Probability of merger between DBS (D05.SG), OCBC (O39.SG) is high in context of Minister Mentor Lee Kuan Yew’s recent comments that Singapore banks may need to consolidate further to grow, says UOB KayHian.

The broker notes DBS’ ambition to become pan-Asian bank: “DBS needs a larger-scale home base through potential acquisitions in Singapore to support meaningfully sizeable acquisitions overseas.”

UOB says union between UOB (U11.SG), OCBC unlikely as stake held by UOB’s largest shareholder (chairman Wee Cho Yaw) would be diluted. Adds, merger between DBS, UOB also unlikely as combined entity will have 40% market share, creating unduly large concentration of risk in single financial institution.

Ultimately, house says further consolidation will only accentuate systemic risk in Singapore’s banking system. DBS last +0.3% at $13.72, UOB off 0.4% at $19.54 and OCBC down 1% at $8.78.