Singapore’s three main banks, namely DBS Group Holdings (SGX: D05), Oversea-Chinese Banking Corporation (SGX: O39), and United Overseas Bank (SGX: U11) are at, or nearing, all-time highs after experiencing strong rallies over the past few years.
A sustained period of high interest rates since 2022 provided the tailwind required for banks to enjoy high net interest margins (NIMs), lifting net profits and dividends across the board.
With some of the valuations stretched (looking at DBS in particular), investors must be wondering if it’s a good time to ring the register, lock in profits, and wait for lower prices before investing in banks again.
Let’s examine if this move of taking profits is the ideal one given the current environment.
Why Singapore Banks Performed So Well
First, let’s recap why the three major Singapore banks have done so well recently.
Since reaching a nadir post-COVID, interest rates roared back with a vengeance, courtesy of multi-year highs in inflation.
Benchmark interest rates then hovered over multi-year highs, allowing banks to earn higher profits from elevated NIMs.
Simply put, banks can earn more from the interest rate spread they charge between the loan rates they charge and the rates they pay on deposits.
Combine this with Singapore’s resilient economic growth– resulting in higher loan growth across mortgages, corporate lending and wealth management– and you’ve got a stew going.
The math is simple: higher NIM plus greater loan growth equals higher net income.
However, what’s remarkable is that all three banks have grown loan volumes while maintaining prudence in underwriting standards; the banks did not simply issue loans to any Tom, Dick, and Harry, only to parties they were confident could fulfill their obligations..
This level of care in issuing loans is best seen in low non-performing loan (NPL) ratios recently.
All these years of strong net profit growth have led to the strengthening of these banks’ capital positions.
Thankfully, management did not just let these large amounts of cash rot on their balance sheets.
Instead, shareholders have been rewarded with generous ordinary dividends, share buybacks, and even the occasional special dividends.
Dividends in Focus: Can Payouts Stay Elevated in 2026?
Speaking of dividends, the multi-million-dollar question facing investors now is: Having enjoyed such bumper dividend payments over the years, can they be maintained as we enter a world of easing rates?
Some factors supporting the dividend payout across all banks include growing fee-based income (diversifying from reliance on interest rates), strong cost-discipline, and relatively conservative dividend payout ratios (leaving room to increase dividends by paying out more from net income earned).
Furthermore, all three banks enjoy robust capital buffers.
Common Equity Tier one (CET1) ratios, average of 14.9% for the three banks, remain comfortably above regulatory requirements.
Having strong CET1 ratios is beneficial for stock investors of these banks; imagine these buffers as safeguards that allow banks to continue paying solid dividends during challenging periods of lower net profit growth.
Having said all the positive factors that could support dividend payments, what could lead to dividend cuts?
Lower interest rates (compressing NIM), slowing fee-based income growth, and an economic downturn which reduces loan demand are all factors that could lead to lower net earnings, resulting in dividend reductions.
The Interest Rate Question: Headwind or Normalisation?
Despite great strides made in diversifying their turnover, banks still rely on benchmark interest rates and NIMs as their main revenue and profit generators.
As such, as 2026 unfolds, more rate cut expectations could be priced into the market in the form of tighter NIMs, further hampering the net income of banks.
On the flip side, lower interest rates could boost borrowing appetite and loan demand.
Additionally, low interest rates could spark activity in the capital markets.
All of this growth in loan volumes and volumes of wealth management products could buffer the decline in net profits due to compressed NIMs.
Essentially, volume-driven growth might compensate for the “pricing” ability of NIMs.
Hence, an easing-rate cycle might not be all bad.
Valuations at Record Highs: Priced for Perfection?
Although all three local banks have decent long-term fundamentals, do current valuations merit buying at these prices?
Looking at price-to-book (P/B), DBS trades at a premium of 2.4 times over the last 12 months (LTM). OCBC is slightly cheaper at 1.53 times, while UOB is the cheapest at 1.26 times.
By comparison, these banks have the following historical 10-year P/B averages: DBS at 1.44 times, OCBC at 1.14 times, and UOB at 1.13 times.
Such elevated valuations might limit upside from increased multiple expansion, but earnings stability and consistent dividend payout should be more important for investors moving forward.
As such, we believe dividends paid should be the main contributor to total returns (instead of share price appreciation) moving into 2026 and beyond.
Risks to Watch in 2026
Other than the main risks mentioned above that could lead to dividend reductions, you should also pay attention to possible rising competition and potential changes in capital requirements.
The former factor would lead to increased costs for the banks and reduce net income, while the latter factor could lead to higher CET1 ratios, contributing to lower dividends and total returns as well.
Get Smart: From Growth to Steady Compounding
Going forward, expect slower normalised earnings growth from banks led by resilient loan growth and the burgeoning growth in fee-based income.
Dividend payments are likely to remain the main draw for investors.
However, do not expect the strong recent growth of the last few years.
A year-long consolidation in the share prices of all three banks would not be surprising as well.
It’s less likely that the local banks will deliver strong capital appreciation but they could remain as attractive dividend payers.
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Disclosure: Wilson.H does not own shares in any of the companies mentioned.
