Singapore Banking Sector Sees Mixed Outlook Amid Rate Declines December 16, 2025

Singapore’s banking sector continues to navigate in a challenging interest rate environment, with Phillip Securities Research maintaining a NEUTRAL stance on the sector while highlighting both headwinds and opportunities ahead.

Key Market Developments

Recent data points to mixed conditions across the secor. November’s 3-month Singapore Overnight Rate Average (SORA) declined 14 basis points month-on-month to 1.26%, marking the lowest level since July 2022 and representing a substantial 203 basis points year-on-year decrease. Despite the softer rate environment, loan growth momentum remained positive, with October 2025 figures showing 6.5% growth and year-to-date loans up 5.7% year-on-year. Banks continue to guide towards low to mid-single-digit growth expectations for the remainer of the year.

On the deposit front, Current Account and Savings Account (CASA) balances rose 13% year-on-year, though the CASA ratio to total deposits dipped slightly to 19.4% in October 2025. Nevertheless, higher CASA balances serve as a tailwind for banks by helping to lower funding costs.

Investment Outlook and Challenges

The continued decline in interest rates across both Singapore and Hong Kong markets has pressured banks’ net interest margins (NIMs), directly impacting net interest income and overall earnings. Phillip Securities Research expects earnings to decline in FY25, due to lower net interest income, despite anticipating that deposit rate cuts will benefit funding costs in the second half of 2025 and help ease NIM compression.

Sector Recommendations and Preferences

Within the sector, Phillip Securities Research upgraded OCBC from Neutral to ACCUMULATE, raising the target price to S$20.00 from S$17.00. This upgrade reflects adjustments to the terminal growth rate to 3% from 2% and the beta value from 1.2 to 1.1, recognising OCBC’s strong wealth management growth and excess capital position.

The research house expresses a preference for DBS, citing its fixed dividend policy, and OCBC, highlighting its strong wealth management growth and excess capital. Despite earnings headwinds, the sector’s 5.5% dividend yield remains attractive, with capital return initiatives expected to continue in FY25. Share buyback programmes are expected to improve return on equity and earnings per share.

Frequently Asked Questions

Q: What is the current outlook for Singapore’s banking sector?

A: Phillip Securities Research maintains a NEUTRAL stance on the sector, citing declining interest rates that are affecting banks’ net interest margins and earnings, though dividend yields remain attractive at 5.5%.

Q: How has loan growth performed in Singapore banks?

A: Loan growth continues to climb with October 2025 showing 6.5% growth and year-to-date 2025 loans up 5.7% year-on-year, with banks guiding for low to mid-single digit growth.

Q: What happened to interest rates in Singapore recently?

A: November’s 3-month SORA declined 14 basis points month-on-month to 1.26%, the lowest since July 2022, and fell 203 basis points year-on-year.

Q: Which banks does Phillip Securities Research prefer and why?

A: The research house prefers DBS for its fixed dividend policy and OCBC for its strong wealth management growth and excess capital position.

Q: What changes were made to OCBC’s rating and target price?

A: OCBC was upgraded from Neutral to ACCUMULATE with the target price raised from S$17.00 to S$20.00, reflecting a higher terminal growth rate of 3% and lower beta of 1.1.

Q: How are deposit trends affecting Singapore banks?

A: CASA balances rose 13% year-on-year, but the CASA ratio to deposits dipped slightly to 19.4%, which serves as a tailwind by lowering funding costs for banks.

Q: What is expected for bank earnings in FY25?

A: Earnings are expected to decline in FY25 due to lower net interest income from compressed margins, though deposit rate cuts may help ease this pressure in the second half of 2025.

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

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