Singapore banks’ wealth fees may ease in Q3 as AI lending, bond yields draw scrutiny

Analysts expect interest margins to stay under pressure, but asset quality and capital positions to hold firm

[SINGAPORE] The strong run in wealth management income at Singapore’s three local banks may be losing some steam in the third quarter, even as analysts predict continued pressure on interest margins.

Still, they expect the sector’s underlying asset quality and capital position to remain robust, even as the banks’ exposure to artificial intelligence-related financing and the impact of rising bond yields come under closer scrutiny.

UOB announces its third-quarter results on Nov 4, followed by DBS and OCBC on Nov 5 and 6, respectively.

Wealth fees are expected to normalise for DBS and OCBC after a strong showing in the second quarter, although the underlying wealth momentum “remains resilient”, Joanna Cheah, equity analyst at Jefferies, told The Business Times.

Softer equity markets are likely to weigh on transaction-driven fees at both banks, despite continued inflows, she added.

Looking at overall fee income, Jefferies forecasts a quarter-on-quarter decline of 6 per cent at DBS, and 16 per cent at OCBC.

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UOB, however, could buck the trend, with net fee income projected to rise 8 per cent quarter on quarter, and 17 per cent year on year.

The bank is expected to benefit from stronger Q3 wealth fees, a recovery in card fees from a low base, and the recognition of loan-related fees deferred from the previous quarter, said Cheah.

For DBS, a cooling in wealth fees following Q2’s 42 per cent jump should be viewed as “normalisation” rather than a red flag, said Eric Xiao, head of sales for Asia at CMC Markets.

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“Net new money matters more,” he said. “Wealth has to make up for falling interest income, so a weak number there is the real red flag.”

Exposure to AI financing

Market watchers will be looking out for the banks’ exposure to AI-related financing, particularly in the data centre sector.

DBS, OCBC and UOB, for example, are among the lenders on the S$5 billion financing for global investment firm KKR and Singtel’s acquisition of ST Telemedia Global Data Centres.

DBS has originated about S$25 billion in AI-related financing this year, and keeps a fraction of that on its balance sheet, which Xiao describes as “the slice that carries the risk”.

“We aren’t bracing for a loss cycle,” he said. “We want to know how much of the money is in fund construction rather than operating assets, and whether tenants are creditworthy, power is secured, and repayment structures are sound.”

He added that while falling AI share prices would not automatically impair a loan, a shortfall in project cash flows or borrower support could lead to credit issues.

Bloomberg Intelligence analyst Rena Kwok said that while AI is a dominant theme, the immediate systemic credit risk “remains contained” for Singapore banks.

Based on the banks’ disclosures, their loan exposures to data centres are “well-diversified across markets and predominantly limited to hyperscalers”, she said.

Interest rates and net margin compression

Rising bond yields could also affect the banks’ trading income, which Cheah identified as a key uncertainty for the third quarter.

The recent October selloff in bank stocks has raised concerns over the impact of rising bond yields on their capital positions.

Higher bond yields can erode the value of these banks’ existing bond holdings, potentially weighing on book values and Common Equity Tier 1 (CET-1) capital ratios.

Jefferies’ Cheah noted that valuations have been running ahead of their expectedreturns on equity, and that bank stocks had surged 70 per cent prior to the recent correction.

Jefferies estimated that a 40-basis-point rise in bond yields could translate to an illustrative 16 to 32-basis-point impact on CET-1 ratios, assuming a 2.5-year duration on the banks’ investment securities.

Despite this, Kathy Chan, equity analyst at Morningstar, said that the pressure is “manageable”.

“Pressure on book value should be at least partly offset by organic capital generation through healthy earnings,” she said.

The trajectory of the CET-1 ratio over the next few quarters will nevertheless be important in determining the banks’ capacity for shareholder returns, she added.

Separately, analysts flagged that net interest margin (NIMs) compression remains a concern for the third quarter.

Cheah expects NIMs to bottom out around the fourth quarter before recovering. While rising interest rates should support bank margins, existing hedging arrangements could delay the benefits, she noted.

She added that banks are increasingly focusing on net interest income rather than margins alone, with stronger loan growth helping to support earnings.

Morningstar’s Chan also noted that Singapore banks benefit from “sticky, low-cost deposit bases in their home markets”, keeping them well-positioned even if near-term NIM pressure persists.

Beyond interest margins, Xiao said investors should focus on loan repricing, deposit costs, recurring fees and signs of deteriorating credit quality, rather than temporary losses on securities on fluctuations in insurance income.

“If margins, customer activity and credit quality all weaken together, that’s a different matter,” he added.

He cited JPMorgan’s Q3 results, in which the bank recorded securities losses, but growth in underlying lending and wealth income.

Even so, Xiao remained cautious about the attractiveness of Singapore bank stocks at current valuations.

“Even a resilient quarter wouldn’t make this an attractive entry point,” he said.

The local banks ended lower on Friday (Oct 30). DBS shed 0.9 per cent or S$0.67 to S$73.13, OCBC fell 0.2 per cent or S$0.05 to S$29.29, and UOB was down 0.3 per cent or S$0.13 at S$41.37.

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