Improving economic conditions and rising rates – which are positive for interest margins – bode well for the banks, the agency said.

Earnings of the three major Singapore banks – DBS, Oversea-Chinese Banking Corporation and United Overseas Bank – are poised to benefit from the rise in global interest rates, while asset-quality risks remain contained, according to Fitch Ratings, one of the world’s main rating agencies.

Fitch said the banks’ “diversified non-interest revenue has supported the resiliency of their operating income, even though interest rates have remained low.”

“Rising interest rates should provide further benefits to earnings. We believe Singapore is one of the APAC markets with the largest pass-through of higher US interest rates into local lending yields. This should boost banks' operating profit/risk-weighted asset ratios towards their pre-Covid-19 levels,” it said. (The Singapore dollar is managed against a basket of currencies, such as the US dollar. When the US Federal Reserve raises rates, the Monetary Authority of Singapore typically follows suit.)

The comment also reflects how an era of ultra-low central bank interest rates has eroded the margins banks make on the difference between what they charge for lending and what they pay on comparable deposits.

Fitch said that Singapore banks’ regional growth plans have resumed as the economic environment abroad is more positive for expansion. Among recent moves, in early 2022 UOB and DBS announced that they will acquire the consumer assets that Citigroup (A/Stable/a) was divesting in Asia. 

“These acquisitions will not significantly alter UOB’s and DBS’s portfolio mix or risk profiles, given the small size of the purchase relative to the two banks' existing portfolios,” Fitch said. 

The rating agency added, however, that the common equity Tier 1 ratios of the three major Singapore banks have become “more differentiated,” in part as a result of these recent bank acquisitions. 

Due to the pressure on the bank’s capitalisation from pending overseas purchases, Fitch has a negative outlook on UOB’s Long-Term Issuer Default Rating. 

DBS has an AA-Stable rating; OCBC has an AA-Stable rating, and UOB has an AA-/Negative rating.