UOBKH upgrades top pick DBS to ‘buy’ on 5.6% yield

[SINGAPORE] A dividend yield of 5.6 per cent this year has led UOB Kay Hian (UOBKH) analysts to upgrade DBS to a “buy” call, with the broader banking sector expected to benefit from sustainable economic expansion and low inflation.

In a note on Wednesday (Jan 7), UOBKH analyst Jonathan Koh said the global backdrop of a so-called “Goldilocks economy” is set to deliver steady growth and stable asset quality in 2026. The banking sector in particular is set to provide “attractive value” with a “low” price-to-book ratio of 1.65 times and a “high” dividend yield of 4.8 per cent.

“Our top pick is DBS,” said Koh, setting a target price of S$68.95. “We also like OCBC for its focus on trade and investment flows within Asean and a defensively low 2026 forecast price-to-book ratio of 1.45 times.”

DBS’ quarterly dividend per share is expected to increase by S$0.06 to S$0.66, starting in Q4 FY2025.

The analyst noted that rumours of the lender’s profit-boosting acquisition of Vertical Theme’s 29.1 per cent stake in Alliance Bank Malaysia has set the stock market “abuzz”. The stake is worth about RM2.5 billion (S$790.5 million), based on Alliance Bank’s market value.

Vertical Theme is a joint venture, 49 per cent owned by Singapore investment company Temasek and 51 per cent owned by Malaysia’s investment vehicle Langkah Bahagia. The potential acquisition could be “comfortably financed” through internal cashflow, said Koh.

Overall, Singapore banks were deemed as “attractive yield plays” on the back of a low-interest rate environment in Singapore, with the sustainability of their dividend payouts supported by resilient earnings, strong capital adequacy and discipline in capital management.

Koh also noted that the banks offer yield spreads – the premium investors earn over risk-free rates – that are well above historical averages. DBS offers a higher spread of 3.5 per cent, while OCBC has a 2 per cent spread.

Shares of both lenders hit multiple all-time highs in the first few trading days of the year, with DBS rising to S$58.80 and OCBC rising to S$20.25 on Wednesday.

DBS shares ended Thursday at S$57.34, with OCBC at S$20.17. A Bloomberg analyst consensus as at Wednesday showed their 12-month target prices to be S$58.13 and S$19.65, respectively.

About 56 per cent of analysts had “buy” calls on DBS, while about 61 per cent had “buy” calls on OCBC, with some cautioning that further upsides for both may be limited.

The “Goldilocks” effect

The UOBKH analyst credited the favourable economic backdrop for banks partly to policy shifts in the US, where the Trump administration has pivoted to focus on affordability and lowering costs for essentials such as food and energy. This focus is expected to keep inflation mild while supporting economic expansion in the ideal “Goldilocks” scenario.

Adding to this favourable environment is a “huge influx of liquidity” seeking a safe haven here amid instability overseas, which has kept Singapore’s interest rates depressed.

While lower interest rates typically hurt bank lending margins, Koh noted that Singapore banks have successfully pivoted to offsetting the dip in interest income by using wealth management fees, ensuring earnings remain resilient even as rates fall.

For OCBC, the “buy” call also coincided with a leadership renewal. New chief executive Tan Teck Long, who took the helm on Jan 1, is expected to drive growth by capturing more trade flows between Asean and Greater China while deepening the bank’s integration through OCBC’s One Group strategy.