DBS Credit Update: Record Earnings but Are Its Bonds Still Worth It?

• DBS delivered record 2Q2026 net profit of S$3.1 billion, with strong wealth-management and fee income helping offset pressure from lower interest rates.
• Asset quality remained resilient, with the NPL ratio at 1.0%, while capital and liquidity buffers stayed comfortably above regulatory requirements.
• DBS’s USD covered bonds remain tightly priced, with the 2028 and 2029 issues yielding 4.68% and 4.88%, respectively; the comparable OCBC 2029 covered bond yields just 1 bp more at 4.89%.
• The DBS 2031 AUD senior unsecured bond yields 5.65%, slightly below comparable UOB and ANZ issues at 5.68% and 5.69%.

DBS is Singapore's largest bank and Southeast Asia's largest by total assets. It operates across three segments: Consumer Banking and Wealth Management, Institutional Banking, and Markets Trading. To offset margin compression from lower interest rates, DBS has been leaning increasingly on wealth management and fee income rather than interest income.

Record Earnings Despite Lower Interest Rates

For 2Q2026, net interest income (NII) rose 2.0% QoQ to S$3.6 billion but declined 2.0% YoY as lower interest rates weighed on margins, pushing net interest margin (NIM) down 18 basis points YoY to 1.87%. The impact of lower rates was partly offset by continued balance-sheet growth and the benefit of hedges put in place earlier. Loans grew 8.0% YoY to S$469.4 billion, while deposits increased 11.0% to S$638.2 billion, with current account and savings accounts deposits accounting for around three-quarters of the YoY increase.

At the same time, DBS continued to benefit from strong growth in non-interest income. Net fee income increased 25.0% YoY to S$1.5 billion, led by wealth-management fees, which jumped 42.0% to a record S$919.0 million on higher customer investment activity. Wealth assets under management rose 16.0% YoY to S$516.0 billion, supported by higher investment product and bancassurance sales. Treasury customer sales also reached a quarterly record, while markets trading income rose 12.0% YoY to S$469.0 million, benefiting from volatile markets and lower funding costs. Together, these provided greater earnings diversification and helped offset pressure on net interest income.

As a result, quarterly total income exceeded S$6.0 billion for the first time, rising 6% YoY to S$6.1 billion. Net profit reached a record S$3.1 billion, up 9.0% YoY and 5.0% QoQ. Although expenses rose 3.0% YoY to S$2.4 billion, operating leverage remained positive, with the cost-income ratio improving to 38.5% from 39.6% a year earlier.

Figure 1: Quarterly Net Interest Income (S$ billion) and Net Interest Margin (%), 1Q2025 - 2Q2026

On a first-half basis, total income increased 3.0% YoY to a record S$12.0 billion and net profit rose 5.0% to S$6.0 billion. NII declined 3.0% as NIM narrowed 20 basis points to 1.88%, but this was more than offset by a 20.0% increase in net fee income. Wealth-management fees rose 33.0% to S$1.8 billion, while transaction-service fees also reached a new high. The cost-income ratio remained broadly stable at around 39.0%.

Looking ahead, management raised its full-year 2026 guidance following the strong first half performance. Assuming interest rates remain broadly around current levels, total income is now expected to exceed 2025 levels, compared with the earlier guidance for it to be broadly flat. Group NII is expected to close the gap to 2025 levels rather than remain slightly lower. Guidance for commercial book non-interest income was also raised from high single digits to the mid-teens, as wealth management continues to grow. The full-year cost-income ratio target remains unchanged in the low-40% range.

The management also expects SORA to average around 1.2% for the remainder of the year. With a NII sensitivity of S$11.0 million per basis points for SGD and minus S$4.0 million per basis point for USD, having a higher interest rate in the coming months could provide some support for 3Q2026 NII. Although the actual impact will still depend on deposit growth, hedging and movements in other currencies.

Credit Profile Remains Strong

DBS continues to maintain strong asset quality. The non-performing loan (NPL) ratio remained stable at 1.0% as new non-performing assets were offset by repayments and write-offs. Specific provisions amounted to 15 bps of loans in 1H2026, remaining below the bank’s historical cycle average of around 19 bps (given at end-FY2025).

