Iran war, rates on hold will benefit Singapore banks but REITs face pressure, say analysts

SINGAPORE – Singapore’s three local banks stand to benefit the most from this period of increased geopolitical uncertainty and the US Federal Reserve’s decision on March 19 to hold interest rates steady in the middle of the US-Iran conflict, said analysts.

This Fed rate decision – the second time it has chosen not to cut rates in 2026 – was widely expected, given the Iran war’s potential to to drive up inflation.

What this means for Singapore markets is a relatively positive outlook for the three local banks, which will enjoy a higher-for-longer interest rate environment that will lift their net interest margins (NIMs).

Mr Glenn Thum, research manager at Phillip Securities Research, said the Fed decision is positive for the local banks as elevated NIMs would moderate any decline in their net interest income.

For 2025, OCBC and UOB reported a drop of 6 per cent and 3 per cent respectively in net interest income due to narrowing NIMs. DBS eked out a 1 per cent increase in net interest income last year, though this declined 4 per cent in the fourth quarter of 2025.

Heightened global uncertainty is also likely to drive inflows into Asia, benefiting regional banks’ wealth and private‑banking income, said Ms Carmen Lee, head of equity research at OCBC.

“A softer global outlook and elevated oil prices could weigh on corporates and keep loan growth subdued, but the banks’ strong asset quality, cost discipline and high provisioning buffers position them well against near‑term uncertainty.”

DBS shares last week gained 3.8 per cent to close at $57.40 on March 20, while OCBC advanced 3.6 per cent to $21.37 and UOB added 2.8 per cent to $37.18.

With the boost from the three banks, the Straits Times Index rose 2.2 per cent last week.

Analysts cited the local bank stocks as core long-term investments, with Mr Thum singling out DBS as a direct beneficiary of higher interest rates.

‘It offers a highly defensive balance sheet, stable NIMs, and strong wealth management inflows driven by regional flight-to-safety behaviour. Furthermore, it has the clearest dividend policy and highest dividend yield amongst the three local banks.”

Share prices should also be supported by ongoing buybacks and healthy dividend payouts, added OCBC’s Ms Lee.

But while the banks look poised for growth in the near term, unchanged interest rates are likely to weigh on Singapore’s real estate investment trust (REIT) sector, analysts noted.

Singapore’s REIT sector made a strong rebound in 2025, with the benchmark iEdge S-REIT index generating 14.7 per cent total returns as at Dec 5 – the highest since 2019 – thanks to the Fed lowering rates three times last year.

Singapore cash and bond yields also softened, improving the appeal of REIT yields.

But with the Fed’s latest decision further dampening rate cut expectations, higher-for-longer interest rates could limit any near-term re-rating for REITS, said Ms Lee.

All else being equal, higher interest rates tend to decrease the value of properties and increase REIT borrowing costs. In addition, they make the relatively high dividend yields generated by REITs less attractive when compared with lower-risk fixed income securities, reducing their appeal to income-seeking investors.

Mr Thum said other stocks that could be affected by a higher interest rate environment include highly leveraged tech and manufacturing counters.

The market could also see a slowdown in merger and acquisition activities and other corporate actions pipelines among companies as a result, with macroeconomic uncertainties also likely to affect economic and loans growth, said Ms Lim Siew Khee, group head of research and head of Singapore research at CGS International Securities.

A lasting energy crisis from the Iran war could have severe ramifications for Singapore, which is a heavy importer of LNG for its electricity production.

The Singapore stock market, however, has displayed more resilience compared with other markets. The STI has dropped just 0.9 per cent since the start of the Iran war on Feb 28 through to March 20. It rebounded last week to cross the 5,000-mark for the third time in 2026 on March 18.

Analysts said Singapore had been largely shielded from severe impact from the oil crisis, with the STI’s weightage towards the banks making it structurally defensive.

They also noted that other sectors that make up the Singapore market’s core stock composition, including industrial, infrastructure and defence, are also not as reliant on the oil industry.

Said Ms Lee: “In addition, artificial intelligence (AI) jitters and concerns over over-investment by software and AI firms continue to linger. This is attracting funds into more defensive industries and sectors, which in turn makes the Singapore market more attractive and less vulnerable to recent sharp spikes in volatility.”

She added that funds are expected to flow out of the Middle East as a result of the Iran war and part of this could potentially flow into South-east Asia.

Singapore’s positioning as a geopolitical safe haven has also been strengthened with more capital rotation out of higher-risk Western assets into Singapore, noted Mr Thum.

This is due to a stronger Singapore dollar and the Monetary Authority of Singapore’s ongoing liquidity injections into the equities market, as part of its Equity Market Development Programme that was launched in Feb 2025.

A strong capital base with a high yield offer from Singapore companies have also helped to keep the market resilient during this period of global volatility.

Apart from the banks, industrial names such as ST Engineering, Sembcorp Industries and Hong Leong Asia were also analysts’ top picks.

CGS International in a note on March 10 added that “investors could look for lower-price entry opportunities into stocks that could be less impacted by the ongoing conflict.” They included jet fuel purchaser China Aviation Oil, Far East Holdings and offshore marine firm Nam Cheong as small-cap picks based on earnings resilience and higher oil price play.

Still, while the Singapore market will be bolstered by strong bank dividends and institutional support in the near term, Mr Thum cautioned that it could face potential headwinds in the form of energy-driven inflation and supply chain bottlenecks that could hurt the aviation, industrial and logistics components.

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