Singapore Banks Face Margin Squeeze Despite Strong Results: Moody's

Singapore's banking sector is facing a potential margin squeeze despite posting strong financial results, according to Moody's Investors Service. The ratings agency maintained a stable outlook for the city-state's banks, citing projections of steady economic growth and improved profitability. However, the banks may face pressure on their net interest margins (NIMs) as interest rates head south.



In its report, Moody's noted that Singapore's real gross domestic product (GDP) is expected to grow 3.8 percent in 2025, faster than pre-pandemic levels. This growth, coupled with a widening of net interest margins (NIMs) and modest credit provisions, is expected to drive banks' profitability. However, the banks may face challenges in maintaining their NIMs as interest rates decline.

The main challenge for banks in 2025 would be lower interest rates, according to Glenn Thum, senior research analyst at Phillip Securities Group. "While expectations have been lowered for fewer rate cuts, lower interest rates could still impact the banks' main revenue segment, their net interest income (NII) and more importantly their NIMs," Thum said.

Singapore's banks are likely to sustain their profits and performance in 2025, driven by continued growth in fee income, particularly wealth management income. The lenders posted strong earnings in the July-to-September quarter of 2024, with wealth management business driving profits. DBS reported a net income of S$3.03 billion in the September quarter, its highest on record.

However, Singapore's economy could be vulnerable to any potential increase in tariffs from the incoming US administration. President-elect Donald Trump has vowed to increase tariffs for several trading partners, including China. Global interest rates are expected to ease during the year, though the pace of cuts may slow after the US Federal Reserve signaled fewer moves in 2025.

In conclusion, Singapore's banks face a potential margin squeeze in 2025 as interest rates head south, despite posting strong financial results. The banks' focus on wealth management and fee income growth will help offset the pressure on lending margins, but they must also manage their excess deposits effectively to maintain their net interest income. The banks' stable asset quality and strong capital reserves will be crucial in navigating the challenges ahead.