Singapore Banking Sector Faces Mixed Outlook as Rates Stabilise March 24, 2026

Interest Rate Environment Shows Signs of Stabilisation

Singapore’s banking sector is navigating a transitional period as interest rate declines begin to moderate. Feb’s 3-month Singapore Overnight Rate Average (3M-SORA) fell by just 2 basis points month-on-month to 1.16%, marking the smallest monthly decline in 20 months. Year-on-year, the rate decreased by 168 basis points, representing the smallest annual decline in eight months. This deceleration suggests that the sharp downward pressure on interest rates may be easing.

The moderation in rate declines comes as Singapore continues to attract capital inflows, with foreign exchange reserves rising 10% year-on-year in Feb 2026, reinforcing the city-state’s position as a regional safe haven. Meanwhile, Hong Kong’s 3-month Hong Kong Interbank Offered Rate (3M-HIBOR) declined 18 basis points month-on-month to 2.69% in Feb, continuing its fourth consecutive month of decreases.

Banking Performance Reflects Sector Headwinds

Singapore’s major banks reported fourth-quarter 2025 earnings that fell slightly below market expectations, with overall earnings declining 5% year-on-year. This performance was primarily driven by a 5% decrease in net interest income as net interest margins compressed by 22 basis points year-on-year. However, robust fee income growth of 13% helped partially offset the decline in traditional lending income.

The banking sector has shown resilience through improved deposit dynamics. Current Account and Savings Account (CASA) balances rose 12% year-on-year, whilst the CASA ratio to total deposits increased to 19.8% in Dec 2025 from 19.6% previously. This improvement in low-cost funding provides banks with a cushion against margin compression and helps lower overall funding costs.

Outlook and Investment Stance

Phillip Securities Research maintains a NEUTRAL stance on the Singapore banking sector, acknowledging both challenges and opportunities ahead. The research house expects fiscal year 2026 profit after tax and minority interests to increase by 7% year-on-year, supported by continued fee income growth despite ongoing pressure on net interest income.

Banks are providing guidance for low to mid-single digit loan growth, with Singapore loan growth continuing to climb at 6.1% as of Jan 2026. Management teams across the sector indicate that net interest margin compression should begin to ease in fiscal year 2026 as deposit rate cuts flow through and interest rates stabilise.

The research highlights that increased market volatility and higher Singapore Dollar Average Volume are boosting capital markets and fee income, helping to offset traditional banking headwinds. Additionally, rising oil prices present inflation risks that could potentially delay further rate cuts, providing some support for margins.

Despite asset quality concerns at United Overseas Bank, analysts view the bank’s pre-emptive provisioning approach as prudent, with overall sector risks considered contained. All three major Singapore banks have committed to completing their previously announced capital return programmes, whilst dividend yields remain attractive at 5.1% with ongoing share buybacks improving return on equity.

Frequently Asked Questions

Q: How did Singapore banks perform in the fourth quarter of 2025?
A: Fourth-quarter 2025 bank earnings were slightly below expectations, with earnings declining 5% year-on-year primarily due to lower net interest income, though this was partially offset by 13% growth in fee income.

Q: What is the outlook for net interest margins in 2026?
A: Banks are guiding that net interest margin compression should ease in fiscal year 2026 as deposit rate cuts begin to flow through and interest rates stabilise, following a 22 basis point year-on-year decline in the fourth quarter.

Q: How are deposit trends supporting the banks?
A: CASA balances rose 12% year-on-year with the CASA ratio to deposits improving to 19.8%, providing a tailwind for banks by lowering funding costs and cushioning net interest margin compression.

Q: What factors could support banking margins going forward?
A: Rising oil prices raise inflation risks that could potentially delay further rate cuts, whilst increased market volatility is boosting capital markets and fee income to help offset traditional banking headwinds.

Q: What is the expected profit growth for Singapore banks in 2026?
A: Phillip Securities Research expects fiscal year 2026 profit after tax and minority interests to increase by 7% year-on-year, as fee income growth will be partially offset by declining net interest income.

Q: What are the key risks facing the banking sector?
A: The main challenges include continued net interest margin compression from declining interest rates and asset quality concerns, though overall risks are viewed as contained with banks taking prudent provisioning approaches.

Q: How attractive are Singapore bank dividends currently?
A: Banks’ dividend yields remain attractive at 5.1%, with all three major banks committed to completing their previously announced capital return plans and ongoing share buybacks improving return on equity.

This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst.