Over the first two weeks of October, Singapore’s three local banks—DBS, OCBC, and UOB—experienced a noticeable 5% to 10% share price pullback.
The timing is notable. The correction comes just a few weeks before the three lenders report their third-quarter earnings in early November:
- DBS: Thursday, 5 November 2026 before market open
- OCBC: Friday, 6 November 2026
- UOB: Second week of November 2026
The pullback coincided with broker downgrades, earnings previews and rising bond yields. Citi downgraded OCBC to "Sell", while CGS International (CGSI) and J.P. Morgan warned that bank earnings are set to normalize sequentially, with Net Interest Margins (NIM) and Net Interest Income (NII) facing continued pressure.
With the US Federal Reserve having raised rates by 25 basis points in September (to 3.75%–4.00%) and local 3-month compounded SORA ticking up to ~1.23% from its May low of 1.06%, forecasting weaker bank margins might sound counter-intuitive.
Looking closely at balance sheet mechanics shows why analysts are cautious about the upcoming Q3 print, where their arguments hold weight, and where they are likely overreaching.
What the Analysts Are Forecasting for Q3
The cautious tone across institutional broker previews centers on three main calls:
| Research House | Recommendation / Call | Q3 2026 Forecast | Key Rationale |
|---|---|---|---|
| Citi Research (7 Oct) | Downgraded OCBC to "Sell" (Target Price: S$27.50 vs ~S$32 close) | Q3 net profit flat YoY | Valuations ran ahead of fundamentals; near-term NII and trading income facing sequential pressure. |
| CGS International (12 Oct) | Cautious preview on DBS | DBS net profit S$2.86B (-3.2% YoY, -7.1% QoQ) | DBS NII down -2.4% YoY to S$3.49B as NIM narrows 10 bps YoY to 1.86%; treasury and trading income cooling from Q2 highs. |
| J.P. Morgan & Julius Baer (13 Oct) | Sector valuation caution | Sequential profit compression | US 10-year Treasury yield spike to ~5.32% heightens funding costs and dampens loan demand. |
| RHB (7 Oct) | Constructive ("Buy" / "Market Weight") | Healthy earnings baseline | Pullback is a valuation reset; rising rates favor OCBC and UOB over DBS due to currency funding structure. |
In short: consensus expects Q3 to look softer than the record-breaking Q2 results reported in August.
Why Would NII Weaken While Rates Are Rising?
To understand the broker downgrades, you have to look at the lag in how bank balance sheets reprice.
1. The YoY Comparison is Still Negative
Even though 3-month compounded SORA has climbed from 1.06% in May to ~1.23% in October, it is still roughly 60 to 80 basis points lower than it was in Q3 2025.
When CGSI forecasts DBS’s NIM to narrow by 10 basis points YoY to 1.86% (down from 1.96% in Q3 2025), that reflects the cumulative effect of lower floating benchmark rates over the past twelve months.
Furthermore, because floating-rate corporate and home loans reprice against compounded SORA in arrears, the rate increases seen in September and October would not meaningfully lift loan yields until Q4 2026 and Q1 2027.
2. The MAS S$NEER Effect
Singapore does not set domestic interest rates directly. SORA is determined by global USD rates minus market expectations of Singapore Dollar appreciation.
On 27 July 2026, the Monetary Authority of Singapore (MAS) tightened policy by steepening the S$NEER appreciation slope to ~1.25%. A stronger domestic currency attracts safe-haven foreign capital, keeping banking liquidity in Singapore exceptionally flush. That liquidity surplus keeps domestic SORA anchored well below US benchmark rates, limiting how much local banks capture from higher US yields on their domestic SGD loan books.
3. Deposit Competition and Promotional Fixed Deposits
As global yields rebounded, depositors became more rate-sensitive.
