Monday Wrap: Firms brace for profit squeeze as banks rally

Profit pressure, stretched bank valuations and weak succession planning temper an otherwise strong economic outlook.

Last week in Singapore Business Review, businesses turned more cautious as rising costs threaten profits, whilst banks and the broader financial sector continued to benefit from strong lending and wealth activity. Employers also flagged persistent gaps in succession planning as demand grows for workers with both domain expertise and technology skills.

Singapore companies are bracing for tougher conditions in 2026, with 56% of profitable firms expecting lower profits than last year, according to the Singapore Chinese Chamber of Commerce & Industry's Annual Business Survey 2026. The share expecting revenue growth also fell from 39% in 2025 to 34.2%.

Rising business costs were the top concern at 71.8%, followed by manpower availability at 50.2% and business transformation at 34.1%.

AI adoption remains cautious. Nearly half of firms, or 45%, are experimenting with off-the-shelf AI tools, but businesses cited uncertainty over implementation, a lack of in-house expertise and adoption costs as key barriers.

Singapore's stock market has become increasingly dependent on its lenders. DBS, OCBC, UOB and SGX accounted for 95.2% of the STI's 1,025-point year-to-date rally, according to DBS, whilst the other 26 components added just 50 points.

DBS warned that banks could enter a correction or consolidation phase in the third quarter. Their price-to-book valuations are more than two standard deviations above historical levels, whilst dividend yields have compressed below 3.5% for OCBC and 4.2% for UOB.

The house instead favoured large caps with earnings momentum, S-REITs and small and mid-cap stocks, alongside companies with value-unlocking catalysts and multi-year orderbooks.

The banks face a more mixed earnings picture. CreditSights expects the Big Three to post flat net interest income in 2026, as margin pressure offsets stronger loan growth.

DBS and OCBC are expected to deliver double-digit growth in fee income and non-interest income, whilst UOB may struggle to achieve low single-digit growth.

Credit costs are expected to diverge, with UOB posting lower costs than its peers whilst DBS and OCBC face modest increases. Wealth management activity also strengthened in Q2, although only OCBC reported sequential growth in net fee income.

Succession planning remains another weak spot. Nearly nine in 10 Singapore businesses said their succession strategies were less effective than desired, according to Robert Walters, with 73% struggling to put them into practice.

More than half cited unclear policies and procedures, whilst 51% had difficulty identifying high-potential employees. AI hiring is adding pressure, with only 16% of AI-related job opportunities in Q2 going to entry-level roles.

The broader financial sector provided a stronger counterpoint to the cautious corporate outlook. Singapore's finance and insurance sector grew 6.2% in Q2, accelerating from 5.3% in Q1, supported by credit growth of 11.8% and stronger wealth management activity.

The economy expanded 5.9% year on year in Q2, prompting MTI to raise its 2026 growth forecast to 4.5% to 5.5%. But Nomura expects core inflation to rise from 1.6% in June to nearly 3% by August or September, keeping inflation risks firmly on the MAS's radar.