6 days ago
S'pore banks face headwinds in rest of 2025, but DBS is pulling ahead, say analysts
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Most analysts expect net interest margin to decline at a slower pace in the second half of the year.
SINGAPORE - Net interest margin (NIM) pressures and potential higher credit costs could continue to challenge Singapore's banking trio – DBS, OCBC and UOB – for the rest of 2025, analysts said.
Still, most of them expect NIM to decline at a slower pace in the second half of the year, supported by lower pressure on the Singapore Overnight Rate Average (Sora) and a possible recovery in the Hong Kong Interbank Offered Rate (Hibor).
They also pointed to DBS as a bright spot, given that it was the only local bank that reported
a year-on-year rise in second-quarter net profit and guided for higher group net interest income (NII) – the difference between total interest income and interest expenses – in 2025 despite lower interest rates.
The banks' first-half net profits were lower year on year primarily due to sharp declines in Sora and Hibor. This squeezed NIMs – the difference between what banks earn on loans and what they pay on deposits.
CreditSights senior analyst Karen Wu said NIM pressure remains the major headwind for Singapore banks in the second half.
'Hibor has only had a modest rebound since end-June... while the Sora decline also has yet to show signs of moderation,' she said in an Aug 8 note.
She added that loan growth will be muted and NII will decline, noting that only DBS has a positive outlook for NII among the trio.
While RHB expects 2025 NII to decline from NIM compression, it does not expect the compression magnitude to be as drastic in the second half of 2025, compared to the first half.
'NIM guidance from banks and 2Q25 NIM levels suggest the impact from US Federal Funds Rate cuts in 2H25 may not be too significant,' an RHB analyst said.
In the second quarter, NIMs fell year on year across all three banks. Group NIM at DBS dropped to 2.05 per cent from 2.14 per cent a year earlier. OCBC's NIM was down to 1.92 per cent from 2.2 per cent while UOB's NIM fell to 1.91 per cent from 2.05 per cent.
For 2025, OCBC guided for NIM in the region of 1.9 per cent to 1.95 per cent, down from the region of 2 per cent previously. UOB forecast a full-year NIM of 1.85 per cent to 1.9 per cent.
The RHB research analyst said any further downside ahead to Sora should not be as steep as that seen in the first half while banks are expecting a rebound in Hibor in the second half.
Morningstar senior equity analyst Michael Makdad said it is 'likely near the end of NIM compression' given Sora's sharp fall and Hibor's even sharper fall.
In the second quarter, the three-month compounded Sora dropped by 50 basis points, while the one-month Hibor plunged nearly 200 basis points, reaching its lowest level since 2022.
Even though NIMs fell across the banks, DBS reported group NII in the second quarter grew nearly 2 per cent year on year to $3.65 billion as deposit growth and proactive balance sheet hedging more than offset the impact of falling benchmark rates.
OCBC and UOB posted softer NII in the quarter. OCBC's NII fell 6 per cent to $2.28 billion as compared to the year-ago period while UOB's NII dropped 3 per cent to $2.34 billion.
DBS maintained its 2025 targets – which include commercial book non-interest income growth to be in the mid- to high single digits and net profit to be below 2024 levels.
Its chief executive Tan Su Shan also reaffirmed the lender's target for 2025 group NII to come in slightly above 2024 levels, as it expects the impact of lower rates to be offset by proactive hedging and strong deposit growth.
DBS shares crossed $50 for the first time on Aug 7, reaching a high of $51 on Aug 11, buoyed by positive investor sentiment. The stock closed 0.41 per cent higher at $50.96 on Aug 12, while OCBC ended down 0.77 per cent at $16.75 and UOB was up 0.34 per cent to $35.87.
The challenges are not unique to the Singapore banks as banks with significant presence in Hong Kong such as Hang Seng Bank and HSBC Group also reported lower first-half earnings, marked by margin compression and higher credit losses.
The RHB analyst said deposit rate cuts could help mitigate some of the NIM compression ahead. 'The impact from the repricing of deposits would also be felt in the second half and help cushion asset yield pressures.'
Fitch Ratings analysts Tania Gold and Willie Tanoto said a modest decline in NIMs, limited loan growth and slight rise in credit costs will likely lead to marginally lower profitability in the second half.
Ms Wu of CreditSights said credit costs may increase slightly as US tariffs will slow gross domestic product growth in the banks' major operating markets.
The RHB analyst expects the banks to remain prudent in their provisioning approach, given the uncertainties surrounding the impact from US tariffs and all three banks had set aside pre-emptive provisions in the first half.
Morningstar's Mr Makdad said most of the higher credit costs from tariff disruptions will probably be from pre-emptive general provisions for future problems, rather than sharply higher specific provisions.
He said DBS is in better position than the other banks because it already has a large reserve coverage. UOB, on the other hand, plans to top up its general provisions buffer.
'UOB has more focus on lending to SMEs that may have less ability to mitigate tariff disruptions than large corporate borrowers and MNCs,' he added.
However, Fitch Ratings analysts said that growth in fee income and tighter operating cost control should partially offset the pressures.
'As such, operating profit relative to risk-weighted assets is likely to decline slightly, but stay well above pre-Covid-19 pandemic levels,' they said.
Mr Makdad and RHB expect a lower full-year net profit for the banks, but also foresee earnings to rebound in 2026.
Mr Makdad added: 'Income growth in the region will continue and I expect profits to rise again in 2026.'
