It’s clearly a solid year for Singapore banks. All three shares of DBS, OCBC and UOB have held steady, backed by healthy earnings. And there’s no doubt of good dividend payouts.
The thing is, with the US Fed starting to cut interest rates, we’re in the midst of a policy cycle shift. So first things first, let’s talk about last week’s Fed rate cuts.
Why Fed 0.25% interest rate cut matter to Singapore banks?
By a 10-2 vote, the Federal Open Market Committee cut its benchmark overnight borrowing rate by 0.25%, bringing it down to 3.75-4%. What happened was Governor Stephen Miran – a Trump appointee – wanted a sharper 0.5% cut, while Kansas City Fed President Jeffrey Schmid argued against cutting at all.
This divide within the Fed committee is stark. I believe that’s why Fed Chairman Jerome Powell has warned investors not to assume another rate cut in December, saying it’s “far from a foregone conclusion.”
But here’s the other thing: this uncertainty was also driven by the US government’s partial data blackout – with job and retail data still available. This makes it hard to assess the US economic situation. Still, the Fed said it wants to end its asset purchase reduction – or what’s known as quantitative tightening – by December.
In other words, the interest rate cycle is indeed turning. And this signals concerns over a softer economic environment.
Which brings me to my next point…
How does rate cuts impact DBS, OCBC and UOB earnings?
US interest rates play a crucial role in Singapore’s financial economy. And are closely watched. Why? Our Singapore SORA rate, which tracks US interest rates, moves almost in sync with the Fed. When the Fed cuts rates, SORA tends to fall. This impacts Singapore banks’ loans. Put it this way, this lowers loan yields for DBS, OCBC and UOB. I wrote earlier what’s driving these three Singapore banks’ peak share prices.
However, despite rising share prices, I’ve also observed lower interest rates will lead to lower net interest margins. This means bank profits are shrinking. As much as I love to be wrong, banks are a cyclical business. When high interest rates peak, the easy growth from higher loan yield is more or less over.
When net interest margins (NIMs) shrink, this hurts bank profits. This also means profit compression.
Net interest margin, which is the spread between what banks earn on loans and pay on deposits – shrink. As banks adjust to a new rate cycle, profit margins suffer.
And stock market performance is a function of a company’s profitability.
Is it time to sell Singapore banks and start buying REITs?
Now, let’s think about REITs for a moment. A rate cut means it’s cheaper for REITs to borrow money to expand and grow – a big plus.
Singapore REITs borrow debt to invest in longer-term, higher yield property assets. The difference between REITs paying interest costs and the rental income collected is called a margin spread. When interest rates fall, these REITs’ borrowing costs fall, leading to improving cash flow and distributable income to their unitholders.
Meanwhile, Singapore REIT landlords can continue to adjust higher rental income as the economy improves. This creates cheaper refinancing and a stronger distributable income for its unitholders.
Because many Singapore REITs have endured some of the highest financing costs over the past years, I’d say they have hit “peak borrowing costs”. That means these Singapore REITs are well-positioned for a strong low interest rate tailwind as interest rates come down. Any meaningful increase in rental income could see a higher impact on their DPU.
For instance, let’s look at CapitaLand Ascott Trust. This is one of Singapore’s biggest hospitality trusts with assets across the world. Today, its cost of debt has hit ~3%. Yet management has also said its debt cost will remain steady for the rest of 2025 and all of CapitaLand Ascott Trust debt has been refinanced.
Think about this: a drop in borrowing costs could potentially lift CapitaLand Ascott Trust’s distributable income higher.
So far, in 2025, CapitaLand Ascott Trust has paid S$6.1 cents per unit in dividends, as compared to S$5.6 cents per unit in dividends.
Combined with rising rental income – driven by tourism recovery and stronger corporate demand, I’d expect CapitaLand Ascott Trust to continue growing its distributions.
So… should I sell all my Singapore banks and start buying REITs?
I’d say this: I’d buy more Singapore REITs. But I won’t necessarily sell all my Singapore bank shares. In a high interest rate world, banks are a strong operating model. In a failing rate world, REITs might be a counterbalance. I’ll explain.
What this means is if you’d own a Singapore bank at good prices, I’d continue to collect dividends. But what I’d also do is redeploy my dividends from Singapore banks into REITs to diversify my exposure. More importantly, take advantage of changing interest rate policies in the US.
What’s more, it’s still good to keep exposure because REITs after all can be susceptible to changes in assets – falling occupancy rates or a surprise move by the Fed could wreck Singapore REITs. Remember 2020 and 2022?
Having said that, Singapore banks also benefit from lower interest rates. However, this doesn’t mean it’s immediate. In fact, it takes time.
My final thoughts
The US Fed’s rate cut marks the start of a new cycle. In my view, Singapore banks’ margins are likely to compress. And it has already happened over the last few quarters. Meanwhile, Singapore REITs are a juxtaposition to a bank’s interest-rate sensitive business model. This is because REITs benefit from cheaper financing costs and expected growing rental yields, especially after the COVID-19 pandemic.
History shows when the Fed cuts rates, REITs tend to outperform in the following quarter.
However, I wouldn’t make a binary bet of just selling Singapore banks, and buying Singapore REITs. Instead, I’d rather increase my exposure and diversify into Singapore REITs and positioning early for an interest rate cycle tailwind.
Moreover, Singapore banks are still one of the highest-quality assets that could generate a healthy dose of dividend income for retirement.
Lastly, as I’ve always advised my readers: if you’ve gotten a high-quality asset at a darn good price, I’d keep it for the long-term to collect growing dividends year after year.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
