SINGAPORE (Oct 19): DBS Group Research continues to prefer UOB to OCBC even as it expects loan yields to trend up in 3Q18 for both banks.

“Our ‘buy’ call on UOB is premised on its higher dividend yield with potential upside and continuous loan growth supported by strong funding portfolio, on top of its strong capital position,” says DBS analyst Lim Rui Wen who has a $31.70 target price for the bank.

Lim expects UOB to see flattish NIM for the quarter as it continues to drive volume growth, supported by a strong funding portfolio, while OCBC’s NIM to expand as it starts to reprice its Singapore mortgages during the quarter and phase out more expensive deposits.

However, loan growth trajectory for the two banks is expected to diverge, says Lim. Although UOB and OCBC are maintaining high single-digit loan growth guidance for the year, UOB has less exposure to trade loans and should continue seeing good loan growth as it continues to drive volumes in 3Q18, says Lim.

Meanwhile, regional operations for both banks are expected to continue to be mixed. OCBC is expected to benefit from higher prime lending rates in Hong Kong amid good loan growth in OCBC Wing Hang while UOB is expected to benefit strongly from growth in Thailand.

In Indonesia, OCBC and UOB are likely to continue seeing pressures in NIM while performance of both banks in Malaysia are expected to remain flattish q-o-q.

In terms of dividend, UOB has verbalised its commitment to a 50% dividend payout ratio and DBS expects more positives to come for its 2H18 dividends as UOB has paid 41% of its 1H18 earnings.

On the other hand, OCBC has fallen back on the scrip dividend scheme in the last quarter to shore up more capital and is unlikely to be able to pay more dividends till FY19.

“We currently have a ‘hold’ call on OCBC as there are limited catalysts for its share price currently due to OCBC’s bigger exposure to trade and wealth management income which may moderate on the back of volatile market conditions,” says Lim.

For OCBC, DBS has a ‘hold’ call as there are limited catalysts for its share currently due to the bank’s bigger exposure to trade and wealth management income which may moderate on the back of volatile market conditions, says Lim who has a $12.40 target price for OCBC.

As at 3.20pm, the stock is trading at $25.33 or 9.6 times FY19F earnings.