S’pore banks still face net interest margin pressure in 2026, but DBS is better hedged, analysts say

SINGAPORE - Singapore’s three local banks are expected to remain under pressure in 2026 over their net interest margins (NIMs), which are key indicators of banks’ earnings, say analysts.

Some analysts also told The Straits Times that NIM compression may be less severe than in 2025 for DBS Bank, OCBC Bank and UOB as most of the impact has already been absorbed.

Another consensus view is that DBS is better positioned than OCBC and UOB to withstand NIM pressures, with a buffer from unexpired hedges and its strength in deposit growth.

NIM refers to the difference between what banks earn on interest-earning assets, such as loans, and what they pay on interest-bearing liabilities, such as deposits, and it can be squeezed when interest rates fall. Interest rate hedges are thus financial contracts to manage earnings risk from changes in market interest rates.

An RHB research analyst said that while the bank expects 2026 NIM to compress by 9 basis points year on year, it will not be as severe as the estimated 17 basis points year-on-year drop in 2025.

“With the Monetary Authority of Singapore expected to maintain its current policy stance amid firm domestic growth and gradually rising inflation, declines in Singapore Overnight Rate Average are likely to be moderate rather than aggressive,” the RHB analyst said.

“DBS has managed its NIM better than its peers in the first nine months of 2025, thanks to proactive hedging activities, and we think it could be in a similar position in 2026 to defend margin,” the analyst added.

Ms Tania Gold, senior director and head of South and South-east Asia banks at Fitch Ratings, said that a large amount of the NIM compression had already occurred in 2025.

The US Federal Reserve cut rates by 25 basis points to a range of 3.5 per cent to 3.75 per cent at its December meeting, marking its third cut in 2025 while projecting one more cut for 2026 amid a “challenging” economic situation with softening labour and persistent inflation.

“A modest further narrowing over the next few quarters is likely as global rates ease and deposit pricing remains competitive at the margin,” she said.

Still, CGS International (CGSI) analyst Tay Wee Kuang cautioned that the full impact of rate cuts in 2025 could be felt in 2026.

“The quantum of margin compression is likely to mimic what we have seen in 2025, given that we felt the impact of two full rate cuts from 2024,” he said.

Morningstar associate equity analyst Kathy Chan noted that the banks will likely mitigate the NIM pressures by increasing lower-cost deposits, adding that the financial services firm continues to favour DBS on its hedging strategy.

“We expect to see DBS’ NIM declining in 2026 as part of its hedges roll off,” she said. DBS holds a total of $200 billion in fixed rate assets and hedges, with $78 billion rolling off in 2026.

“But we think DBS will continue to benefit from its dynamic hedging strategy, as the unexpired portion of the fixed-rate book should continue to support NIM, and the bank will continue to hedge their book when Singapore dollar or US dollar rates are favourable,” said Ms Chan.

CreditSights senior analyst Karen Wu said: “DBS’ strength in low-cost deposit growth should help sustain net interest income through continued deployment into high-quality liquid assets.”

Mr Tay of CGS International said banks continue to look for ways to deploy wealthy clients’ deposits into assets, which would help generate fee income, though it will depend on investor sentiment heading into 2026.

Fee income, particularly from wealth management, should offset a meaningful share of margin compression as investors chase yields amid a lower interest rate environment, analysts said.

However, Ms Gold of Fitch Ratings still expects fee income growth to moderate in 2026 due to base effects from strong assets under management inflows and higher client activity in 2025.

While DBS is more cushioned compared with its peers, Ms Chan of Morningstar said UOB is more exposed to small and medium-sized enterprises, which it has a significant focus on, as well as the ASEAN region, making it more vulnerable to tariff-related uncertainties.

CGSI’s Mr Tay said weaker ASEAN economies such as Malaysia or Indonesia could lead to further exceptional provisions, and that UOB also faces additional pressure from Hong Kong, China and US commercial real estate sectors that resulted in hefty provisions in the third quarter of 2025.

UOB’s credit provisions more than quadrupled to $1.36 billion from $304 million a year earlier, as the bank strengthened coverage amid ongoing macro and sector-specific headwinds.

CreditSights’ Ms Wu said: “Further provisioning for Hong Kong commercial real estate cannot be ruled out as we maintain a soft outlook for the sector, while US commercial real estate may see some relief as the Fed eases.”

The RHB analyst said that if UOB’s fourth-quarter 2025 credit cost normalises to earlier guided levels, it can help shore up investor confidence regarding its 2026 guidance for a normalised full-year credit cost figure.

UOB’s credit costs, which surged to 134 basis points in the third quarter from 36 basis points a year earlier, are expected to fall back to 25 to 30 basis points in the fourth quarter and into 2026.

But Mr Tay said it will likely take two to three quarters of consistent execution on financial performance before investors will return to the name. An outperformance in the bank’s earnings could lead to an earlier recovery, he added.

For OCBC, Mr Tay said ushering in a new chief executive could be an opportune time for the bank to unveil its new corporate strategy that could entail a new shareholder return policy, given that it has achieved its three-year target of $3 billion incremental revenue.

Mr Tan Teck Long succeeded Ms Helen Wong as group CEO on Jan 1. Ms Wong – who joined OCBC in February 2020 as deputy president and head of global wholesale banking before becoming group CEO in April 2021 – had indicated in 2024 that she wished to retire for family reasons.

Ms Chan said Great Eastern could also provide some buffer for OCBC, but Morningstar expects net insurance income to account for only around 7 per cent of OCBC’s total revenue.

CGSI’s Mr Tay noted that OCBC could yield better synergies with its Great Eastern franchise to grow its wealth business.

Analysts further noted that DBS offers the most attractive dividend yields among the local banks, as it looks to step up quarterly dividends by 6 cents to 66 cents in 2026. It means an additional 24 cents for 2026.

Furthermore, there is an additional 15 cents per share to be paid in capital return dividend, which has been committed up to financial year 2027, making up a total of 81 cents per quarter.

A DBS report on Dec 9 noted that dividend yields of up to 6 per cent and excess capital continue to be strong tailwinds for the sector. DBS’ dividend yield is forecast to be at 6.1 per cent in 2026, while those for OCBC and UOB are at 5.4 per cent each, estimates DBS Group Research.

Ms Wu of CreditSights said that net profit growth would be a challenge for the local banks in 2026.

DBS guided for 2026 net profit to be slightly below 2025 levels and total income to be around 2025 levels, even as rate headwinds put pressure on net interest income.

UOB expects 2026 NIM to be between 1.75 per cent and 1.8 per cent, below the projected 1.85 per cent to 1.9 per cent for 2025, alongside low single-digit loan growth, high single- to double-digit fee growth, and total credit costs of 25 to 30 basis points.

While net profit for the local banks is likely to trend lower, it will remain above historical averages, said Ms Gold.