Singapore banks’ interest margins narrow in Q2, but DBS edges ahead

[SINGAPORE] Singapore’s three local banks suffered compressed net interest margins (NIMs) in the second quarter of FY2025, as falling benchmark rates weighed on lending yields across the region.

The squeeze on margins – largely driven by declines in the Singapore Overnight Rate Average (Sora) and the Hong Kong Interbank Offered Rate (Hibor) – is expected to remain a key pressure point in the second half of the year.

In Q2, the three-month compounded Sora fell by 50 basis points (bps), while the one-month Hibor declined by nearly 200 bps to its lowest level since 2022.

This resulted in all three lenders reporting year-on-year declines in NIMs.

Despite the common headwind, DBS posted a 1 per cent year-on-year increase in net profit to S$2.82 billion, beating consensus estimates. OCBC and UOB reported net profit declines of 7 per cent and 6 per cent, respectively.

DBS’ stronger showing was helped by interest rate hedges and growth in trading and fee income, analysts said, with the lender able to take advantage of interest rate volatility during the quarter.

While DBS’ commercial book NIM fell to 2.55 per cent from 2.83 per cent in the year-ago period, hedging gains helped limit the decline in net interest income, noted Morningstar senior equity analyst Michael Makdad.

Commercial book net interest income fell 4 per cent to S$3.63 billion. Wealth management fees rose 25 per cent from a year ago to S$649 million, while markets trading income more than doubled to hit a 13-quarter high of S$418 million.

DBS maintained its 2025 guidance, including expectations of mid- to high-single-digit growth in non-interest income and a cost-to-income ratio in the low-40 per cent range.

Chief executive Tan Su Shan also reaffirmed the lender’s target for 2025 group net interest income to come in slightly above 2024 levels, supported by continued volume growth.

DBS declared an ordinary dividend of S$0.60 per share, along with a capital return dividend of S$0.15 per share.

Maybank Securities Singapore head of research Thilan Wickramasinghe noted that South-east Asia’s largest lender remains ahead on execution and scale.

He said: “The group generated above market trend growth across all pillars. We believe this is sustainable in the medium term given the self-reinforcing effects of scale and strong management execution.”

OCBC slashes NIM guidance

OCBC reported a 7 per cent year-on-year decline in Q2 net profit to S$1.82 billion, slightly above expectations.

Net interest income fell 6 per cent to S$2.28 billion, as NIM dropped 28 bps to 1.92 per cent from a year earlier. The bank lowered its full-year NIM guidance to between 1.9 and 1.95 per cent, from around 2 per cent previously.

Group chief financial officer Goh Chin Yee attributed the margin pressure to a sharper drop in loan yields compared with funding costs, particularly for floating-rate loans in Singapore and Hong Kong.

Fee income rose 24 per cent in the quarter, led by wealth management, but this was offset by lower insurance income. Non-interest income rose 5 per cent overall to S$1.26 billion.

OCBC declared an interim dividend of S$0.41 per share, in line with its 50 per cent payout policy, down from S$0.44 per share a year ago.

The bank maintained guidance for mid-single-digit loan growth and a cost-to-income ratio in the mid-40s. Its NIM for end-June stood at 1.88 per cent, with management expecting an “upward inflection” in H2 as recent deposit rate cuts filter through.

Wickramasinghe said OCBC’s results were broadly in line with consensus, though there is likely to be reduced visibility on capital return plans amid the ongoing CEO transition.

UOB trims guidance

UOB’s Q2 net profit fell 6 per cent year on year to S$1.34 billion, missing consensus estimates. NIM declined to 1.91 per cent, from 2.05 per cent a year earlier. Net interest income fell 3 per cent to S$2.34 billion, while non-interest income rose 5 per cent to S$1.13 billion.

The bank lowered its full-year guidance for NIM to a range of 1.85 to 1.9 per cent, from around 2 per cent previously. Loan growth is now expected to be in the low single digits, and fee income growth in the high single digits – both below earlier projections.

Chief financial officer Leong Yung Chee said the revised assumptions reflect expectations of further US rate cuts, delayed impact from recent deposit rate adjustments, and a stabilisation of Sora and Hibor later in the year.

Makdad said UOB’s regional footprint may have weighed on expectations.

The guidance downgrade “reflects UOB’s above-peer exposure to slower-growing South-east Asian economies such as Thailand, as well as its focus on lending to smaller businesses, which are often less equipped than large corporates to navigate tariff-related disruptions”, he said.

UOB declared an interim dividend of S$0.85 per share, slightly down from S$0.88 last year, and will pay a second tranche of its S$0.50 per share special dividend. The bank’s capital return plan – totalling S$3 billion over three years – remains on track.

S$50 high-water mark

DBS shares rose 6.7 per cent over the past five trading days to close at S$50.74 on Aug 8, crossing the S$50 mark, as investors cheered its results.

OCBC slipped 0.2 per cent to S$16.79 over the same period, while UOB declined 1 per cent to S$35.70.

DBS’ performance prompted several analysts to raise their target prices. Maybank’s Wickramasinghe upgraded DBS from a “hold” to a “buy”, and lifted his target price from S$45.26 to S$56.15. Citi raised its target from S$48.85 to S$56.50, while Goldman Sachs maintained its “buy” rating and increased its 12-month target from S$54.50 to S$57.20.

Morningstar’s Makdad, however, kept his fair value estimate for DBS at S$48. He noted that while DBS continues to generate stronger returns – including a return on equity of around 17 per cent versus 13 per cent for OCBC and UOB – this strength is already priced in.

Makdad estimated that DBS is trading at close to two times its forward book value, compared with 1.26 times and 1.15 times for OCBC and UOB, respectively. “While DBS’ performance merits a premium, we see relatively greater value in its peers at current levels,” he said.