Bank margins seen rising as borrowing rate hits 1.4% by year-end

The three-month compounded SORA grew to 1.22% in the third quarter. 

Singapore’s three-month benchmark borrowing rate is expected to rise to 1.4% by year-end, with higher interest rates seen supporting banks into 2027, according to UOB Kay Hian.

The three-month compounded Singapore Overnight Rate Average (SORA) fell to 1.02% in April before increasing to 1.22% in the third quarter.

The brokerage said money supply growth also slowed to 2.7% year-on-year in July, from a recent peak of 9.5% in August 2025, which it said reflected the Monetary Authority of Singapore’s (MAS) tighter monetary policy stance.

The authority has tightened monetary policy in response to inflation, slightly increasing the pace of appreciation of the Singapore dollar in July after making a similar adjustment in April. 

MAS is expected to further tighten its policy in October as core inflation rose to 2.2% in August.

Based on the previous interest-rate cycle, UOB Kay Hian said OCBC’s net interest margin rose by around 20 basis points for every 100-basis-point increase in three-month SORA, compared with 15 basis points for DBS.

The brokerage raised its 2027 net profit forecasts for DBS by 5.7% and OCBC by 4.7%, citing expectations of higher lending margins.

It noted that MAS expects imported costs to increase in the coming quarters, with higher fuel and electronic input costs feeding into construction materials, capital equipment and food commodities.

Adverse weather conditions could also push food prices higher, with core inflation expected to remain elevated into the first half of 2027.

US interest rates could also remain higher. The US Federal Reserve raised its benchmark rate by 25 basis points to 3.75% on 16 September, following two meetings without a rate increase.

Based on the Federal Reserve's September projections cited by UOB Kay Hian, the median policy-rate forecast stood at 4.1% by year-end, implying another 25-basis-point increase in October or December.

The brokerage also flagged risks from the Middle East, where disruptions to shipping through the Red Sea could raise freight and insurance costs and delay deliveries to Asian customers.

It said greater disruption to Saudi Arabia's Red Sea export route could constrain oil shipments and put further upward pressure on global crude prices.