Fed hike throws Singapore banks a margin lifeline; UOB most likely to feel impact

[SINGAPORE] The US Federal Reserve’s return to rate hikes could begin reversing one of the biggest earnings headwinds facing Singapore’s banks, although analysts expect the benefits to become more meaningful only in 2027.

Higher Singapore dollar rates should support the net interest margins (NIMs) of DBS, OCBC and UOB after falling rates weighed on their net interest income (NII) in the first half of the year, analysts told The Business Times.

UOB’s results could be the most sensitive of the three, given its greater reliance on NII and larger exposure to Singapore dollar lending, they added.

“In general, we expect the Singapore banks to benefit from NIM expansion following the Fed’s 25 basis point rate hike,” Morningstar equity analyst Kathy Chan told BT.

But the impact should be greater next year because of the lag between US rate hikes, their transmission to the benchmark Singapore Overnight Rate Average (Sora) and the eventual repricing of bank loans, she said.

“For 2026, we continue to expect strong non-interest income growth to be the larger earnings driver,” added Chan.

The Fed on Wednesday raised its benchmark rate by 25 basis points to 3.75 to 4 per cent, its first increase since 2023.

Its latest projections pointed to further tightening. The median policy rate projection rose to 4.1 per cent for both end-2026 and end-2027, while 16 of 18 policymakers expect at least one more hike this year.

UOB’s economics team now expects another two 25 basis point hikes – in December and the first quarter of 2027 – before the Fed holds rates for the rest of next year. It also sees upside risks to its forecasts for the US dollar, US rates and Sora.

UOB most sensitive to rising Sora

The extent of the impact on local banks depend on how much the Fed’s tightening feeds through to Sora.

Jayden Vantarakis, head of Asean equity research at Macquarie Capital, told BT that Macquarie now expects three 25 basis point Fed hikes by the first quarter of 2027, up from two previously.

It expects Sora to rise about 70 basis points from its second quarter 2026 average low of 1.06 per cent by the second half of 2027.

“The more hawkish US Fed stance means further US dollar strength and a pathway for the gap between Sora and the Secured Overnight Financing Rate (a key benchmark for US dollar interest rates) to narrow,” he said.

Macquarie sees UOB as the most exposed to higher rates. About 43 per cent of its loans are denominated in Singapore dollars, compared with 37 to 38 per cent for DBS and OCBC, while NII accounts for 66 per cent of revenue, against around 58 per cent for its two peers.

For DBS, the impact is less straightforward. The lender said in August that its US dollar book remained negatively sensitive to higher rates, with annualised NII falling about S$4 million for every 1 basis point rise in US dollar rates.

Chan said this could partly offset the benefit from higher Singapore dollar rates, although Morningstar still sees DBS as a net beneficiary of a higher rate environment.

The shift comes after all three banks grappled with margin pressure in the second quarter.

DBS’ NII fell 2 per cent year on year to S$3.58 billion as NIM declined to 1.9 per cent, even as net profit rose 9 per cent to S$3.08 billion. OCBC’s NII slipped 1 per cent to S$2.26 billion, while UOB’s fell 2 per cent to about S$2.3 billion.

Their earnings were instead supported by areas including wealth management, fees, trading and balance sheet growth.

The rate backdrop has also shifted markedly from the assumptions underpinning their August guidance.

DBS had not expected a US rate hike this year and saw Sora staying around 1.2 per cent, while OCBC’s outlook was premised on an unchanged Fed funds rate and an average three-month Sora of around 1.2 per cent.

UOB maintained full-year NIM guidance of 1.75 to 1.80 per cent at its second-quarter results.

Higher rates, however, also raise the risk of stress among borrowers.

Rena Kwok, senior credit analyst at Bloomberg Intelligence, told BT that Singapore banks’ asset quality should remain “structurally resilient”, supported by tight risk controls and disciplined underwriting.

The banking system’s gross non-performing loan ratio was just 0.96 per cent as at the second quarter, she noted.

Kwok expects DBS’ credit metrics to outperform those of its major peers if rates stay elevated, supported by stronger margin resilience, asset quality and ample provisions.

Wider market impact

Beyond the banks, strategists expect the Fed’s shift to keep borrowing costs and market volatility elevated.

Tai Hui, Asia-Pacific chief market strategist at JP Morgan Asset Management, said the hike reinforced the message that inflation remained the Fed’s overriding concern, while the US economy was strong enough to withstand tighter policy.

“The economic projections reinforce the Fed’s confidence in a soft-landing scenario: growth remains resilient, unemployment stays low and inflation declines only gradually,” he said.

In Singapore, higher global rates could eventually mean more expensive floating rate loans and mortgages as Sora rises, while real estate investment trusts could face higher financing costs, said Gunawan Wijaya, portfolio manager at CGS International Securities Singapore.

Still, he said the Straits Times Index had so far held up relatively well, supported by inflows into the domestic equity market.