In October, both OCBC and UOB rolled out 12-month promotional fixed deposit rates at 1.7%. Promotional deposits reprice bank funding costs almost immediately as customers shift money out of low-cost accounts. Meanwhile, the loan book reprices more slowly, creating a temporary margin squeeze in the third quarter.
Here, DBS holds a distinct structural advantage:
- CASA Ratio: DBS sits at 54.4%, compared to ~48%–50% for its peers.
- Loan-to-Deposit Ratio (LDR): DBS maintains a conservative 73.5%, giving it less urgency to chase expensive promotional deposits.
4. The USD Net Liability Mismatch
RHB highlighted an important balance sheet difference between the three lenders:
- DBS operates with a net liability position in USD, utilizing wholesale and FX swap funding. While rising SGD rates benefit DBS, higher USD rates actually increase its USD funding costs faster than its USD asset yields reprice.
- OCBC guides for an NII sensitivity of +S$6 million per 1 basis point increase across its four core currencies (SGD, USD, HKD, MYR).
- UOB has roughly 80% of its loan book on floating rates.
If global rates remain elevated into 2027, OCBC and UOB have a cleaner path to NII expansion than DBS.
What Could Cushion Earnings—and What Could Still Go Wrong
While the warnings about Q3 sequential softness are mechanically valid, extrapolating this into a prolonged earnings slump overlooks three important facts:
1. Loan Volume Growth Offsets Margin Compression
A bank’s net interest income is a function of both margin and volume:
Net Interest Income = Net Interest Margin × Average Earning Assets
Sector loan growth across Singapore expanded past +9% YoY heading into the second half of 2026. For Q3 alone, CGSI estimates DBS expanded its customer loan book by +1.5% QoQ.
Even if NIM narrows by 2 to 3 basis points sequentially, loan volume expansion cushions total dollar earnings, preventing a steep drop in NII.
2. Comparing Against an Exceptional Q2 Peak
In Q2 2026, both DBS and OCBC delivered record net profits (S$3.08 billion and S$2.22 billion respectively). Those results were boosted by outsized treasury customer flows and trading income, which surged 85% YoY at OCBC.
A sequential decline of 10% to 15% in trading income during Q3 is normal quarter-on-quarter seasonality, not structural weakness. Meanwhile, the core driver—wealth management fee income—remains intact. Wealth management fees account for roughly 63% of OCBC’s total fee income, while DBS’s Q3 wealth fees are projected to grow +7.4% YoY.
3. Valuation Reset vs. Balance Sheet Deterioration
Before this pullback, DBS and OCBC were trading near multi-year highs at Price-to-Book (P/B) multiples above 2.0x to 2.3x.
Citi’s downgrade of OCBC was fundamentally a valuation call, arguing that share prices had outpaced near-term earnings growth. It was not a warning of credit distress. Asset quality across the three banks remains solid, with non-performing loan (NPL) ratios steady at 1.0%–1.5% and credit costs benign at 20 to 25 basis points.
What to Expect in November
When the three banks report their results in November, here is what I think the numbers are likely to show:
- Near-Term (Q3 2026): Headline earnings will likely show sequential softness. Expect net profits to dip 3% to 7% QoQ compared to Q2’s record peak, with NIMs settling around the 1.85% to 1.90% range.
- Medium-Term (Q4 2026 and FY2027): The concern that higher rates will hurt bank earnings is overblown. As the recent rebound in 3-month SORA (~1.23%) and 3-month HIBOR (~2.95%) flows through loan books in Q4, NII should stabilize and begin expanding YoY again.
- Dividend Sustainability: With return on equity (ROE) hovering around 13% to 14% and Common Equity Tier 1 (CET1) ratios above 14.5%, the banks' current dividends remain well-protected.
A 5% to 10% pullback ahead of earnings has removed some of the valuation froth accumulated earlier this year. For long-term dividend investors, near-term quarterly noise can create better opportunities than chasing stocks at peak valuations.
Stay the course and let dividends compound.
All Huat !!
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