Singapore banks have the edge

SINGAPORE’S Straits Times Index, or STI, has seen spectacular growth this year, with the 30-stock benchmark index rising by approximately 23.5% up to the end of August 2026. At the same time, the FBM KLCI is only up 2.7% over the same period.

The 20.8-percentage-point outperformance has become a talking point, to the extent that one wonders what we are missing.

After all, if we look at the composition of the two benchmark indices, they are both heavily skewed towards the banking sector.

The three major Singapore banks have a whopping 57.4% weighting on the STI based on net market capitalisation, after taking into consideration the free float of the companies’ shares.

DBS Group Holdings Ltd alone accounts for 29.1% of the main index weight, followed by Overseas Chinese Banking Corp Ltd (OCBC) at 19% and United Overseas Bank Ltd (UOB) at 9.3%.

Hence, it is not rocket science that the strong performance of the three banking stocks alone has propelled the STI to record highs this year.

For context, OCBC is a star performer this year, rising by 59.5% by the end of August, followed by DBS’ 37.3% appreciation and UOB’s 18.5% gain, as seen in Table 1, which also includes the financial performance of Singapore-based banks for the first half of 2026 (1H26).

Based on the compiled data, the banking stocks’ performance is clearly supported by respectable earnings growth of 3.1% and 5% by UOB and DBS, respectively and a stunning 13.4% growth reported by OCBC.

As banking stocks are also measured on their asset quality as well as return on equity (ROE), one cannot help but notice that two of the three Singapore banks saw an increase in their respective ROEs in 1H26, while their common equity tier-1 (CET-1) ratios also remained relatively healthy despite dips at DBS and OCBC.

The most compelling feature for these Singapore banks is their dividend payouts, as all three raised their respective dividends.

UOB raised its payout by 3.5%, DBS increased its dividends by 8%, while OCBC improved its dividends by 14.6%.

The current annualised yield on Singapore banks of between 3% and 4.3% is well above the benchmark 10-year Singapore government bond yield of approximately 2.42%, by between 56 basis points (bps) for OCBC and as high as 186 bps for UOB.

Malaysian banks

Similar to the STI, the banking sector in Malaysia is also the largest sector represented in the current 30-stock index, with a net weighting of 42.7% at the end of August 2026.

The three largest Malaysian banks, Malayan Banking Bhd (Maybank), Public Bank Bhd (PBB) and CIMB Group Bhd, have a combined weight of 34.3%, with Maybank at 12.6%, followed by PBB at 11.3% and CIMB at 10.4%.

Unlike Singapore banks, the Malaysian banks have been underperforming even the FBM KLCI, with only PBB providing investors with positive price performance at 2% year-to-date, while both Maybank and CIMB are down 0.9% and 0.2%, respectively.

For the sake of comparison, since Singapore has three main listed banking groups, the analysis will also only focus on Malaysia’s top three banks as summarised in Table 2.

Except for PBB, which reported a modest earnings growth of 2%, both Maybank and CIMB saw a contraction in earnings in 1H26.

Malaysian banks’ ROE is also stuck at a low double-digit level and is only comparable with UOB’s ROE, while remaining well below those of DBS and OCBC.

The relatively low ROE is reflected in the low price-to-book multiples of Malaysian banks compared with Singapore banks, apart from UOB, which trades at par with Maybank.

Despite the low ROE generated by UOB, its stock price has done exceptionally well and has far outpaced Maybank’s performance.

In terms of dividend yield, based on the 1H26 dividends and assuming these are annualised, Maybank provides the highest yield at 5.8%, followed by CIMB at 4.9% and PBB at 4.2%.

The current annualised yield on Malaysian banks is also well above the benchmark 10-year Malaysian government bond of approximately 3.88%, ranging from 36 basis points (bps) for PBB to as high as 193 bps for Maybank.

Conclusion

Despite the strong outperformance among the Singapore banks, which has helped the STI scale new all-time highs this year, these banking stocks are not trading at exceptionally lofty valuations, as they are supported by strong ROEs and decent dividend yields.

In contrast, Malaysian banks – well, at least the top three presented in this analysis – are struggling to show earnings growth, with mediocre ROEs and flattish dividend payouts with little to no growth.

Until and unless Malaysian banks return to the growth trajectory and improve their ROEs, it is unlikely that the banking stocks, and by extension, the FBM KLCI, will see much outperformance in the near future.