[SINGAPORE] The trio of local banks will likely post weaker results for the second quarter of 2025, weighed down by lower net interest income from falling interest rates, analysts said.
They are expected to post their Q2 financials next month, beginning with OCBC on Aug 1 and followed by DBS and UOB on Aug 7.
Net interest margins (NIMs) will probably be “materially lower” in Q2, said Thilan Wickramasinghe, head of research and regional financials at Maybank Securities Singapore.
He noted that the Singapore Overnight Rate Average (Sora) was down 50 basis points – due to “massive” domestic liquidity, partly because of safe haven inflows – while the Hong Kong Interbank Offered Rate (Hibor) was at its lowest since 2022.
The Sora decline provided only partial relief in funding costs, as banks “weigh off preserving market share”, he said.
DBS Group Research analyst Lim Rui Wen also expects NIMs to fall quarter on quarter by a high single digit, due to the lower Sora and Hibor.
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The rates’ impact will likely be more pronounced as more loans get repriced against reduced benchmark rates throughout Q2, she added.
However, she noted that OCBC’s and UOB’s repricing of their fixed-deposit and flagship deposit account interest rates should buffer falling asset yields in subsequent quarters.
Wickramasinghe also pointed out that loan growth was better than expected in Q2, probably due to front-loading demand ahead of the expiry of US President Donald Trump’s tariff moratorium.
While this may partially offset downsides in net interest income, it is unlikely to arrest sequential decline, the researcher said.
Trump impact
Analysts also said that Trump’s “Liberation Day” tariffs in April likely weighed on market sentiment, impacting wealth management fees in turn.
Tay Wee Kuang, an analyst at CGS International, said that macroeconomic uncertainty could continue to dampen fee income in the second half of the year, despite equity market sentiment having slowly recovered.
Nevertheless, Lim of DBS expects wealth management income to remain a tailwind for Singapore banks in the medium term, as wealth management activity began recovering in May.
This is also supported by ongoing growth in assets under management (AUM), she said. “The investible portion of AUM is expected, as clients reallocated funds from fixed-deposit rates and (treasury-bill) rates, which continue to see declining rates through Q2.”
Wickramasinghe likewise expects sequential improvements in wealth management fees, given falling domestic benchmark rates and risk-on market conditions.
He added that significant volatility around foreign exchange, trade and interest rates would likely have supported trading income in Q2, which could surprise on the upside, especially for DBS and UOB.
Higher credit costs
Meanwhile, the three banks’ credit costs could trend towards the higher end of their respective 2025 guidance, due to weakness across Asean economies such as Thailand and Indonesia, said Tay.
“However, we do not expect total credit costs to change drastically quarter on quarter, as we believe the pre-emptive general provisions recognised by the Singapore banks in Q1 should remain sufficient amid the current credit cycle,” he added.
Ongoing reviews of second-order impacts from the US tariffs may also lead the banks to maintain or increase their general provision buffers, said Lim. Therefore, general provisions write-backs are unlikely this year, she noted.
CGS International and Maybank Securities kept their “neutral” call on the Singapore banking sector, with Tay noting that the lenders lack growth catalysts in an uncertain economic outlook.
The analysts expect UOB to restore its guidance for 2025, which it had suspended in Q1.
They are also awaiting more clarity from OCBC on its strategy, following its failed bid to privatise its insurance arm, Great Eastern. Clarity around returns may also take longer to resolve due to the lender’s “unexpected leadership change”, Wickramasinghe said.
But Lim, who has “hold” calls on OCBC and UOB, expects the banks’ dividend yields of up to 6.5 per cent to continue supporting share prices.
“As asset quality remains largely benign, and dividend yields stay attractive, comparable to Singapore real estate investment trusts, we expect share prices to remain well-supported in a low interest-rate environment and due to the safe haven appeal of the Singapore dollar,” she said.
Ongoing share buyback programmes across the local banks should also translate to meaningful returns for shareholders, she added.
