Singapore bank bonds are likely to retain their safe-haven status in 2H2025, as their asset quality is expected to remain robust despite increased headwinds linked to tariffs.
Strong underwriting and risk management have kept small- and medium-sized enterprises (SME), trade-reliant industries and commercial real estate (CRE) loan exposures steady with no material stress points.
SME business prospects in Singapore are set to weaken in the coming quarters as tariff uncertainties dampen global trade and weaken the US dollar, hitting outwards-oriented sectors such as ICT, transport & logistics and wholesale trade.
Tariffs will raise costs and inflation, while potentially softer US demand may slow growth and consumer spending, forcing firms into a cautious operating environment.
Despite this, credit losses on Singapore banks’ SME loans look manageable as tight underwriting has broadly improved credit quality, further aided by support measures in the government’s 2025 budget.
Based on their internal ratings-based model, built on Basel rules, the average probability of default (PD) for DBS’s and UOB’s SME exposures improved modestly in 4Q2024 vs FY2024, while OCBC’s were steady.
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Singapore banks’ CRE loans, largely in Singapore and Hong Kong, are set to stay resilient in 2H2025 with low defaults and limited systemic risk. Healthy fundamentals continue to bolster Singapore’s CRE loans.
While Hong Kong office owners face high vacancy rates and a surge of non-core supply pushing down rents on older assets, the banks have curtailed CRE exposures and focus on lending to top-tier developers with low average loan-to-value ratios below 60%.
Since 2024, they have recognised some idiosyncratic borrowers as bad loans and set ample provisions (averaging 1.5% of total loans as of 1Q2025) as part of prudent risk management, giving them a cleaner slate for the rest of the year.
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A still robust outlook for Singapore banks’ asset quality amid global risks, along with ample capital cushions and provisioning could allow them to be better-placed among regional peers.
The lenders’ solid credit, relatively low bond volatility and positive technicals alongside low refinancing needs this year appear to be already reflected by the market.
As of June 30, the average option-adjusted spread for Singapore banks’ dollar seniors in the Bloomberg ME Asia Dollar Credit Index have been relatively steady year-to-date unlike other Southeast Asian banking peers amid increased macroeconomic headwinds linked to tariffs.
