic consumption [[1]].

Capital Management Plans

• DBS: Expected to maintain a capital return dividend of 15 S cents per quarter, paid over three years (2025-27), totaling S\$5 billion. DBS has bought back and cancelled shares representing 9% of the S\$3 billion allocated for the share buyback program [[1]].
• OCBC: Plans to return excess capital of S\$2.5 billion to shareholders over two years, including a total dividend payout of 60% (50% regular, 10% special) amounting to S\$1.5 billion, and a share buyback of S\$1 billion [[1]].
• UOB: S\$3 billion capital management plan includes a special dividend of 50 S cents per share over two tranches in 2025 to commemorate its 90th anniversary (S\$0.8 billion), and a new share buyback program of S\$2 billion over the next three years (2025-27). UOB has bought back and cancelled 80 million shares, representing 4% of the S\$2 billion target [[2]].

1Q25 Financial Performance

• DBS’s 1Q25 results exceeded expectations, while OCBC’s results were in line [[2]].
• DBS recorded strong growth in net interest income [[2]].
• NIMs were stable for DBS and UOB, easing just 2bp quarter-on-quarter to 2.12% and 2.00% respectively. This stability was attributed to the accumulation of fixed-rate assets and deployment of interest rate swaps as cash flow hedges [[2]].
• OCBC’s NIM experienced a steeper fall of 23bp year-on-year and 11bp quarter-on-quarter to 2.04%, due to a significant drop in 3M SORA [[2]].
• DBS registered the strongest growth in net interest income of 5% year-on-year in 1Q25, compared to OCBC’s -4% and UOB’s +2% [[2]].

Deposit Franchise Improvement

• UOB strengthened its deposit franchise, with the CASA ratio improving 4.5 percentage points year-on-year to 55.1% in 1Q25 [[2]].
• CASA balance grew 13% year-on-year (retail: +18%, wholesale: +8%), while fixed deposits dropped 6% year-on-year [[2]].
• OCBC’s CASA expanded 13% year-on-year, and CASA ratio improved 1.5 percentage points year-on-year to 48.9% [[2]].

Wealth Management Growth

• DBS and UOB achieved stellar growth in wealth management fees, at 35% and 30% year-on-year respectively in 1Q25, while OCBC saw 18% growth [[2]].
• This performance was largely driven by buoyant sentiment prior to Liberation Day on 2 Apr 25 [[2]].
• DBS, OCBC, and UOB grew AUM by 13%, 12%, and 6% year-on-year, respectively [[2]].

Asset Quality and Provisions

• NPL formation was relatively benign, with S\$159 million for DBS and S\$236 million for OCBC in 1Q25 [[2]].
• DBS set aside general provisions of S\$205 million to strengthen loan-loss coverage, improving 8 percentage points quarter-on-quarter to 137% [[2]].
• OCBC set aside general provisions of S\$118 million, with loan-loss coverage improving 3 percentage points quarter-on-quarter to 162% [[2]].
• UOB set aside general provisions of S\$133 million, maintaining a stable loan-loss coverage at 90% [[2]].

Implementation of Final Basel III Reforms

• Singapore banks implemented Final Basel III Reforms starting 1 Jul 24 [[2]].
• DBS’, OCBC’s, and UOB’s fully phased-in CET-1 CAR were 15.2%, 15.5%, and 15.5% respectively as of Mar 25 [[2]].

Capital Management Exercises Comparison

[[2]]

Impact of US-UK Trade Deal

• The US has rolled back the 25% tariff on imports of automobiles and metals from the UK. Imports of steel and aluminium from the UK are zero-rated [[2]].
• Imports of the first 100,000 cars to the US are subject to a reduced 10% tariff. In return, the UK will improve market access for US farmers and buy more Boeing airplanes [[2]].
• The framework agreement serves as a template for other countries, indicating reciprocal tariffs for all countries would be above 10%, especially those with sizeable trade surpluses with the US [[3]].

US-China Trade Negotiations

• Senior negotiators from the US and China were engaged in trade negotiations. Discussions focused on lowering tensions rather than reaching a comprehensive agreement [[3]].

Attractive Dividend Yields

• The banking sector provides attractive value with a low P/B of 1.42x and a high dividend yield of 6.5% for 2025 [[3]].
• OCBC is a top pick due to its focus on ASEAN trade and investment flows, and a defensively low 2025F P/B of 1.22x [[3]].
• DBS is also recommended for its 2025 yield of 6.9% [[3]].

Sector Upgrade and Outlook

• The banking sector is upgraded from MARKET WEIGHT to OVERWEIGHT, as the risk of a prolonged trade conflict is believed to have abated [[3]].

