Singapore's three major banks are embarking on a transitional phase.

For investors focused on dividends, grasping the mechanics of bank earnings is crucial for establishing realistic expectations for the coming year.

At the core of this shift is a fundamental dynamic: net interest income (NII) is declining, placing the burden of growth squarely on non-interest income.

Two Engines, Diverging Paths

Banks generate revenue through two primary channels.

The first is NII, which is derived from lending activities.

The second is non-interest income, sourced from services like wealth management, remittances, and card fees.

NII is influenced by two key factors: net interest margin (NIM) and the volume of loans.

As interest rates soften, NIM contracts, resulting in lower earnings per dollar lent.

The potential upside is that more affordable loans could eventually spur increased borrowing, helping to counterbalance some of the margin pressure.

However, this compensatory effect does not materialize instantly.

DBS Group anticipates a slight decrease in NII for 2026.

The impact of falling rates is more acute for United Overseas Bank, which relies on NII for approximately 70% of its revenue, compared to about 60% for both DBS and Oversea-Chinese Banking Corporation.

Fortunately, non-interest income is gaining momentum.

Growth in wealth management fees, treasury operations, and transaction services is providing a buffer against the weaker performance of lending margins.

OCBC gains an additional advantage from its insurance subsidiary, Great Eastern, which bolsters non-interest earnings and enhances revenue diversification.

Profitability: The Bedrock of Dividend Sustainability

Ultimately, dividends are funded by profits.

We have already seen UOB and OCBC reduce their interim dividends as they manage this period of change. In contrast, DBS has navigated the interest rate decline more adeptly and may even increase its dividend payout.

This divergence is also reflected in their market valuations.

DBS currently trades at a price-to-book ratio exceeding 2.4, significantly above its historical average of 1.45.

OCBC and UOB trade at ratios of approximately 1.6 and 1.3, respectively, both also elevated above their long-term averages of around 1.1.

For 2026, overall revenue could remain stagnant or even dip, as softness in NII counteracts gains in other areas.

Non-interest income will be essential to sustaining performance during this interim phase.

Uncontrollable External Factors

Several external forces will influence the banks' performance in ways that management cannot directly control.

The speed and scale of future interest rate cuts remain uncertain.

While markets expect further easing, the specific timing and magnitude will dictate how quickly NIM stabilizes and loan growth recovers.

Credit quality presents another variable.

UOB recently made a pre-emptive general provision that impacted its net profit.

Such provisions can be reversed in future periods if conditions improve, but they underscore management's wariness regarding potential loan deterioration.

Geopolitical tensions, trade disruptions, and broader economic weakness could also lead to an increase in non-performing loans, thereby pressuring bank earnings and, consequently, their capacity to pay dividends.

Get Smart: Three Key Metrics to Monitor

For dividend investors monitoring Singaporean banks in 2026, three metrics warrant close observation.

First, track loan growth.

Robust expansion in lending volumes can help offset shrinking margins and support NII.

Second, observe how excess deposits are utilized.

Banks invest surplus liquidity into high-quality liquid assets, and the returns on these investments become particularly important during periods of margin compression.

Third, follow the growth trajectory of non-interest income.

Wealth management and fee-based revenues offer diversification and recurring income streams that are less dependent on interest rate fluctuations.

The upcoming transition will not be entirely smooth.

However, for patient investors with appropriate expectations, Singapore's banks continue to represent formidable dividend payers, underpinned by strong balance sheets and diversified revenue streams—provided one is prepared for a long-term investment horizon.