Among the three banks here, DBS Group Holdings is RHB Bank Singapore’s top pick for its “too good to ignore” FY2025 dividend yield, thanks to its capital return plan. But peers United Overseas Bank (UOB) and Oversea-Chinese Banking Corporation (OCBC) also surprised with respect to dividends, say RHB’s research analysts, reinforcing their “overweight” view on the banking sector here.
RHB has “buy” calls on all three banks, with target prices of $51.20 for DBS, $41.60 for UOB and $19.10 for OCBC. RHB was previously ambivalent about the latter, having only upgraded its call from “neutral” on Feb 27 after the release of its results for FY2024 ended Dec 31, 2024.
“We viewed its capital return plan as a positive addition to its investment thesis as a defensive option (solid asset quality and capital) and connectivity play,” says RHB in a March 7 sector note.
Based on optimal common equity tier-1 (CET-1) levels ranging from 13% to 14%, the three banks plan to return between $2.5 billion and $8 billion over the next two to three years via a combination of dividends and share buybacks.
DBS plans to return $8 billion in excess capital, with $5 billion to be returned via dividends over a three-year period and $3 billion via share buybacks. The latter was announced at DBS’s 3QFY2024 results in November 2024.
Meanwhile, OCBC’s $2.5 billion capital return comprises special dividends amounting to 10% of the group’s net profit for FY2024 and FY2025, with the balance via share buybacks over two years.
Finally, UOB will return $3 billion in excess capital with $0.8 billion in special dividends this year and $2 billion in share buybacks over three years.
UOB to outperform
Among the three banks, UOB has outperformed year to date as investors reacted positively to its capital management plans, say RHB’s analysts.
They also expect UOB to outperform its peers in terms of earnings growth this year; RHB is forecasting FY2025 patmi to rise 5% y-o-y.
“[This is] aided by a further downshift in Citi integration costs and lower loan allowances now that it has beefed up provisioning for some of its large property exposures and in anticipation that its Thailand operations has stabilised,” says RHB. “This is as compared to the flat to slight y-o-y earnings decline for its peers — partly due to the effect from the global minimum tax rate.”
OCBC’s ‘conservative’ guidance
DBS and UOB retained their 2025 guidance, which were introduced in their respective 3QFY2024 briefings, while OCBC unveiled its guidance during the latest quarter.
Of note, OCBC appears more conservative on its net interest margin (NIM) outlook as compared to its peers. In part, its management has assumed three US Federal Funds Rate cuts and continued redeployment of excess liquidity into high-quality, lower yielding assets, hence the sharper squeeze.
But OCBC management did also admit that the guidance could be conservative and there could be upside to the figure.
On the other hand, DBS’s 2025 NIM guidance takes into account two rate cuts and that the markets trading will benefit from lower funding cost and help cushion the impact of rate cuts on the commercial book.
As for UOB, it cited that the bulk of the impact from earlier rate cuts have been felt in 4QFY2024 and the lagged impact from the repricing of deposits should filter through in 2025.
As at 3.10pm, shares in DBS are trading 5 cents higher, or 0.11% up, at $46.01; while shares in UOB are trading 13 cents higher, or 0.34% up, at $38.73; and shares in OCBC are trading 5 cents higher, or 0.29% up, at $17.24.
