Fed hike throws Singapore banks a margin lifeline; UOB most likely to feel impact

The U.S. Federal Reserve’s decision to raise its benchmark interest rate by 25 basis points to a range of 3.75-4.0% marks its first increase since 2023. Analysts anticipate the effects of this rate hike on Singapore's banks will likely become more pronounced in 2027, as higher U.S. rates trickle down to the local benchmark Singapore Overnight Rate Average (Sora) and impact bank loan books.

According to Morningstar equity analyst Kathy Chan, the net interest margins (NIMs) of Singapore's banks, particularly UOB, are expected to improve following the Fed's rate hike. UOB's economics team expects two more 25 basis point hikes by the end of 2027, while Macquarie Capital sees three hikes by the first quarter of 2027. Macquarie estimates Sora will rise by around 70 basis points from its current low of 1.06% by the second half of 2027.

UOB is anticipated to be the most sensitive to the rate hike due to its greater reliance on net interest income (NII) and a larger exposure to Singapore dollar lending. About 43% of UOB's loans are denominated in Singapore dollars, compared to 37-38% for DBS and OCBC, while NII accounts for 66% of UOB's revenue, slightly higher than DBS and OCBC.

Despite margin pressure in the second quarter, all three banks have managed to offset the impact through other areas, such as wealth management, fees, trading, and balance sheet growth. However, rising rates raise concerns about potential stress among borrowers. Credit analyst Rena Kwok expects Singapore banks' asset quality to remain resilient, supported by tight risk controls and disciplined underwriting, with DBS potentially outperforming its peers in credit metrics if rates stay elevated.