SINGAPORE (Feb 22): UOB KayHian is maintaining its “overweight” rating on the local banking sector, keeping DBS Group Holdings and Oversea-Chinese Banking Corp as its top buys.

In a Monday report, UOB lead analyst Jonathan Koh says the outlook for 2017 is brighter as it believes banks have already recognised the larger troubled accounts as Non-Performing Loans (NPLs) while interest rates are on an uptick.

“Headwinds from the O&G sector would diminish as we believe Singapore banks have already recognised the larger troubled accounts from the O&G sector as NPLS. Higher interest rates and bond yields are also positive for banks

Koh says UOB’s 4Q16 results stood out due to the improvement in asset quality. On the other hand, results from DBS and OCBC came in slightly below expectations due to higher-than-anticipated specific provisions.

Specific provisions rose to $432 million for DBS, $235 million for OCBC and $482 million for UOB due to the steep fall in valuations for collaterals. But UOB offset the huge negative impact with writeback in general provisions of $310 million.

Loan-loss coverage are 96.9% for DBS, 100% for OCBC and 118% for UOB. DBS will set aside the gain of $350 million from the divestment of PwC Building as general provisions, thus beefing up loan-loss coverage to 104% in 1Q17.

NIMs (Net Interest Margins) were stable at 1.63% for OCBC and 1.69% for UOB. Koh expects the 6bp q-o-q NIM compression of DBS to be a temporary dip due to excess deposits. NIMs would gradually inch higher due to the upcycle in US interest rates, which will also pull SIBOR and SOR higher in Singapore.

DBS, OCBC and UOB grew fee income by 6.2%, 4.5% and 10.6% y-o-y respectively. Wealth management and credit cards were key growth drivers. DBS experienced a steep 16% q-o-q decline in fees due to seasonal weakness for investment banking and wealth management.

DBS has the highest Common Equity Tier 1 CAR of 13.3%, followed by 12.4% for OCBC and 12.1% for UOB.

Shares of DBS, OCBC and UOB are up 28 cents at $18.74, $9.67 and $21.79 respectively.