UOB Kay Hian
Date of Report: September 10, 2025

Singapore Banks Face Persistent Headwinds as Safe Haven Status Alters Sector Dynamics

Singapore’s Banking Sector: Navigating a New Era of Safe Haven Liquidity

Singapore’s banking sector is in the spotlight as global geopolitical tensions and shifting US policies drive defensive capital flows into the city-state. While Singapore’s reputation as a safe haven and its prudent fiscal policy have long been strengths, the influx of liquidity is now presenting new challenges for its major banks—DBS, OCBC, and UOB. This detailed analysis examines how these structural changes are impacting net interest margins (NIMs), overseas growth, and the sector’s overall investment outlook.

Sector Overview: Structural Liquidity Influx and Its Consequences

Singapore’s status as a financial and advanced manufacturing hub, backed by a disciplined fiscal policy, is attracting persistent capital inflows from investors seeking stability.
The city-state’s low reciprocal tariff of 10% further enhances its competitiveness.
However, the surge in liquidity is exerting downward pressure on domestic interest rates, compressing NIMs across the banking sector.
The Singapore dollar (SGD) has appreciated sharply, affecting overseas income and loan growth.
Despite these headwinds, banks benefit from growing wealth management businesses and lower cost of equity (COE), supporting sector valuations.

Sector Ratings and Analyst Recommendations

Sector rating: Downgraded to MARKET WEIGHT
Top pick: OCBC (BUY, Target Price: S$20.40)
DBS: HOLD (Target Price: S$54.40)
UOB: Not Rated

Key Financial Metrics: Peer Comparison Table

Key Sector Challenges and Opportunities

• Net Interest Margin (NIM) Compression: Domestic interest rates are under pressure with overnight SORA hitting lows of 0.73% during Indonesian unrest and three-month compounded SORA dropping by 147bps to 1.60% (YTD Aug 2025). This structural low-rate environment is expected to persist, suppressing banks’ NIMs.
• SGD Strength: The SGD has appreciated 6.4% against the USD, 8.8% against the IDR, and 3.5% against the CNY in 2025. MAS has intervened twice to slow the pace, yet a strong SGD continues to moderate overseas income and loan growth.
• Wealth Management Growth: Inflows from high net worth individuals are driving growth in assets under management (AUM) and providing an offset to NIM pressure. In 2Q25, DBS and OCBC attracted S\$9b and S\$4b in net new money, respectively, with AUMs hitting record highs.
• Lower Cost of Equity (COE): The 10-year Singapore government bond yield dropped by 103bps to 1.83% in 2025, prompting a reduction in the sector risk-free rate from 2.5% to 2.2% and COE from 8.5% to 8.2%.

Dividend Outlook and Capital Management

Macroeconomic Backdrop: Fed Rate Cuts and Global Uncertainty

The US Federal Reserve is expected to cut the Fed Funds Rate four times (totaling 100bp) by January 2026, bringing it to 3.25%, as US job market weakness and trade uncertainties persist.
Singapore’s stability continues to attract capital, but the era of NIM expansion seen in 2022-2023 is over, replaced by a period of margin compression.

DBS Group Holdings: HOLD (Target Price S\$54.40)

Guidance & Outlook:

• 2025 net interest income is projected to be slightly above 2024, with NIM compression offset by loan growth.
• Non-interest income is expected to post mid-to-high single-digit growth, with wealth management fees driving double-digit expansion.
• Cost-to-income ratio (CIR) to remain in the low-40% range. Specific provisions guidance unchanged at 17-20bp.
• Pre-tax profit to be flat, but net profit expected to dip due to the impact of the global minimum tax rate (negative S\$400m effect).
• Full-year NIM expected below 2.05% (2Q25 level), with 1.98% in June and 1.95% in July. Exit NIM for 2026 forecasted at 1.95%.
• Balance sheet hedges (three-year tenure) and growth in deposits help moderate NIM decline.
• Quarterly DPS to rise by another 6 S¢ to 66 S¢, with CET-1 CAR remaining comfortably above its preferred range.

OCBC: BUY (Target Price S\$20.40)

Guidance & Outlook:

• Mid-single-digit loan growth expected in 2025, with CIR to remain in the low-40% range.
• Credit costs guided at 20-25bp; dividend payout ratio set at 60% (50% regular, 10% special).
• NIM guidance revised to 1.90-1.95% for 2025 (previous: stable at 2.00%), reflecting three expected rate cuts in 2H25. Exit NIM in June was 1.88%.
• Net interest income expected to decline mid-single-digit, with NIM compression partially offset by loan growth.
• Incoming CEO Tan Teck Long (from Jan 2026) aims to strengthen OCBC’s positioning across corporate and retail banking, pursue synergies via the “One Group” strategy, and consider inorganic expansion if strategically suitable.
• Earnings forecast for 2026 cut by 2.2% on an 11bp NIM compression to 1.85%.

UOB: Not Rated (Consensus Estimates Included)

UOB’s key financial indicators and valuation metrics remain in line with peers, featuring a 2025F PE of 10.4x, P/B of 1.19x, dividend yield of 5.8%, and ROE of 11.6%.
UOB’s focus remains on prudent capital management and regional expansion, but it is not rated in this report.

Sector Catalysts and Risks

Potential Catalysts:

• US closing more trade deals with major trading partners.
• Singapore’s manufacturing sector benefiting from low reciprocal tariffs.

Key Risks:

• Regional and global trade slowdowns impacting loan growth.
• Escalation of geopolitical tensions, such as the Russia-Ukraine war and China-Taiwan cross-straits conflict.

Conclusion: High Dividends, Cautious Growth; OCBC Tops the Picks

Singapore banks are offering attractive dividend yields (circa 6%) and solid capital management, but persistent NIM compression and a strong SGD present ongoing challenges. OCBC is the preferred pick, thanks to its ASEAN trade focus and lower valuation, while DBS is recommended as a hold for its stable yield and diversified income streams. Investors should watch for macroeconomic shifts, trade policy changes, and regional political developments as key drivers for sector performance in the coming quarters.