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.
The persistently high interest rate environment since 2022 has provided banks with the favorable conditions necessary to achieve high net interest margins (NIMs), thereby significantly boosting their net profits and dividend levels.
Given that the valuations of some companies have already been too high (taking DBS Bank as an example), investors must be wondering: Is now a good time to buy, lock in the gains, and wait for the price to fall before reinvesting in bank stocks?
Let's examine whether this profit-taking move is the most appropriate strategy in the current environment.
Why Singapore Banks Performed So Well
First, let's review why the three major banks in Singapore have achieved such outstanding results recently.
After the outbreak of the pandemic, interest rates dropped to their lowest point, but then rose sharply, thanks to the inflation rate reaching a new high in years.
The benchmark interest rate has remained near the high levels for several years, enabling the banks to earn higher profits by leveraging the expanding net interest margin.
In simple terms, banks can generate more income by charging deposit interest rates higher than loan interest rates. That is to say, banks can earn profits from the difference between the loan interest rates they charge to customers and the deposit interest rates they pay.
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.
This excessive valuation might limit the upside potential resulting from the expansion of multiples. However, for future investors, the stability of earnings and the continuous payment of dividends are more important factors.
Therefore, we believe that in the period after 2026, the dividends paid should become the main source of total returns (rather than the increase in stock prices).
Risks to Watch in 2026
In addition to the aforementioned major risks that may lead to a reduction in dividends, you should also be aware of the possible intensification of competitive situations and changes in capital requirements.
The former will cause an increase in bank costs and a decrease in net profits, while the latter may lead to an increase in the core Tier 1 capital adequacy ratio, resulting in a reduction in dividends and a decrease in overall return rates.
