Singapore’s three major banks are entering a period of transition.
For dividend investors, understanding how bank earnings work is essential to setting the right expectations for the year ahead.
At the heart of this transition lies a simple dynamic: net interest income (NII) is falling, and non-interest income must do the heavy lifting.
Two engines, different trajectories
Banks earn money in two main ways.
The first is NII, which comes from lending activities.
The second is non-interest income, derived from wealth management, remittances, card fees, and other services.
NII depends on two key drivers: net interest margin (NIM) and loan volume.
As interest rates ease, NIM compresses, meaning banks earn less on each dollar lent.
The upside is that cheaper loans should eventually stimulate borrowing, helping to offset some of the margin decline.
However, this dynamic takes time to play out.
DBS Group (SGX: D05) expects NII to decline slightly in 2026.
For United Overseas Bank (SGX: U11), which derives around 70% of its revenue from NII compared to roughly 60% for DBS and Oversea-Chinese Banking Corporation (SGX: O39), the exposure to falling rates is more pronounced.
The good news is that non-interest income is stepping up.
Wealth management fees, treasury activities, and transaction services are growing, providing a cushion against weaker lending margins.
OCBC also benefits from its insurance arm, Great Eastern (SGX: G07), which contributes to non-interest earnings and adds another layer of diversification.
Dividend sustainability hinges on profits
Ultimately, dividends are paid out of profits.
We have already witnessed UOB and OCBC reduce their interim dividends as they navigate this transitional period. DBS, by contrast, has weathered the interest rate decline more effectively and could potentially raise its payout.
This difference shows up in valuations too.
DBS currently trades at a price-to-book ratio of over 2.4, well above its historical average of 1.45.
OCBC and UOB trade at around 1.6 and 1.3, respectively, both above their long-term averages of around 1.1.
For 2026, revenue may stay flat or even decline as weaker NII offsets gains elsewhere.
Non-interest income will need to carry the load during this interim phase.
Factors outside management’s control
Several external forces will shape the banks’ performance in ways that executives cannot dictate.
The pace and magnitude of interest rate cuts remain uncertain.
While markets anticipate further easing, the timing and extent will influence how quickly NIM stabilises and loan growth responds.
Credit quality is another wildcard.
UOB recently took a pre-emptive general provision that weighed on net profit.
Such provisions can be reversed in future periods if conditions improve, but they reflect management’s caution about potential loan deterioration.
Geopolitical tensions, trade disruptions, and broader economic weakness could also trigger higher non-performing loans, putting pressure on bank earnings and, by extension, dividend capacity.
Get Smart: Three Things to Watch
For dividend investors tracking Singapore banks in 2026, three metrics deserve close attention.
First, monitor loan growth.
Healthy expansion in lending volumes can offset declining margins and support NII.
Second, watch how excess deposits are deployed.
Banks channel surplus liquidity into high-quality liquid assets, and the returns on these holdings matter during periods of margin compression.
Third, track the growth trajectory of non-interest income.
Wealth management and fee-based revenues provide diversification and recurring income streams less tied to interest rate movements.
The transition ahead will not be seamless.
But for patient investors with the right expectations, Singapore’s banks remain formidable dividend payers backed by strong balance sheets and diversified revenue streams — that is, if you are prepared to hold the long-term.
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Disclosure: Chin Hui Leong owns shares of DBS Group, OCBC, and UOB.
