CNA Explains: Why are Singapore bank shares falling after a record run?

Singapore bank stocks continued to decline for a second consecutive day on Thursday, following a downgrade by Citi, which reduced OCBC's rating to "sell" from "neutral". Citi's report expected the bank's third-quarter earnings to remain flat compared to the previous year. OCBC's shares dropped by 4.29% to S$29, after falling more than 5% the previous day, wiping out over S$8 billion off its market capitalisation.

Other banks, such as UOB and DBS, also experienced declines, with shares falling by 5.16% and 4.7% respectively.

Investors are pulling back due to a combination of factors, including profit-taking after the sector's strong performance, rising bond yields, and concerns about higher funding costs. Some analysts attribute the pullback to the banks' elevated valuations and the question of whether their performance can be sustained. Citi's downgrade of OCBC, with a target price of S$27.50, and the differing opinions among analysts on the banks' valuations and how much they could benefit from the changing interest-rate environment also contributed to the sell-off.

Analysts suggest that investors should consider various factors before making investment decisions, such as the Singapore Overnight Rate Average (SORA) and its relation to US interest rates, the economic outlook, loan growth, and borrowers' ability to repay debts, as well as the potential for continued inflows into wealth management to sustain fee income growth.