CGS International
July 15, 2025

Singapore Banks 2Q25F Outlook: Navigating Lower Rates, Sluggish Loans, and Yield Opportunities

Executive Summary: Neutral Stance Amid Softer Earnings and Muted Growth

Singapore’s banking sector is set for a challenging 2Q25F, with CGS International maintaining a neutral outlook due to expectations of weaker earnings momentum. Net interest income (NII) is projected to decline as a result of lower market interest rates and muted loan growth, while non-interest income (Non-II) growth is also likely to taper off. Despite these headwinds, Singapore banks continue to offer attractive dividend yields, positioning them as yield plays in the current environment. DBS remains the top pick for its robust capital return strategy and attractive dividend prospects.

Key Themes for 2Q25F: Interest Rates, Loan Growth, and Non-Interest Income

• NII Under Pressure: Net interest margins (NIMs) are expected to compress by 5-7 basis points in 2Q25F, notably wider than the 2-3bp contraction seen in 1Q25, amid a 50bp quarter-on-quarter drop in the Singapore Overnight Rate Average (SORA) to 2.04% and a steep 200bp fall in 3M-HIBOR to 1.88%.
• Loan Growth Stalls: Latest MAS statistics show two consecutive months of system-wide loan declines by May 2025, reflecting both domestic and regional softness.
• Non-Interest Income Weakens: Non-II, especially from wealth management fees and treasury/trading income, likely softened post-US Liberation Day in April, as investors took a risk-off approach. Although equity indices in the US and Singapore rebounded to all-time highs, macroeconomic uncertainty could keep fee income subdued in 2H25F.
• Credit Costs: With weaker ASEAN economies, specific provisions (SPs) may rise and trend toward the upper end of FY25F guidance; however, credit costs are not expected to shift drastically, as previous general provisions should cushion the impact.

Sector Outlook: Neutral with a Preference for Yield and Capital Return

CGS International expects Singapore banks to report a 3.7–5.3% quarter-on-quarter decline in PATMI (profit after tax and minority interests) for 2Q25F. The lack of visible growth catalysts and economic uncertainty underpin the neutral sector rating. DBS is favoured for its clear capital return strategy and projected dividend yields of 6.6–7.6% for FY25F–27F.
Potential upside risks include a surprise rebound in loan growth or less aggressive US Federal Reserve rate cuts, which could support NIMs. Downside risks remain a further deterioration in fee income, higher SPs, and downward revisions to FY25F guidance.

Highlighted Company Analysis

DBS Group (ADD, Target Price S\$47.90, S\$46.29 Close)

• 2Q25F Net Profit: S\$2.79bn (+0.1% yoy, -3.7% qoq)
• NIM: Expected compression by 8bps qoq to 2.06%
• Credit Costs: 18bp (normalising towards FY25F guidance of 17-20bp)
• Dividend Yield: 6.61% (FY25F), rising to 7.13% (FY26F) and 7.65% (FY27F)
• Valuation: P/E of 11.67x (Dec-25F), P/BV of 1.91x (Dec-25F)
• Strengths: Strong capital return initiatives, robust wealth management inflows, and leading yield profile.

OCBC (HOLD, Target Price S\$17.20, S\$17.00 Close)

• 2Q25F Net Profit: S\$1.79bn (-8.2% yoy, -5.2% qoq)
• NIM: Steep 11bp qoq decline in 1Q25; further compression expected in 2Q25F
• Dividend Yield: 6.18% (FY25F), 6.35% (FY26F), 5.59% (FY27F)
• Valuation: P/E of 10.36x (Dec-25F), P/BV of 1.30x (Dec-25F)
• Potential Catalysts: New capital return initiatives may be communicated after the unsuccessful bid to privatise Great Eastern.

United Overseas Bank (UOB) (ADD, Target Price S\$38.60, S\$36.88 Close)

• 2Q25F Net Profit: S\$1.41bn (-5.1% yoy, -5.3% qoq)
• ASEAN Exposure: Higher SPs expected due to softer regional economic conditions
• Dividend Yield: 6.72% (FY25F), 5.69% (FY26F), 5.97% (FY27F)
• Valuation: P/E of 10.32x (Dec-25F), P/BV of 1.20x (Dec-25F)
• Guidance: FY25F guidance was retracted in 1Q25; new guidance anticipated in 2Q25F

Summary Valuation Metrics Table

Singapore Banking System Trends: Loans, Deposits, and Liquidity

• Loan Growth: System-wide loans have declined for two consecutive months as of May 2025, with both resident (domestic) and non-resident (regional) portfolios affected.
• Deposit Growth: YOY deposit growth stands at 5.7%, with a CASA (current account/savings account) to fixed deposit (FD) split of 51% to 49% as of May 2025. CASA growth remains subdued, impacting funding mix.
• Loan-to-Deposit Ratio (LDR): Overall LDR stands at 66.4%, reflecting ongoing liquidity management and prudent lending practices.

Regional Peer Comparison: ASEAN Banks Snapshot

Note: Table includes selected key peers from Indonesia, Malaysia, and Thailand. Full peer data available in the original report.

Key Abbreviations for Reference

• NII: Net interest income
• NIM: Net interest margin
• Non-II: Non-interest income
• PPOP: Pre-provision operating profit
• CASA: Current account/savings account
• SORA: Singapore overnight rate average
• HIBOR: Hong Kong interbank offered rate
• HQLA: High quality liquid assets
• LDR: Loan-to-deposit ratio
• SP: Specific provisions
• GP: General provisions
• CET-1: Common equity tier 1

Conclusion: Defensive Yield, Cautious Outlook

Singapore banks enter 2Q25F facing headwinds from lower interest rates, subdued loan demand, and softer non-interest income. Despite near-term challenges, their strong capital positions and attractive dividends offer defensive yield opportunities in uncertain times. DBS stands out for its yield and capital return visibility, while OCBC and UOB may provide updates on their respective capital strategies in the months ahead. Investors should watch for sector catalysts in the form of loan growth recovery or positive interest rate surprises, while remaining alert to downside risks from fee income volatility and rising provisions.

Disclosure and Recommendation Framework

• Stock Ratings:
  • Add: Expected total return >10% over 12 months
  • Hold: Expected total return between 0% and +10% over 12 months
  • Reduce: Expected total return below 0% over 12 months
• Sector Rating: Neutral (market cap-weighted, neutral recommendation)

CGS International, its affiliates, and employees may hold positions in some of the companies covered. Please refer to the full report for a comprehensive list of disclosures and disclaimers.