NII is still the local banks’ largest income source. Evolution of NIMs in 2QFY2025 and banks’ guidance for FY2025 NIM due to changes in Sora, Hibor and Sofr will be closely watched, Modi says.
In a report dated July 13, he is expecting local banks’ NIM to decline q-o-q and y-o-y.
Second is the impact of the persistence of strength on wealth management, treasury and payment flows. “There is significant demand across corporates and high net worth individuals for flows, which is coming from a rethink of currency allocation, leverage and destination of investments,” Modi says.
“Third, credit costs and NPLs should remain broadly range-bound, within guidance. If we end up getting slower growth, then there is a risk of higher credit costs,” he cautions.
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Fourth, the main driver for Singapore banks being on investors’ radar is their consistent dividends. “The stock and flow of capital is enough for the banks to keep their payouts high,” Modi reassures investors.
On the flow front, liquidity continues to enter the Singapore system. As a case in point, in May, total deposit growth rose by 5.7% y-o-y but Singapore dollar deposits rose by 9.1% based on the monthly digest of statistics.
“I would characterise the investment thesis for banks as one driven by flows. Singapore deposit growth has been strong, with liquidity coming to the market,” Modi says.
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He believes that Singapore’s credit rating, fiscal surpluses, the regulatory environment, among others are the building blocks of trust in the banking system here. “This has encouraged some of the HNWI customers from Asia and elsewhere to keep a meaningful portion of their savings under the custody of various banks in Singapore. SGD is managed within the nominal effective exchange rate (NEER) framework, and has appreciated in last 10 years, which helps the flows to a degree as well,” Modi explains.
On the other hand, as long as these flows continue, rates are biased lower. That’s important to keep in mind, as net interest margins tend to move down with rates, he adds.
In a report titled Singapore Banks dated July 13, Modi says he expects NIM disappointment for the Singapore banks with a 7 bps average q-o-q decline in 2Q2025 on lower Sora/Hibor, as well as a cut in guidance from management to drive stock price weakness.
“Basically, deposit growth, lower rates, NIM and wealth management flows are interlinked,” Modi says in the interview.
On a broad level, in JP Morgan’s Asean Banks report dated July 15, Modi is expecting NIMs for the Singapore banks to decline by 14 bps y-o-y in FY2025, and by a further 9 bps y-o-y in FY2026. This is despite ROEs sustaining at higher levels.
“When rates fall, it affects Singapore banks’ asset yields. It is relatively difficult to match that decline in asset yield one-on-one on the liability side, as cost of funds is already low. Hence, NIMs will go lower over next few quarters,” Modi says in the interview.
Drilling down into the 2QFY2025 results, the JP Morgan report warns: “We are wary going into 2QFY2025 earnings, as the extent of NIM compression of 7-8 bps q-o-q will likely drive near-term stock price weakness. 3-month Sora is down 48 bps on average in 2QFY2025, and 3-month Hibor is down around 140 bps the second quarter. DBS and OCBC have 10-11% of loans in HK dollars. Given the retail presence of these banks in Hong Kong, funding should be more closely FX matched. The usual lag in deposit repricing will weigh on NIMs.”
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At United Overseas Bank (UOB), HK dollar loans are less than 10% of its total but a larger part (45%) is funded by US dollar swaps. Hence, UOB’s q-o-q NIM decline may be more pronounced given the 277 bps gap that had opened up between Sofr and Hibor as of end 2QFY2025, JP Morgan points out.
NIM compression will be partly offset by strength in treasury. Yet, given that investors tend to pay a higher multiple for NII vs treasury income, UOB may be weaker vs peers. Wealth management should remain firm for all three, with higher hedging demand helping treasury and fees as well. DBS may hold revenues better on these, the JP Morgan report says.
“Our FY2026-FY2027 ROE forecasts for all three banks are higher than FY2019, when Singapore interest rates were close to similar levels. The y-o-y decline in NIM this and next year of 14 bps and 9 bps, respectively, will limit re-rating,” the JP Morgan report says.
“Wealth management flows were quite strong in the first quarter. The banks’ guidance suggested a degree of strength in these revenues,” Modi says in his interview with The Edge Singapore.
In the Singapore Banks report, JP Morgan calculates that wealth management has added 8%-11% to revenues in the last seven years, while treasury sales have added another 6%-10%. These profits are capital efficient, hence RoRWA for the three banks are likely to be up by around 40 bps in FY2026-FY2027 vs FY2019.
Despite the JP Morgan analysts’ FY2025-FY2027 forecasts for three banks being 1%-3% below Street, “we stay Neutral on all three. We resume coverage on OCBC with "neutral" rating and a June 2026 price target of $18,” the JPM report says.
Citigroup is expecting DBS to report in-line 2QFY2025 profits; OCBC slight-beat; UOB miss driven by NII due to higher earnings sensitivity to rates. It is expecting NIM to contraction by 6-8 bps q-o-q in 2QFY2025. Citi also expects SG dollar strength against HK dollar and US dollar (by as much as 5%-6%) to depress balance sheets and AUM growth.
The Bloomberg consensus estimates in 2QFY2025 for: DBS is $2.783 billion (1QFY2025: $2.897 billion); OCBC $1.84 billion (1QFY2025: $1.883 billion); and UOB $1.496 billion (1QFY2025: $1.49 billion).
JP Morgan expects DBS to continue trading at a premium to OCBC and DBS because its ROE and dividend yield are higher. OCBC reports on Aug 1, and DBS and UOB report their 2QFY2025 results on Aug 7.
In JP Morgan’s Asean Banks report, Modi, Daniel Andrew Tan and Gaurav Khandelwal recommend adding select Thailand, Vietnam, Malaysia and Philippine banks into 2QFY2025, while trimming Singapore and Indonesia banks.
“Vietnam banks will likely benefit from front-loading on trade. We believe Malaysia banks will have the most stable numbers, with pre-provisioning operating profit, asset quality and capital management range-bound,” the trio write in their report. “While we believe there is more downside risk into earnings, significant cuts post earnings could provide an opportunity to add for the longer term.”
