Singapore lenders face earnings drag with NIMs falling fast

This acceleration in margin pressure could weigh heavily on near-term earnings across the banking sector, DBS said.

Singapore banks are bracing for a sharper-than-expected decline in profitability, with net interest margins (NIMs) set to compress significantly in the second quarter of 2025 due to a steep drop in benchmark interest rates.

According to a new report from DBS, this acceleration in margin pressure could weigh heavily on near-term earnings across the banking sector.

Key rate indicators have fallen sharply: the 3-month SORA dropped 50 basis points, while 1-month and 3-month HIBOR plunged 299 and 221 basis points, respectively.

These declines, DBS said, will ripple through banks’ loan books as more facilities are repriced at lower rates, squeezing interest income.

In the first quarter of 2025, NIMs were showing signs of stress. DBS reported a slight drop to 2.12%, OCBC fell to 2.04% (down 11bps quarter-on-quarter), whilst UOB’s NIM held steady at 2.00%. But with benchmark rates now tumbling, further declines are inevitable, analysts warn.

To offset the drop in asset yields, banks have begun to reprice deposits downward. Both OCBC and UOB cut fixed deposit rates by 25–50 basis points starting in May, alongside steeper reductions of 70–135bps for flagship savings accounts. These moves are expected to help protect margins heading into the third quarter, though only partially.

The report also flags weaker revenue and earnings ahead, with wealth management income under pressure in the early part of 2Q25 following the “US Liberation Day” market shock.

Whilst client activity began to recover in May, overall fee momentum remains subdued. Nevertheless, wealth management is expected to remain a medium-term growth pillar as clients rotate assets into managed portfolios.

Loan growth was modest but positive in the first quarter, driven partly by businesses front-loading financing ahead of new tariff regimes. Similar momentum is expected in Q2, though FX translation effects from a weaker USD may impact reported figures.

Provisioning remains conservative. UOB is likely to continue building up general provisions, aiming to raise its GP-to-loan ratio from 80 to 90 basis points. Writebacks are unlikely this year, as banks remain cautious about second-order risks from trade disruptions and commercial property exposure.

Despite these concerns, asset quality remains stable, with non-performing loan (NPL) ratios ranging from 0.9% (OCBC) to 1.6% (UOB).

One area of support for investors is dividends. With payout ratios intact, dividend yields remain high: 7.0% for DBS, 6.6% for UOB, and 6.0% for OCBC.

Along with share buyback programs and relatively benign credit conditions, these yields are expected to provide a buffer for bank valuations in a low-rate environment.