If you’ve been following the big news out of Singapore’s financial scene lately, you’ll know that the benchmark Straits Times Index has been hitting record highs

And what’s driving that? Well, the stellar run of local banks has been one big reason given their strong franchises and generous dividends. 

Indeed, DBS recently hit a record high and became the first Singapore-listed stock to have a market cap that surpassed US$100 billion.

Let’s break down what’s happening:

One of the major draws of Singapore’s banks is their healthy dividend payouts, which hover around 50% to 60% of net profits. 

Analysts expect yields to hold up around 5% to 6% for the next few years, and that’s been a magnet for investors seeking income. 

Unlike many other sectors, the banks continue to generate enough surplus capital to share with shareholders. 

Even though rates from the US Federal Reserve have been trimmed recently, our banks have had some tricks up their sleeves to keep profits robust, like lengthening portfolio durations, managing deposit costs, and stepping up their wealth management businesses.

Join over 4 million Americans who start their day with 1440 – your daily digest for unbiased, fact-centric news. From politics to sports, we cover it all by analyzing over 100 sources. Our concise, 5-minute read lands in your inbox each morning at no cost. Experience news without the noise; let 1440 help you make up your own mind. Sign up now and invite your friends and family to be part of the informed.

Subscribe to 1440 today.

Another element fueling these banks’ expansions is their focus on digital innovation and regional acquisitions. 

In the past few years, DBS has acquired Citi’s retail operations in Taiwan, while UOB scooped up Citi’s retail business across a few Southeast Asian markets. 

These are big moves that can deepen their presence and widen their customer bases, both at home and abroad.

The digital side of the business has also come into sharper focus. A user-friendly app or online banking platform makes a huge difference in attracting and retaining customers. People want to transact or invest from the convenience of their phone, 24/7. 

While nobody expects this alone to totally offset any global downturn, tech capabilities will be a key differentiator and profit driver.

Even with all these positive signals, banks are cyclical. If the global economy slides into a deep recession, loan growth could stall, rates could plunge, and net interest margins (the profit banks make between the interest they pay depositors and the interest they collect from borrowers) might shrink further. 

Wealth management revenues could also take a dip if investors get spooked and cut back on new investments.

That said, the local banks have traditionally been pretty prudent with capital and are generally well-capitalised, with robust core equity tier-one ratios.

That means they’re likely to weather a downturn better than many of their global counterparts. Still, no investment is immune to broader macroeconomic forces.

I get why some investors feel compelled to double down, given the relatively higher dividend yields compared to something like T-bills or lower-yielding stocks. 

However, it’s important to keep things in perspective. Singapore banks dominate the Straits Times Index (STI), making up more than half its total weight. 

That’s a big concentration risk if you already hold STI-related funds or ETFs. As always, it’s about striking the right balance in your portfolio.

If you do believe rates might stay higher for longer, or that the economy will remain resilient, then these big banks could continue delivering steady returns. 

But if you worry about a deep global recession, factor that into your decision. We’re in an era where trade tensions, supply chain issues, and unpredictable policies can shake confidence.

There’s no one-size-fits-all answer. Personally, I see the current dividend yields—5% to 6%—as pretty attractive, given the strength of these institutions and the solid fundamentals backing their businesses. 

But I’d also balance that out by saying valuations are not exactly cheap and would also caution against going overboard on any single sector, especially one that depends heavily on global economic conditions.

Singapore’s banks have shown that they can adapt to changing interest rate environments by pulling various levers: managing costs, growing recurring fee-based businesses like wealth management, and leveraging acquisitions. These measures have kept the profit train going…so far.

For now, the outlook remains generally positive, barring a major economic shock. If you’re the kind of investor who appreciates steady dividends in a relatively robust market, these banks may well remain in your good books. 

Just remember that, like with all investments, it’s critical to understand your own risk tolerance and financial goals.