Banks Weathering Downturn in Credit Cycle

The following table summarizes key metrics related to how DBS and OCBC are positioned to handle the credit cycle downturn:

[[3]]

DBS Group Holdings (HOLD/Target: S\$45.45)

• Management largely maintains guidance for 2025, expecting net interest income to be slightly above 2024 levels [[3]].
• The negative impact from NIM compression (three rate cuts expected in 2025) will be offset by mid-single-digit loan growth [[3]].
• Non-interest income guidance has been adjusted from high single digit to mid-to-high single digit, with fee income driven by wealth management [[3]].
• CIR is expected to be in the low-40% range, and specific provisions guidance remains unchanged at 17-20bp [[3]].
• Pre-tax profit should be flat at around 2024 levels, while net profit is expected to be lower due to the global minimum tax rate of 15% (negative impact of S\$400 million) [[3]].
• DBS has the highest beta among the three local banks, with dividend payout ratios of 82% for 2025 and 87% for 2026 [[3]].
• Potential acquisitions in Malaysia or Indonesia might be untimely due to ongoing external uncertainties [[3]].
• The target price for DBS is based on 1.92x 2026F P/B, derived from the Gordon Growth Model (ROE: 16.3%, COE: 8.75%, growth: 0.5%) [[3]].

Oversea-Chinese Banking Corp (BUY/Target: S\$19.30)

• OCBC has maintained its 2025 financial targets, guiding for mid-single-digit loan growth, cost-to-income ratio at low 40%, and credit costs at 20-25bp [[3]].
• Management expects NIM to remain stable at 2.00% in 2025, based on the expectation of three rate cuts by the Fed [[3]].
• Exit NIM was 2.03% in Mar 25. OCBC has started to cut interest rates for fixed deposits, and the deployment of surplus liquidity into high-quality liquid assets (HQLA) had been largely completed in 1Q25 [[3]].
• Strategic initiatives aim to deliver incremental revenue of S\$3 billion cumulatively over 2023-25, driven by Asian wealth, trade and investment flows, new economy, and sustainable financing [[4]].
• Management aims to deliver ROE of 12-13% with an additional contribution of 1 percentage point from the incremental revenue of S\$3 billion [[4]].
• The target price of S\$19.30 is based on 1.38x 2026F P/B, derived from the Gordon Growth Model (ROE: 12.1%, COE: 8.75%, growth: 0.0%) [[4]].

Projected DPS and Dividend Payout Ratios

The following table compares the projected Dividends Per Share (DPS) and Payout Ratios for DBS, OCBC, and UOB:

[[4]]

Comparison of Profit & Loss (1Q25)

The table below provides a comparison of the Profit & Loss statements for DBS, OCBC, and UOB in 1Q25:

[[4]]

Comparison of Key Ratios (1Q25)

Key financial ratios for DBS, OCBC, and UOB in 1Q25 are compared in the following table:

[[4]]

Assumption Changes for DBS

• Net profit forecast for DBS is raised by 1.3% for 2025 and 8.8% for 2026 [[4]].
• NPL ratio is expected to edge higher to 1.11% at end-25 (previous: 1.23%) and 1.16% at end-26 (previous: 1.32%), compared with 1.09% at end-24 [[4]].
• Credit costs of 30.0bp in 2025 (previous: 35.2bp) and 19.5bp in 2026 (previous: 47.1bp) are factored in [[4]].

Key Assumptions – DBS

The following table outlines key financial assumptions for DBS:

[[4]]

Assumption Changes for OCBC

• Net profit forecast for OCBC is raised by 4.4% for 2025 and 11.5% for 2026 [[4]].
• NPL ratio is expected to edge higher to 1.00% at end-25 (previous: 1.06%) and 1.09% at end-26 (previous: 1.21%), compared with 0.89% at end-24 [[4]].
• Credit costs of 30.7bp in 2025 (previous: 36bp) and 22.0bp in 2026 (previous: 47.1bp) are factored in [[4]].

Key Assumptions – OCBC

The following table outlines key financial assumptions for OCBC:

[[4]]

Sector Catalysts

• Slowdown in trade globally and regionally, leading to a decline in loan growth [[4]].
• Slowdown and job losses in the manufacturing sector within ASEAN countries, which are likely to spill over into a contraction in domestic consumption. Asset quality could start to deteriorate [[4]].

Risks

• Escalation of trade conflicts between the US, EU, and China [[4]].
• Geopolitical tensions between the US, EU, and China [[4]].