Shrinking margins threaten bank growth despite fat dividend

High dividend yields of up to 6.1% are being tested by shrinking interest margins and a projected 50-basis-point cut to US interest rates.

After a robust 2025, Singapore’s banking sector is expected to see more modest returns in 2026, RHB Securities said.

“We see a mixed bag for Singapore banks (SG Banks) ahead,” the report said. Positives include a stable macroeconomic environment, a wealth management business poised to benefit from low interest rates, ongoing investor inflows, and sound asset quality.

These are tempered by pressures on net interest margin (NIM) and elevated sector valuations. “In the absence of a meaningful rise in ROEs, headroom for further valuation expansion may be limited, resulting in more modest returns for the sector ahead.”

The sector ended last year with double-digit total returns, outperforming regional peers in Malaysia and Indonesia, recovering strongly from the April sell-off triggered by U.S. tariff uncertainties.

Analysts noted that flight to quality into SGD assets, high dividend yields, falling risk-free rates, and potential equity market reforms boosted 2025 returns, but NIM pressures and high valuations are likely to cap gains next year.

According to a DBS report, Singapore banks are expected to offer attractive FY26F dividend yields: DBS 6.1%, OCBC 5.4%, and UOB 5.4%.

The sector’s performance is also supported by potential general provision writebacks and excess capital, though UOB remains the exception.

Further inflows are expected through 2026 from the Equity Growth Development Plan (EQDP), with $2.85b allocated in the second batch. Operating expenses will be tightly managed to protect profits.

DBS economists expect 3M SORA OIS to rise from 1.13% to 1.25% in 2026, insulating short-term SGD rates from Fed cuts.

Meanwhile, wealth management activity is expected to stay robust, with assets under management growing +18%/+18%/+8% YoY for DBS, OCBC, and UOB in 3Q25.

High investment-to-assets under management ratios (40–56%) are likely to continue as Singapore remains a safe, politically stable market.

Singapore’s GDP is forecast to grow about 3% in 2026, supported by resilient external demand and momentum across manufacturing and trade-related sectors, including technology and electronics.

Inflation is seen edging up toward ~1.5%, reflecting firm local demand, while the Singapore dollar could strengthen further under the Monetary Authority of Singapore’s mild appreciation bias.Two U.S. Federal Funds Rate cuts totaling 50 basis points are expected, likely resulting in a measured decline in SORA, supporting demand for yield-bearing assets.

RHB projects sector PATMI growth of around 4% in 2026, rebounding from a 6% decline in 2025. UOB is expected to drive much of this growth with an estimated 18% YoY increase as credit costs normalize, whilst DBS and OCBC are projected to see relatively flat 2026 earnings.