“Continued liquidity inflows through deposits have supported resilient NII, which declined 0.9% - 3.2% q-o-q against a 2 basis point (bps) - 10 bps decline in NIMs (net interest margins), observed across Singapore banks in 1Q2026 due to the deployment of excess liquidity into NII-accretive and NIM-dilutive HQLA,” write Tay and Tan in their June 9 report. HQLA refers to high-quality liquid assets, which can be easily converted into cash at little or no loss of value.
Tay and Tan also note that the m-o-m growth rate of lower-cost current account savings account (CASA) deposits has outpaced growth of fixed deposits (FDs) since February this year, which suggests Singapore banks could experience a lower funding cost environment.
“Asset yields could also improve with the re-acceleration in loan growth in April (+8.0% y-o-y, +0.8% q-o-q),” the analysts add.
In addition to capital inflows and loan demand in Singapore, the analysts are upbeat on the sector given stabilising interest rates. Quarter-to-date, the average Singapore overnight rate average (Sora) and Hong Kong inter-bank offered rate (Hibor) stood at 1.06% and 2.49%, flat and 2 bps higher q-o-q respectively.
Other factors in the sector’s favour include the higher-than-expected US non-farm payroll employment, which rose by 172,000 in May. The figure fuelled expectations of a potential interest rate hike by the US Federal Reserve (US Fed) by the end of 2026.
While the analysts point out that higher US interest rates may not necessarily translate to a recovery in the Sora or Hibor rates, an increase in US interest rates could present the local banks with “opportunities to deploy excess capital into higher-yielding instruments that can help to support NII growth in FY2027”.
With this, the analysts now see the banks being positioned for an ROE (or return on equity) expansion driven by NII growth and the ongoing structural growth of the wealth management business in Singapore.
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They have raised their FY2027 - FY2028 earnings per share (EPS) estimates across the board as they expect NIM to increase by 5 bps in FY2027 from FY2026. NIM is expected to be constant in FY2028. Tay and Tan have upped their EPS estimates for DBS Group Holdings (SGX:D05
) by 4.6% and 6.3% for FY2027 and FY2028, while their EPS estimates for Oversea-Chinese Banking Corporation (OCBC) (SGX:O39) was increased by 2.7% and 2.6% for the two years. The analysts have also increased United Overseas Bank’s (UOB) (SGX:U11) EPS estimates by 4.5% and 5.1%.
Based on the US Fed’s previous hike cycle in 2022 to 2023, when the three banks saw their ROEs expand between 4 percentage points and 5.5 percentage points over FY2021 to FY2023, Tay and Tan have factored in a 1 percentage point expansion to ROE assumptions across the three banks.
Accordingly, their target prices for DBS, OCBC and UOB are now at $69.90, $26 and $42.60 respectively. All banks also now have “add” calls with DBS being the sector top pick given its best-in-class ROE among its regional peers.
DBS also expressed confidence that it can deliver an increased quarterly core dividend in 4QFY2026, which would translate to an annualised dividend per share (DPS) of $3.48 or an FY2027 yield of 5.5%.
The potential cessation of its share buyback programme under its capital return initiative announced in November 2024 could also lead to a one-off special DPS of up to 93 cents at the end of FY2027, Tay and Tan predict.
As at 10.52am, shares in DBS, OCBC and UOB are trading at $63.94, $23.78 and $38.45 respectively.
