Singapore banks: Higher expectations, dividend appeal remains intact

• Singapore banks' earnings outlook has strengthened as resilient non-interest income and easing NIM pressure now support growth simultaneously.

• Banking system loan growth accelerated to 8.7% YoY in May 2026, while 3-month compounded SORA showed signs of bottoming, improving the NIM outlook.

• Singapore's structural wealth management story remains intact, supporting sustained fee income growth as banks continue expanding private banking and family office capabilities.

• The recent re-rating reflects stronger fundamentals alongside renewed investor participation, lifting all three banks above their 10-year average forward P/B multiples.

• The upcoming 1H26 results will determine whether continued earnings delivery can justify further share price gains beyond the recent valuation expansion.

Since our 1Q26 Singapore banks update, Singapore's three local banks have ranked among the best-performing large-cap stocks on the SGX in 2Q26, with all three extending their gains to fresh record highs during the first two weeks of July. The quarter was marked by a series of developments that could have weighed on investor sentiment, including lingering geopolitical tensions in the Middle East, shifting expectations for the Federal Reserve's rate path, and the introduction of China's new outbound investment regulations.

Despite these uncertainties, we maintained our constructive view on the sector, supported by strengthening non-interest income and Singapore's enduring position as a regional wealth management hub, which continues to underpin banks' long-term earnings fundamentals. The subsequent share price performance has confirmed our positive stance on the sector.

Figure 1: Singapore's three local banks have outperformed the STI since the end of 1Q26

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What has driven the recent rally?

Two reinforcing factors help explain Singapore banks' recent share price outperformance.

First, the domestic lending and interest rate backdrop has turned more supportive. Banking system loan growth accelerated to 8.7% year-on-year in May 2026, outpacing deposit growth of 6.8%. At the same time, SORA appears to be bottoming out following its sharp decline over the past year. Together, these developments point to stronger loan growth and a more stable net interest margin outlook, providing further support for banks' earnings expectations.

Second, the improving earnings outlook was reflected in a broad wave of positive sell-side revisions during the first two weeks of July. Financial institutions raised target prices while maintaining or upgrading their sector views, supported by expectations of firmer net interest margins, continued growth in non-interest income, and resilient asset quality. Optimism ahead of the upcoming 1H26 results season further reinforced investor sentiment. The combination of stronger earnings fundamentals and growing sell-side conviction has been a key catalyst behind the sector's recent rally.

Outlook: Two earnings engines are now running in the same direction

Non-interest income: The wealth hub thesis continues to strengthen

We continue to expect non-interest income to be the primary driver of earnings growth across the sector. The structural wealth hub thesis has strengthened further since our previous update, supported by continued safe-haven capital reallocation into Singapore amid persistent geopolitical uncertainty. Wealth inflows into Singapore remain underpinned by the country's political stability, strong regulatory framework, appreciating currency, and established position as a trusted jurisdiction for global wealth management.

Recent international recognition further reinforces this structural trend. In the March 2026 edition of the Global Financial Centres Index, Singapore retained its position as the world's fourth-largest financial centre, narrowing the gap with third-placed Hong Kong to just one rating point. Separately, a July 2026 study by UK think tank New Financial ranked Singapore among the world's top five global financial hubs, citing sustained growth in foreign bank assets and inward investment. While these rankings do not drive capital flows themselves, they provide independent validation of Singapore's growing importance as an international wealth management centre.

The implications for Singapore banks are increasingly evident. Wealth management has become a meaningful and expanding contributor to earnings across all three banks, and we expect this contribution to continue rising as they invest further in private banking and family office capabilities. DBS, for example, has set a target of growing assets under management to more than SGD1 trillion by 2030, supported by expansion across both its retail wealth and high-net-worth client franchises. As wealth management income is predominantly fee-based and capital-light, it provides a durable source of earnings growth while reducing reliance on the interest rate cycle.

Net interest income: Margin pressure continues to ease

On the interest income side, we continue to see evidence that net interest margin (NIM) compression is approaching a cyclical floor. Singapore interest rates rose for the second consecutive month, with the 3-month compounded SORA increasing by 1 basis point month-on-month to 1.07% in June 2026. On a year-on-year basis, SORA declined by 109 basis points, marking the smallest annual decline in the past 15 months and suggesting that the downward rate cycle is beginning to moderate.

Figure 2: 3-month compounded SORA edged higher since May 2026

The external interest rate backdrop has also become more supportive. At its latest meeting, the Federal Reserve adopted a more hawkish tone, with the median Fed Funds Rate projection for end-2026 now stands at 3.8%, from 3.4% previously. The revised dot plot points to a shallower easing cycle than previously anticipated, reducing the downside risk to domestic interest rates and supporting a more stable NIM outlook for Singapore banks.

Taken together, these developments point to further moderation in margin pressure across the sector. Even if interest rates stabilise around current levels, this would represent a materially more favourable outcome than the prolonged margin compression banks have guided for since 2024. As net interest income stabilises while non-interest income continues to strengthen, the sector's two key earnings engines are now moving in the same direction, providing a broader and more resilient foundation for earnings growth.

Fundamentals remain constructive; 1H26 results are the next key catalyst

The recent rally has materially lifted sector valuations, with all three Singapore banks now trading at forward price-to-book multiples above their respective 10-year historical averages. In our view, the re-rating reflects not just improving investor sentiment, but also strengthening fundamentals, underpinned by resilient non-interest income, easing net interest margin pressure, and renewed investor participation following Singapore's ongoing capital market revitalisation initiatives. Nevertheless, the higher valuation base leaves less room for upside surprises in the near term.

The upcoming 1H26 reporting season will therefore be the next key catalyst for the sector. Current valuations increasingly reflect expectations of resilient earnings, continued momentum in wealth management, and a stabilising interest rate backdrop. While we remain constructive on these structural drivers, the upcoming results will provide greater clarity on the pace of earnings growth and whether recent share price gains are justified by underlying operating performance.

Importantly, we distinguish between the long-term investment case and near-term valuation. Singapore banks continue to offer an attractive combination of resilient earnings, strong capital positions, and sustainable dividend yields that remain compelling both in absolute terms and relative to other income-generating assets. For existing shareholders, particularly those holding the sector for income, we see no reason to alter that positioning, as the dividend investment case remains firmly intact.

For investors considering fresh capital deployment, however, a more gradual and selective approach may be appropriate at current valuations. While the long-term earnings outlook remains favourable, we believe further share price appreciation is likely to depend increasingly on continued earnings delivery rather than further valuation expansion.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.