The same Bloomberg poll reports United Overseas Bank’s (UOB) 1QFY2026 net profit ended March 31 at $1.591 billion, compared with $1.41 billion in 4QFY2025 and $1.49 billion in 1QFY2025.
The main challenge for local banks has been the downward trend in the three-month compounded Singapore overnight rate average (Sora), which is where corporate loans are usually priced.
“We expect [the local banks’] managements to take down guidance on this. The views of 1.25%–1.40% [Sora] average for this year appear a stretch; we assume 1.0%–1.1%. This will affect net interest margins (NIM) and potentially net interest income (NII). We also anticipate higher provisions this quarter to reflect a more uncertain macro environment,” says Jayden Vantarakis, banking analyst at Macquarie Equity Research, in a report dated April 20.
In a report dated April 16, UBS also expects the local banks’ NIM to decline by 2–4 basis points (bps) q-o-q in 1Q2026, driven by further decline in Sora rates. The decline in Sora has driven banks such as DBS to deploy excess liquidity into high-quality liquid assets (HQLA) and UBS expects this deployment to continue. “This could pose some downside to NIM/NII guidance relative to previously guided management expectations. Loan growth is likely to remain muted on a sequential basis based on Monetary Authority of Singapore (MAS) data as of February,” the UBS report says.
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Vantarakis is also cautious about credit costs. Allowance coverage is a key watch point given macro volatility in the Middle East and the US. The largest variance (downside surprise) could be in provision expenses in the first quarter. All three banks posted lower non-performing asset (NPA) cover in 4Q2025, though OCBC is at the highest level (151%, even before collateral). UOB raised general allowances; its total provision cover remains adequate.
“Prior macro shocks over the past five years (Covid, start of the Russia-Ukraine conflict) led to higher general allowances. While there is a large amount of uncertainty on where energy markets and downstream product access end up (and the impact on growth and inflation in Southeast Asia), we expect macroeconomic overlays (part of expected credit loss or ECL 1&2) to increase,” the Macquarie report points out.
Analyst downgrades
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In the past week or so, some analysts have downgraded their favourite banks. Tay Wee Kuang, an analyst at CGS International (CGSI), downgraded OCBC from “add” to “hold”. Tay points out that during the bank’s FY2025 analyst briefing held in February, OCBC shared that its 4Q2025 exit NIM was 1.84%, 2 bps below its reported NIM of 1.86%. “We believe OCBC saw further declines in NIM to about 1.82% (–2 bps from 4Q2025’s exit NIM) in 1Q2026, given the decline in Sora and Hibor 1Q2026, which we expect would translate to 1Q2026 net interest income of $2.23 billion, down 4.9% y-o-y and down 2.8% q-o-q,” Tay writes in his report.
“[The Middle-East conflict] could spur OCBC to recognise higher levels of provisioning in 1Q2026, which we estimate at about $217 million, representing about 26 bps in credit costs. Consequently, we estimate OCBC to report 1Q2026 net profit of $1.80 billion (–4.5% y-o-y, +3.0% q-o-q),” the report adds, indicating that the current share price already reflects OCBC’s resilient earnings profile with limited near-term catalysts amid margin compression.
CGSI believes that the pressure on OCBC’s NII should be partially mitigated by the continued growth of non-interest income. CGSI is expecting a 26.4% y-o-y and a 9.3% q-o-q growth in 1QFY2026 in wealth management fees to underpin an increase in non-interest income (non-II) for OCBC. On the other hand, contributions from insurance could be softer due to lower interest rates, which would drive up the value of Great Eastern Holdings’ liabilities compared to its assets. On the equity front, trading was volatile, and the impact could be ambivalent for Great Eastern.
Over at Macquarie, Vantarakis has downgraded UOB to “neutral” and its price target is cut to $36.78 from $41 previously. DBS is maintained at underperform. His favourite bank at the moment is OCBC as its allowance coverage is higher than the other two banks. In his view, positives during the quarter include market comments on wealth flows into Singapore as a result of the Middle East conflict.
“While we expect this to be the case, activity on deployment can lag with more funds sitting in deposits. The most recent invested proportion was reported at 60%–62% for DBS and OCBC with
41% for UOB. Trading income also could surprise with volatility during the quarter and this is most relevant for DBS,” the Macquarie report says.
The Macquarie report points to DBS as the most expensive with the largest net interest income headwind as hedges roll off, and replacement rates remain low. “We have had very limited investor interest [in DBS] noting [heightened] valuations in recent meetings,” the report adds.
However, DBS is the most preferred bank for UBS, with OCBC the least preferred. “Over the last one month, we have adjusted our 2026 EPS marginally by 0%–1% for the banks to reflect the shift in rates. DBS is our most preferred going into the results, while OCBC is our least preferred on relative valuations,” the UBS report says.
On the dividend front, only DBS will pay a dividend for the first quarter, and this has been communicated as 66 cents ordinary dividend and 15 cents special dividend. OCBC’s messaging is it will stick to its 50% payout ratio, similar to UOB.
