As a proxy to Singapore, Asean and the wider Asia-Pacific region, banks are viewed as a core part of most equity portfolios. We had a challenge deciding which bank to land on as one of our top 12 picks for 2025. The three local banks rose to new highs in January.
Since we can only choose one bank for our 2025 top 12 picks, we landed on United Overseas Bank (UOB) because of Malaysia and China. Among the local banks, UOB is viewed as the largest foreign bank in Malaysia. It also has the smallest absolute exposure to greater China, including mainland China. Although we prefer to be contrarian, we are going with the trend this year. Based on a Bloomberg poll, analysts seem to like UOB more than DBS Group Holdings and Oversea-Chinese Banking Corporation (OCBC). In terms of valuations, though, OCBC has the lowest valuations, and DBS has the richest.
According to UOB Kay Hian (UOBKH) in a Jan 17 update, the trend of elevated government bond yields is expected to persist. Firmer interest rates are positive for banks. Additionally, inflows of foreign direct investments (FDI) into Asean are good for the banks with an Asean footprint. According to UOB Global Economics & Markets Research, FDI inflow into Asean countries is projected to expand at a CAGR of 8.3% to reach US$356 billion ($486 billion) in 2030.
“OCBC and UOB are beneficiaries of the supply chain repositioning due to their extensive network within Asean countries. Asean countries, including Singapore, accounted for 48.5% of total loans for DBS, 55.7% for OCBC and 68.4% for UOB as of June 2024. The region also accounted for 68.3% of total income for DBS, and 81.4% [combined] for OCBC and UOB in 1HFY2024 ended June 30, 2024,” UOBKH says.
In an interview with The Edge Malaysia, Ng Wei Wei, CEO of UOB Malaysia, says the group sees various hot spots for potential growth in the country and is eager to deepen collaborations and facilitate investments across its economic corridors. These include Penang’s high-tech manufacturing hub; the Klang Valley, a centre for finance, commerce and innovation; and Sarawak, a corridor for energy and renewable energy.
Add to that the Johor-Singapore Special Economic Zone (JS-SEZ). Ng points out that UOB was the first bank in Malaysia to sign a memorandum of understanding with Invest Johor last year to drive investment opportunities under the JS-SEZ.
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“Additionally, we hosted a C-suite business dialogue in Shenzhen between the Johor state delegation and 13 top Chinese companies in sectors like technology, media and telecommunications, electrical and electronics, renewable energy and manufacturing to attract FDI into Johor,” she says. Ng adds that three companies have made investment commitments into Johor, with a total projected investment value of close to RM2 billion ($607 million) as a result of that meeting.
But after its sharp run-up last year, can UOB offer further upside this year? “Valuations, on almost all metrics (P/B, dividend yield, implied equity risk premium (ERP)), still look fairly stretched. This creates a high bar for upside surprises. Our analysis also suggests that share prices are already pricing in potential dividend surprises in 4QFY2024,” says a UBS report on the Singapore banks dated Jan 16.
“Since last year, a majority of the returns for the Singapore banks have been driven by ERP normalisation. Earnings accounted for less than one-fourth. Given the macro uncertainties looming on the horizon and stretched valuation, risk-reward doesn’t look favourable,” UBS says, adding that UOB remains its most preferred in the sector, followed by DBS and OCBC.
JP Morgan is also cautious about the outlook for the banks. However, it has placed UOB on “Positive Catalyst Watch”. “We expect the bank to announce a $2 billion buyback during 4QFY2024 results on Feb 19. A combination of buyback, a focus on cost management, and sector-high loan growth of 6%–8% should allow the bank to come close to 14% return on equity next year (2026), leading to a sustained re-rating,” JP Morgan says.
