UOB Kay Hian analyst Jonathan Koh has kept his “overweight” rating on the Singapore banking sector after all three Singapore banks continued to deliver “upside surprises” for their dividends.

Looking ahead, Koh estimates that the banks will benefit from the full impact of the previous rate hikes going into 2023.

“The Russia-Ukraine War exacerbates higher inflation, which could keep bond yields higher for longer,” he writes.

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In his report, Koh has kept his “buy” calls for DBS and OCBC as he deems their FY2023 dividend yields of 4.9% and 5.9% attractive. The analyst has given target prices of $45.80 and $18.25 for DBS and OCBC respectively.

In addition, the banks, particularly OCBC and UOB, may benefit from the “reorientation of supply chain” towards Asean countries. Asean countries have a large population of 680 million people and accounts for about 8% of global exports, Koh points out.

“Many multinational companies have adopted the China + 1 strategy and plan to set up alternative production facilities within the Asean region. Malaysia, Thailand and Vietnam are seeing growth in inflow of foreign direct investments (FDI),” he adds.

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In his view, an expansion of net interest margins (NIMs) in the 1HFY2023 driven by the upcycle in interest rates will one of the catalysts for the sector.

Other sector catalysts include a recovery in the economy and higher dividend payouts. Meanwhile, an escalation to the Russia-Ukraine war and geopolitical tensions and trade conflicts between the US, China and Russia are deemed as downside risks.

Shares in DBS, OCBC and UOB closed at $33.82, $12.50 and $29.50 on March 6.

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