Banks in the money

SINGAPORE banks are expected to remain resilient as higher interest rates and structural growth in wealth management continue to support earnings, even as inflation and geopolitical risks cloud the near-term outlook.

The sector is also likely to see a more gradual recovery in net interest margins (NIMs), while slower business sentiment could temper loan growth.

UOB Kay Hian (UOBKH) Research upgrades its rating on Singapore banks to “market weight”, saying the lenders deserve to trade at a premium given their structural resilience.

On a year-to-date basis, DBS Group Holdings and Oversea-Chinese Banking Corp (OCBC) have gained 38% and 60% respectively, while United Overseas Bank (UOB) has risen 22%.

The research house says its preferred pick is OCBC, which it rates “buy” with a target price of S$35.70, citing the bank’s strategic shift towards accelerating growth.

It rates DBS “hold” with a target price of S$83.60, noting that its valuation is already stretched despite its leading position in wealth management and earnings scale.

The upgrade comes as the Monetary Authority of Singapore (MAS) shifts its focus towards tackling elevated inflation.

MAS increased the rate of appreciation of the Singapore dollar nominal effective exchange rate policy band slightly in July 2026, following another adjustment in April, as it expects imported costs to rise in the coming quarters.

Higher fuel and electronic input costs are expected to lift prices of upstream and intermediate goods, including construction materials, capital equipment and food commodities.

Adverse weather conditions are also expected to push up food prices, with MAS core inflation forecast to step up and remain elevated into the first half of 2027.

At the same time, the US Federal Reserve (Fed) has finally resumed tightening, with Fed chairman Kevin Warsh seeing the US economy running strongly on robust hiring, business capital investment and private-sector earnings.

The Federal Open Market Committee raises the Fed Funds Rate by 25 basis points (bps) to 3.75% last month.

Based on the September 2026 dot plot, the median projected Fed Funds Rate is 4.1% by end-2026, implying another 25-bps increase either this month or December.

Highlighting the resilience of Singapore banks, UOBKH Research says: “We postulate that Singapore banks are a hedge against potential sovereign debt crises in developed countries. Conventional wisdom also dictates that higher government bond yields are positive for banks.”

However, it adopts a defensive stance given near-term risks from the prolonged conflict in the Middle East, which could keep inflation elevated.

“The economy and loan growth could potentially slow down due to weakness in business sentiment,” it says.

Meanwhile, UOBKH Research notes that the Singapore overnight rate average (Sora) has bottomed, and it is expected to increase gradually in the near term.

Three-month compounded Sora bottoms at 1.02% in April 2026 before rising gradually by 14 bps to 1.22% in the third quarter (3Q26).

Assuming the current pace of around five bps a month continues, the brokerage estimates three-month compounded Sora could reach 1.4% by end-2026.

The research house also finds differences in NIM sensitivity among the banks.

During the previous interest-rate cycle, OCBC’s NIM improves by 20 bps for every 100-bps increase in three-month compounded Sora, compared with 15 bps for DBS.

OCBC targets new growth

UOBKH Research, which names OCBC as its preferred pick, notes that the lender is taking a more growth-oriented approach through its New Frontier strategy, which aims to deepen its domestic presence in Malaysia and Indonesia while capturing opportunities across its twin wealth hubs of Singapore and Hong Kong.

The bank targets a Whole-of-Wealth proposition spanning banking, wealth management and insurance, with management targeting double-digit growth in wealth management fees and asset under management (AUM), the brokerage highlights.

Its private banking arm, Bank of Singapore (BOS), is sharpening its focus on ultra-high net worth (UHNW) clients in South-East Asia and North Asia.

BOS reaches its target of 500 relationship managers for private banking by end-2025 and aims to increase AUM contributed by UHNW clients by 30% by 2028.

OCBC also plans to hire 600 relationship managers for consumer financial services over the next three years.

In September 2026, OCBC enters a new 10-year strategic cooperation agreement with Bank of Ningbo, extending a partnership that dates back to 2006.

The agreement is aimed at capturing trade, investment and wealth opportunities between Asean and Greater China.

OCBC holds a 20% stake in Bank of Ningbo and records a 50% increase in new-to-bank Chinese companies expanding into Asean in 2025.

The new agreement also includes a US$5mil training grant for staff development and knowledge sharing.

According to UOBKH Research, OCBC’s asset quality remains manageable, with non-performing loan (NPL) formation at S$123mil in the 1Q26 and S$300mil in the 2Q26.

Its NPL ratio of 0.9% is the lowest among the banks, while loan-loss coverage at 163% is the highest.

The research house raises its 2026 and 2027 net profit forecasts for OCBC by 0.6% and 4.7%, respectively, reflecting higher expected NIMs of 1.75% and 1.87%.

It maintains its “buy” rating on OCBC with a target price of S$35.70, based on 2.36 times 2027 forecast price-to-book (P/B) using the Gordon Growth Model.

DBS focuses on wealth

For DBS, UOBKH Research highlights its strength in wealth management as a key earnings driver.

DBS is recognised as the world’s best private bank by Euromoney Private Banking Awards 2026, while Asian Private Banker ranks it as the fourth-largest private bank in Asia, with AUM rising 22% to S$335bil in 2025.

The bank has doubled its wealth management AUM since 2019, representing a six-year compound annual growth rate of 12.2%.

Its proportion of invested AUM is also relatively high at 58%.

Wealth management fees rise 29% in 2025 and 25% year-on-year in the 1Q26.

Its wealth management cost-to-income ratio of 46% is also among the most efficient of top global private banks, according to UOBKH Research.

DBS plans to open 18 new and upgrade 36 wealth centres across the Asia-Pacific region in the second half of 2026, including in Singapore, Hong Kong, China, India, Indonesia and Taiwan.

Its wealth-centre presence in Singapore is set to expand by 50%.

UOBKH Research says face-to-face meetings remain important for HNW clients despite the growing use of digital wealth platforms.

Asset quality remains solid, with NPL formation at S$126mil in the 1Q26 and S$155mil in the 2Q26. DBS has an NPL ratio of 1% and loan-loss coverage of 130%, alongside S$2.4bil in management overlay for general provisions.

The brokerage raises its 2026 and 2027 net profit forecasts for DBS by 1.5% and 5.7%, respectively, supported by higher expected NIMs of 1.9% and 2.01%.

“DBS provides a dividend yield of 4.5% for 2027 with latent potential for more capital management exercises,” it says.

The research house expects DBS to raise its quarterly dividend per share by six Singapore cents to 72 Singapore cents starting from the 4Q26.

It upgrades DBS to “hold”, with its S$83.60 target price based on 3.23 times 2027 P/B, derived from the Gordon Growth Model.

Overall, geopolitical risks remain a key variable.

For instance, uncertainties in the Middle East could increase risks to maritime traffic through the Suez Canal and Red Sea, potentially raising freight and insurance costs and disrupting deliveries to Asian customers.

Higher crude oil prices resulting from supply disruptions could add another layer of inflationary pressure for the Singapore economy and its banks.