Singapore's capital-rich banks, backed by healthy earnings and risk profiles, could take advantage of retreating interest rates to issue debt to replace costlier equity. Falling rates allow lenders to optimise their capital structures at lower cost to lift shareholder returns while maintaining buffers. Collective capital bond issuance of US$13 billion is needed in 2026 to fully optimise.
Amid expectations of rate cuts, capital-rich Singapore banks can optimize their capital structures by issuing debt rather than relying mostly on costly Common Equity Tier 1 (CET1) buffers to meet regulatory hurdles. This may allow them to swap CET1 capital with cheaper, subordinated debt, returning equity to shareholders via share buybacks or higher dividends, but with mixed credit implications.
Though their CET1 ratio is at least 6% above the 9% regulatory minimum as of 2Q2025 on a pre-fully loaded final Basel III rules basis, their buffers are lower on a total capital basis, showing a lack of debt used. Singapore's regulator broadly follows global guidelines, allowing banks to issue additional Tier-1 debt for up to 1.5% of risk-weighted assets, and Tier-2 debt for up to 2%.
Singapore banks may collectively need to issue $6 billion in additional Tier 1 and US$7 billion in Tier 2 bonds in 2026, if they fully optimise capital structures by filling their AT1 and T2 stacks and refinance existing capital debt callable in 2026. Singapore's regulator is following global Basel guidelines, allowing AT1 and T2 issuance up to 1.5% and 2% of banks' risk-weighted assets. We calculate the issuance needs using 2Q figures disclosed by the banks at pre-fully loaded Basel III figures, and total debt outstanding on Sept. 22, compiled by Bloomberg.
Investor demand for high-coupon debt amid expected rate cuts could make such issuance more attractive to well-capitalised Singapore lenders. They tend to get favorable pricing for their debt due to their track records of solid credit, call history and ratings.
Asset Quality Stable Despite Macro Risks
Singapore banks' asset quality is set to stay healthy through year-end despite tariff uncertainties. New nonperforming asset formation vs. recoveries is a key watchpoint, but no major stress is seen in small business, trade-reliant, or commercial real estate loans so far. The lenders anticipate minimal direct tariff impact to their asset quality, and while second-order risks are harder to quantify, they are tempered by banks' strong underwriting and risk controls.
The lenders may stay prudent in provisioning, with only a slight uptick in credit cost mainly from pre-emptive general provisions, but still likely to be within guidance. DBS' large reserve coverage makes it best-positioned, while UOB plans to boost its own general provision buffer.
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Singapore banks' capital could stay solid in 2025 despite planned committed capital return plans. The banks had at least $3 billion in excess common-equity Tier 1 capital over their target CET1 range of 12.5-14% in 2Q. Overall earnings generation could stay resilient despite margin pressures amid expected rate cuts, sustaining CET1 levels, supporting capital returns, and absorbing 2025's likely flattish risk-weighted asset growth. Global risks make near-term M&A appear unlikely. Suboptimal additional Tier 1 and Tier 2 capital ratios allow room for greater capital structure-optimisation as rates fall. OCBC led with a 15.3% fully phased in CET1 ratio in 2Q2025, while banks' average risk-weight density fell to 41%, down four percentage points year-on-year.
Earnings to Absorb Risk-Weighted Asset Consumption
Singapore banks' robust capital may be sustained through year-end, aided by healthy earnings capacity. Their pre-emptive measures to boost fixed-rate assets and extend loan-book duration – in addition to manageable credit costs on a robust asset quality outlook – can support overall earnings stability despite expected rate cuts, complemented by strong non-interest income, keeping profits largely stable vs. 2024. Risk weighted assets' (RWA) year-on-year-growth would likely be flattish this year, led by prudent lending amid macroeconomic headwinds and tariff uncertainties.
The banks' solid return-on-equity ratios outpaced negative year-on-year RWA growth as of 2Q2025.
