US policy boosts Singapore banks

THE outlook for Singapore’s banking sector this year tilts towards stability after a period of sharp swings in rates and liquidity, with global monetary signals becoming clearer and capital flows less one-way.

As expectations around US policy settle and safe-haven demand cools, domestic interest rates look set to find a firmer footing, shaping earnings and yield dynamics for local lenders.

That shift is framed by a change at the top of the US Federal Reserve (Fed), which ripples through global markets and into Singapore’s rate environment.

UOB Kay Hian (UOBKH) Research argues that credibility rather than stimulus is back in fashion at the Fed, with implications for Asian financials.

“The appointment of Kevin Warsh as the new Fed chair has strengthened the Fed’s credibility in fighting inflation, leading to an abrupt unwind from safe haven assets, especially precious metals,” the research house says.

It adds that the knock-on effects extend beyond commodities, noting that liquidity exiting safe haven assets, such as the Singapore dollar, could lead to firmer domestic interest rates in 2026.

Constructive stance

For Singapore banks, that environment underpins a constructive stance. Thus, UOBKH Research keeps its sector call unchanged at “overweight”.

Valuations and income remain central to the case, with the research house highlighting that the banking sector provides attractive value with a low price-to-book value (PBV) of 1.71 times and a high dividend yield of 4.8% for 2026.

Within the sector, stock preferences reflect both yield and balance-sheet strength.

The research house names DBS Group Holdings as its top pick, with a target price of S$68.95, for its attractive 2026 projected dividend yield of 5.5%.

It also points to Oversea-Chinese Banking Corp (OCBC) as a “buy”, with a target price of S$23.65, for its focus on trade and investment flows within Asean and a defensively low 2026 forecast PBV of 1.52 times.

According to UOBKH Research, income remains a recurring theme for investments in Singapore banks.

“Banks provide attractive yield spread,” it says, describing lenders as “attractive yield plays given the current low-interest rate environment in Singapore”.

It stresses that dividends are not just generous but durable, with the sustainability of their dividend payout supported by resilient earnings, strong capital adequacy and discipline in capital management.

Easing rates

Capital metrics back that up. “DBS and OCBC have high common equity tier 1 capital adequacy ratio of 15.1% and 15%, respectively, as of September 2025,” it notes.

On relative income appeal, it adds: “DBS provides a higher yield spread of 3.4%, compared to 1.9% for OCBC.

“Their yield spreads are more than one standard deviation above long-term mean.”

Interest-rate expectations sit at the heart of the outlook. UOBKH Research expects US policy to ease but not dramatically.

“We anticipate two rate cuts of 25 basis points (bps) in the first half of financial year 2026 (1H26), bringing the Fed Funds Rate (FFR) to 3% by mid-2026.

“We expect the Fed to pause rate cuts and the FFR to stabilise at 3% in 2H26,” it states.

Against that backdrop, the exceptional inflow of funds into Singapore during the global risk-off phase looks set to cool.

“The huge influx of liquidity seeking safe haven in Singapore is expected to moderate and could even reverse,” it says.

That moderation matters because domestic rates have already moved sharply.

“Three-month compounded Singapore overnight rate average fell by a massive 188 bps to 1.19% in 2025, significantly more than the Fed’s three rate cuts totalling 75 bps,” it notes.

US President Donald Trump has officially nominated Kevin Warsh to succeed Jerome Powell as the next Fed chair.

If confirmed by the Senate, Warsh is expected to take the helm in May.

UOBKH Research notes that Warsh’s background, spanning investment banking, the White House and the Fed, shapes market expectations of policy discipline.

His reputation as an inflation hawk was established during his earlier tenure as a Fed governor from 2006 to 2011, the research house notes, recalling that “he was a staunch critic of quantitative easing”.

More recently, it points to an evolution in thinking, noting that Warsh expects artificial intelligence-driven productivity gains and deregulation to act as deflationary forces, potentially allowing for lower interest rates without compromising price stability, while also viewing the Fed’s balance sheet as bloated.

For Singapore’s banks, the message is less about the personality at the Fed and more about the policy mix that follows.

A steadier global rate path, moderating safe-haven flows and resilient capital positions frame a 2026 outlook where yield, rather than rapid growth, stays front and centre.