CGS International
July 15, 2025

Singapore Banks Q2 2025 Outlook: Muted Growth, Yield Focus, and Key Risks Unveiled

Overview: Q2 2025 Earnings Preview for Singapore Banks

Singapore’s banking sector is bracing for a softer Q2 2025 as macroeconomic headwinds and lower interest rates weigh on earnings. In its latest sector note, CGS International maintains a neutral stance on the sector, forecasting a quarter-on-quarter (qoq) decline in profit after tax and minority interests (PATMI) of 3.7% to 5.3% across the three major banks—DBS, OCBC, and United Overseas Bank (UOB). Despite the subdued outlook, the sector remains attractive for yield investors, with DBS standing out for its robust dividend growth guidance and capital return clarity.

Key Highlights and Macroeconomic Trends

• Lower Interest Rates and Muted Loan Growth: Net Interest Income (NII) is expected to decline by 1.1% to 1.9% qoq due to compression in Net Interest Margins (NIMs) and weak loan growth. SORA dropped 50 basis points (bp) qoq to 2.04%, and 3M-HIBOR saw a steep 200bp decline to 1.88%.
• Non-Interest Income (Non-II) Under Pressure: Risk-off sentiment post-Liberation Day in April led to weaker wealth management fees and trading income in Q2, though long-term prospects remain supported by Singapore’s resilient economy and net new money inflows.
• Credit Costs and Regional Exposure: Weakness in ASEAN economies, notably Thailand and Indonesia, could push credit costs toward the upper end of prior guidance. However, total credit costs are not expected to rise drastically qoq due to pre-emptive general provisions set aside in Q1.
• Yield Play Remains Intact: With limited growth catalysts on the horizon, the sector is positioned as a yield play. DBS’s capital return initiatives underpin an attractive forecast yield of 6.6-7.6% for FY25F-27F.

Singapore Banking Sector: Q2 2025 Forecasts and Metrics

The following table summarizes key financial estimates for Q2 2025:

Revenue and Margin Pressures: Interest Rate and Loan Growth Dynamics

• SORA’s 50bp qoq drop to 2.04% and a sharper 200bp fall in 3M-HIBOR to 1.88% are exerting downward pressure on NIMs, which are projected to compress 5-7bp across the board this quarter, except for OCBC, which already experienced an 11bp qoq drop in Q1.
• Bank lending volumes are weakening, with the Monetary Authority of Singapore reporting two consecutive months of declines in system loans as of May 2025. Deployment of excess liquidity into high-quality liquid assets (HQLA) could help buffer the NII drop.

Non-Interest Income: Post-Liberation Day Slowdown

Following the US Liberation Day in April, risk-averse sentiment dampened non-II, particularly in wealth management and trading. Despite a recovery in equity markets to new highs in both the US and Singapore, ongoing global economic uncertainty continues to suppress fee income. However, Singapore’s stability and appeal as a wealth hub should support longer-term inflows and franchise growth for these banks.

Credit Costs: ASEAN Weakness and Provisions

• Credit costs are expected to trend toward the upper limit of previous FY25F guidance—DBS: 17-20bp, OCBC: 20-25bp, UOB: 25-30bp—due to economic softness in regional markets like Thailand and Indonesia.
• Thanks to pre-emptive general provisions booked in Q1, overall credit cost escalation is expected to be modest. DBS, which provided 30bp in Q1, is likely to see the largest reduction in Q2.

Sector Outlook: Neutral Stance with DBS as Top Pick

CGS International reiterates its Neutral view on Singapore banks, citing lack of strong growth catalysts amid an uncertain macro environment. DBS remains the preferred pick for its transparent capital return policy and sector-leading yield trajectory.

• Downside risks: Further deterioration in non-interest income, rising specific provisions (SPs), and possible downward revisions to FY25F guidance.
• Upside risks: Stronger-than-expected loan growth in H2, or a rebound in SORA and 3M-HIBOR if US rate cuts are less aggressive than anticipated.

Company-Specific Analysis

DBS Group

• Recommendation: ADD
• Target Price: S\$47.90 (Last Close: S\$46.29)
• Q2 2025 Net Profit Estimate: S\$2.79bn (+0.1% yoy, -3.7% qoq)
• Credit Costs: 18bp (normalizing towards 17-20bp FY25F guidance)
• Dividend Yield Guidance: 6.6% (FY25F), 7.1% (FY26F), 7.6% (FY27F)
• Valuation: P/E 11.67x (Dec-25F), P/BV 1.91x (Dec-25F), ROE 16.2%
• Notes: DBS is favored for its capital return initiatives and yield clarity. The bank’s credit costs are expected to normalize after a pre-emptive spike in Q1.

Oversea-Chinese Banking Corporation (OCBC)

• Recommendation: HOLD
• Target Price: S\$17.20 (Last Close: S\$17.00)
• Q2 2025 Net Profit Estimate: S\$1.79bn (-8.2% yoy, -5.2% qoq)
• NIM Compression: Significant, following an 11bp qoq decline in Q1
• Dividend Yield Guidance: 6.2% (FY25F), 6.4% (FY26F), 5.6% (FY27F)
• Valuation: P/E 10.36x (Dec-25F), P/BV 1.30x (Dec-25F), ROE 12.6%
• Notes: OCBC may announce new capital return initiatives after its failed bid to privatize its insurance arm, Great Eastern. NIM pressure is especially acute.

United Overseas Bank (UOB)

• Recommendation: ADD
• Target Price: S\$38.60 (Last Close: S\$36.88)
• Q2 2025 Net Profit Estimate: S\$1.41bn (-5.1% yoy, -5.3% qoq)
• ASEAN Exposure: Higher risk of elevated credit costs due to regional economic softness
• Dividend Yield Guidance: 6.7% (FY25F), 5.7% (FY26F), 6.0% (FY27F)
• Valuation: P/E 10.32x (Dec-25F), P/BV 1.20x (Dec-25F), ROE 11.5%
• Notes: UOB retracted its FY25F guidance in Q1 and is likely to update it in Q2, reflecting more subdued expectations.

Comparative Regional Bank Valuations

Trends in Lending, Deposits, and System Metrics

• Loan Growth: Singapore banking system shows sluggish year-on-year and month-on-month growth through May 2025, with both resident and non-resident loans declining.
• Deposit Growth: Year-on-year deposit growth remains healthy at 5.7%, with S\$ and foreign currency deposits nearly balanced (51% CASA, 49% fixed deposits).
• Loan-to-Deposit Ratio (LDR): The sector’s overall LDR remains stable at 66.4%, indicating a prudent funding structure.

Sector Risks and Guidance for 2H25

• Upside Risks: Unexpectedly strong loan growth, less aggressive US Fed rate cuts (supporting SORA and HIBOR), and a rebound in non-interest income could drive sector outperformance.
• Downside Risks: Further deterioration in non-interest income, rising specific provisions, and downward revisions to guidance pose significant threats.

Summary: Positioning for Yield Amidst Uncertainty

As Singapore’s banks enter the second half of 2025, the sector’s appeal lies in its robust dividend yields and defensive characteristics. With macroeconomic clouds persisting and growth catalysts lacking, investors should focus on yield, capital return initiatives, and prudent risk management. DBS leads the pack for its clarity on dividends and capital, but all three major banks offer attractive yields in a challenging environment. Monitor sector guidance updates closely in the coming months for new opportunities or risks.