Brief Overview
Phillip Securities Research highlights that Singapore interest rates climbed for the third consecutive month in July, with loan growth surpassing 9% year-on-year for the first time since COVID. The firm’s second quarter 2026 bank earnings analysis shows performance exceeded expectations, driven by record fee and trading income, despite continued net interest income (NII) declines. The research house maintains its positive stance on the sector while acknowledging mixed guidance updates from major banks.
Investment Positives
The team identifies several compelling reasons for optimism in Singapore banking. Loan growth has become a significant positive catalyst, crossing the 9% year-on-year threshold for the first time since the pandemic, with June 2026 recording 9.2% growth. This volume of expansion is compensating for what interest margins cannot deliver, representing a fundamental shift in the growth dynamic.
Record fee and trading income performance stands out as key earnings drivers. These non-interest revenues more than offset another quarter of declining NII during the second quarter of 2026, with the analyst expecting this trend to continue delivering results through the second half of 2026.
CASA deposits demonstrated robust growth of 16% year-on-year, maintaining the CASA ratio at 20.6% of total deposits. This performance is particularly valuable as it keeps funding costs contained despite the challenging interest rate environment.
DBS and OCBC have raised their full-year 2026 earnings guidance, signalling management confidence in their business outlook. OCBC specifically increased its loan growth guidance, reinforcing the positive volume of momentum across the sector.
The analyst notes that banks’ dividend yields remain attractive at 4.0% for FY26e, supported by share buyback programmes and capital return dividends that bolster return on equity.
Investment Negatives
Net interest margins continue to face pressure, declining 17-22 basis points across the three major banks during the quarter. This margin compression represents an ongoing headwind that volume growth is working to offset rather than eliminate.
The Monetary Authority of Singapore’s policy tightening on 27 July, which steepened the Singapore dollar NEER appreciation slope to around 1.25% from approximately 1.00%, creates a counteracting force against rising SORA rates. A stronger Singapore dollar works to lower SGD rates, potentially capping the net interest margin recovery rather than reversing the decline.
The Monetary Authority of Singapore’s policy tightening on 27 July, which steepened the Singapore dollar NEER appreciation slope to around 1.25% from approximately 1.00%, creates a counteracting force against rising SORA rates. A stronger Singapore dollar works to lower SGD rates, potentially capping the net interest margin recovery rather than reversing the decline.
UOB reduced its fee growth guidance to low single digits from previously high single digits, indicating some uncertainty around non-interest income sustainability across all institutions.
The analyst expects NII to turn positive year-on-year only towards the fourth quarter of 2026, suggesting continued near-term pressure on this core revenue stream.
Outlook
The research suggests SORA will hold around current levels through the second half of 2026 rather than climb further, limiting the scope for significant margin expansion. However, the combination of strong volume growth and robust non-interest income is expected to support overall earnings momentum.
Recommendation & Target Price
Phillip Securities Research maintains an ACCUMULATE recommendation on Singapore banks. The firm expresses preference for DBS, citing its fixed dividend per share policy and raised FY26e guidance, and OCBC, highlighting wealth management momentum and remaining capital return potential. No specific target prices are provided in the report.
Frequently Asked Questions
Q: What drove Singapore banks' second quarter 2026 earnings beat?
A: Record fee and trading income more than offset another quarter of falling net interest income, leading to 13% year-on-year earnings growth that exceeded expectations.
Q: How significant is the recent loan growth achievement?
A: Singapore loan growth crossed 9% year-on-year for the first time since COVID, reaching 9.2% in June 2026, providing crucial volume support to offset margin pressures.
Q: What happened to net interest margins across the major banks?
A: Net interest margins declined 17-22 basis points at the three major Singapore banks during the quarter, representing continued pressure on this key profitability metric.
Q: How did CASA deposits perform and why is this important?
A: CASA deposits grew 16% year-on-year while maintaining the ratio at 20.6% of total deposits, which helps keep funding costs contained despite challenging rate conditions.
Q: When does the analyst expect net interest income to recover?
A: Net interest income is expected to turn positive year-on-year only towards the fourth quarter of 2026, indicating continued near-term headwinds.
Q: Which banks does Phillip Securities Research prefer and why?
A: The firm prefers DBS due to its fixed dividend per share policy and raised FY26e guidance, and OCBC for its wealth momentum and remaining capital return potential.
Q: What is the outlook for SORA rates through the rest of 2026?
A: The analyst expects SORA to hold around current levels through the second half of 2026 rather than climb further, following MAS policy tightening that strengthened the Singapore dollar.
Q: What makes the dividend proposition attractive?
A: Banks offer FY26e dividend yields of 4.0%, supported by share buyback programmes and capital return dividends that enhance return on equity.
This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst.
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