Broker: UOB Kay Hian
Date of Report: 23 July 2025

Singapore Banks Face Delayed Rate Cuts Amid Higher US Tariffs: Full Sector Outlook & Stock Analysis

Overview: US Reciprocal Tariffs Set to Impact Inflation and Interest Rate Policy

The Singapore banking sector is bracing for a new wave of volatility as the US implements higher reciprocal tariffs on key trading partners starting 1 August 2025. These tariffs, ranging from 25% for Japan to 50% for Brazil, are expected to push inflation higher in the near term and delay anticipated interest rate cuts. The sector, however, remains resilient, boasting attractive dividend yields and strong capital management. UOB Kay Hian maintains an OVERWEIGHT stance on Singapore banks, with OCBC as the top pick (BUY, Target: S\$19.25) and a HOLD rating for DBS (Target: S\$47.00).

Key Sector Developments: Tariffs, Trade, and Fed Dynamics

• Reciprocal Tariffs Take Effect 1 August: The US will enforce tariffs of 50% (Brazil), 35% (Canada), 30% (EU), and 25% (Japan, South Korea). Lower tariffs have only been agreed with Indonesia (19%), the UK (10%), and Vietnam (20%). Exporters shipping to the US will be subject to these new tariffs from 1 August, though negotiations remain ongoing.
• Tough Trade Negotiations Expected: US-EU discussions have been challenging, with the EU preparing countermeasures, including tariffs on agricultural goods and restrictions on US tech companies. The US may also expand trade talks to include China’s oil purchases from Russia and Iran, complicating resolutions and increasing inflationary pressures.
• Federal Reserve Independence in Question: President Trump has called for a 3ppt cut in the Fed Funds Rate to 1.25%, aiming to lower the US government’s interest burden. Criticism of Fed Chair Jerome Powell has intensified, and although Trump refrained from firing Powell, expectations are that his successor will be more dovish, potentially embedding structurally higher inflation.
• Rising Inflation Expectations: Five-year inflation projections have increased by 21 basis points to 2.52%, reflecting concerns over the impact of tariffs and anticipated Fed appointments.

Singapore Banking Sector: Valuation and Dividend Strength

Singapore banks present an attractive investment case, trading at a sector-average P/B of 1.52x and offering a high dividend yield of 6.0% for 2025. The sector’s robust capital management and defensive positioning support this outlook, even as economic headwinds mount.

Dividend yields are a key attraction, with 2025F yields at 6.3% for DBS, 5.8% for OCBC, and 5.9% for UOB. OCBC stands out for its focus on ASEAN trade and investment flows, a defensively low 2025F P/B of 1.29x, and a strong management team.

Company Analysis: DBS Group Holdings

• 2025 Guidance: DBS expects 2025 net interest income to be slightly above 2024 levels. While net interest margin (NIM) is expected to compress slightly due to anticipated three Fed rate cuts, this will be offset by mid-single-digit loan growth. Non-interest income guidance has been moderated to mid-to-high single digits, mainly driven by wealth management fee growth in the low to high teens.
• Cost & Profitability: Cost-to-income ratio (CIR) is expected to remain in the low 40% range. Specific provisions are guided at 17–20bp. Pre-tax profit is projected to remain flat, while net profit is expected to dip slightly due to the global minimum tax rate’s negative S\$400 million impact.
• Valuation: Target price is S\$47.00, based on 1.96x 2026F P/B (ROE: 16.7%, COE: 8.75%, growth: 0.5%). HOLD rating is maintained, primarily for its 2025 dividend yield of 6.3%.

DBS Key Financial Forecasts

DBS Profit & Loss Forecast (2Q25)

Company Analysis: Oversea-Chinese Banking Corp (OCBC)

• 2025 Financial Targets Maintained: OCBC expects mid-single-digit loan growth, a cost-to-income ratio in the low 40% range, and credit costs at 20–25bp. The NIM is projected to remain stable at 2% in 2025, reflecting the expectation of three Fed rate cuts. Surplus liquidity has already been deployed into high-quality liquid assets.
• Leadership Renewal: Tan Teck Long will become Group CEO from 1 Jan 2026. With over 30 years’ banking experience (including senior roles at DBS), he has led OCBC’s Global Wholesale Banking division to a 20% CAGR in income and 25% CAGR in net profit over the past three years. He has driven strong Greater China-ASEAN revenue growth (+35%) and customer growth (+50%), modernizing OCBC’s credit and asset-liability management frameworks.
• Valuation: Target price is S\$19.25, based on 1.38x 2026F P/B (ROE: 12.1%, COE: 8.75%, growth: 0.0%). OCBC remains a BUY, reflecting its robust management and regional trade positioning.

OCBC Key Financial Forecasts

OCBC Profit & Loss Forecast (2Q25)

Key Assumptions and Sector Catalysts

• DBS: 2025 loan growth at 2.4%, NIM at 2.07%, fee growth at 17%, NPL at 1.09%, and credit costs at 27.7bp. Net profit is forecast at S\$10,836m in 2025, a 4% decline from 2024.
• OCBC: 2025 loan growth at 1.9%, NIM at 1.96%, fee growth at 11.9%, NPL at 1.01%, and credit costs at 29.7bp. Net profit forecast for 2025 is S\$7,039m, a 7.2% decline from 2024.

Risks and Opportunities

• Catalysts: US securing further trade deals and Singapore manufacturing benefiting from low reciprocal tariffs.
• Risks: A regional or global trade slowdown could dent loan growth. Escalation of geopolitical tensions, such as the Russia-Ukraine war or cross-straits conflict, presents downside risk.

Conclusion: Sector Remains Attractive Despite Macroeconomic Headwinds

The Singapore banking sector demonstrates resilience, supported by healthy dividends, strong capital bases, and prudent management. While higher US tariffs and inflation concerns may defer rate cuts, current valuations and yield profiles make banks like OCBC and DBS compelling for income-focused investors. The evolving macro landscape, Fed leadership changes, and ongoing trade negotiations will remain key variables to monitor in the months ahead.