Staff Reporter
Published:
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Higher deposit costs are expected to continue pressuring banks’ net interest margins.
Singapore banks are expected to rely on resilient loan growth to support net interest income (NII) in the third quarter of 2026, as higher deposit costs continue to pressure margins, according to analysts.
DBS expects net interest margin (NIM) compression to persist in 3Q26, with higher deposit costs outpacing loan repricing. OCBC and UOB raised fixed deposit rates by about 40 basis points during the quarter.
However, loan growth of 2% to 3% quarter-on-quarter and continued balance sheet deployment are expected to support NII, according to DBS.
“3Q26 NIMs remain under pressure, though asset growth supports NII; turning more constructive on margins amid sharp repricing of fixed-rate mortgages,” the bank said.
UOB also expects stabilising NIMs and resilient loan growth to enable Singapore banks to record growth in net interest income.
“Growth from wealth management has moderated but maintains its uptrend,” it noted. “Asset quality remains stable.”
Looking ahead, DBS expects Singapore banks to approach a turning point in NIMs as rising Singapore-dollar benchmark rates and more rational loan pricing gradually offset funding cost pressures.
“We believe Singapore banks are approaching a NIM inflection as rising SGD benchmark rates and more rational loan pricing gradually offset funding cost pressures,” DBS said.
Two-year fixed mortgage rates have risen from 1.4% to 1.5% to above 2% since the end of September. Improving loan pricing and the repricing of higher benchmark rates are expected to flow through over the next three to six months.
DBS expects net interest income to recover sequentially into FY27, supported by sustained loan expansion and improving asset yields. Its economists expect the three-month Singapore Overnight Rate Average overnight indexed swap rate to reach 2% by the fourth quarter of 2027, alongside US Federal Reserve rate hikes to a terminal rate of 4.5%.
UOB expects the one-month compounded SORA rate to reach 1.4% by the end of 2026, assuming its recent pace of increase continues at five basis points a month. The rate rose from a low of 0.97% in April 2026 to 1.25% in the third quarter.
Despite the improving outlook for interest income, higher bond yields could weigh on some banks’ earnings. DBS expects OCBC to be more exposed through its insurance earnings and non-customer trading income, following a rise of more than 80 basis points in 10-year US Treasury yields and 43 basis points in Singapore government bond yields during 3Q26.
UOB, meanwhile, expects wealth management growth to moderate but maintain its upward trend.
DBS also expects some quarter-on-quarter moderation in wealth management fees after a strong second quarter, except at UOB.
“Nonetheless, we remain positive on medium-term prospects, underpinned by regional wealth creation, diversified wealth inflows into Singapore and continued AUM growth,” it said.
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