Allowance coverage remained healthy at 130.0% of non-performing assets, rising to 196.0% after including collateral. Management expects specific provisions to increase modestly to 17–20 bps in the second half of the year, but DBS continues to hold around S$2.4 billion of general allowance overlays that provide an additional buffer against potential deterioration in credit conditions.

Capitalisation also remained strong despite some moderation in headline ratios. The fully phased-in Common Equity Tier 1 (CET1) ratio declined to 14.6% from 15.1% a year earlier, reflecting capital returns and higher risk-weighted assets from balance-sheet growth. Nevertheless, the ratio remains above DBS’s target of around 13.0% ± 0.5%.

DBS also retains substantial capacity to return excess capital. With S$2.6 billion remaining under its S$3.0 billion share buyback programme through end-2027, management has indicated that any unused capacity could instead be returned through Capital Return dividends. As a result, CET1 could gradually move closer to its target range, depending on earnings generation, RWA growth and the pace of capital returns.

Liquidity also remained a key credit strength, underpinned by DBS’s large deposit franchise. Deposits grew 11% YoY to S$638.2 billion, with CASA balances accounting for around three-quarters of the increase, while loans stood at S$469.4 billion. This implies a low loan-to-deposit ratio of around 74%, giving DBS substantial funding headroom and reducing its reliance on wholesale funding. The liquidity coverage ratio remained strong at 142%, while the net stable funding ratio stood at 113%, both comfortably above the 100% regulatory minimum.

DBS is also facing a lawsuit filed in Singapore by the liquidators of four companies linked to 1Malaysia Development Berhad (1MDB), seeking approximately S$1.3 billion in damages. DBS has said it “categorically rejects and will vigorously resist” the claim and has assessed that no provisions are required at this stage. While the outcome remains uncertain, the case is worth monitoring as any eventual settlement or adverse judgment could result in a one-off charge and modestly reduce capital buffers.

Overall, DBS's credit profile remains robust, supported by stable asset quality and strong capital and liquidity buffers.

USD Covered Bonds: Strong Protection, Tight Pricing

Covered bonds provide bondholders with an additional layer of protection compared with ordinary senior unsecured debt. Investors have recourse to both the issuing bank and a dedicated pool of collateral backing the covered-bond guarantee, which generally supports higher credit ratings and tighter spreads. For DBS, the covered bonds are issued by DBS Bank and guaranteed by Bayfront Covered Bonds, with the guarantee secured by a pool that includes mortgage loans purchased from DBS Bank.

The DBSSP 3.989% 28Aug2028 Corp (USD) yields 4.68%, while the DBSSP 4.486% 29Jun2029 Corp (USD) yields 4.88%. Both carry Aaa/AAA ratings, reflecting the additional protection provided by the covered-bond structure. Against peers, the OCBCSP 4.630% 11Sep2029 Corp (USD) yields 4.89%, just 1 bp more than the comparable DBS 2029 issue. Given the small yield differential and similarly strong ratings, relative value between the two remains limited.

Table 1: DBS Covered Bonds Peer Comparison (USD)

AUD Senior Unsecured Bonds: Wider Spreads, Lower Structural Protection

For investors seeking higher absolute yields, DBS’s AUD senior unsecured bonds offer more than its USD covered bonds. This partly reflects the higher yields available on Australian government bonds, while the AUD issues also carry lower structural protection than DBS’s covered bonds.

Against the Australian government bonds, the AUD issues offer a wider pickup over of around 60 bps. The DBSSP 5.065% 13Feb2031 Corp (AUD) yields 5.65%, 3 bps less than the UOBSP 5.023% 29Jan2031 Corp (AUD) at 5.68% and 4 bps less than the ANZ 5.400% 12May2031 Corp (AUD) at 5.69%.

Overall, we view DBS’s bonds as fairly priced, consistent with the bank’s strong credit profile. While they generally offer only a modest pickup over their respective sovereign benchmarks, and some comparable bank bonds offer slightly higher yields, DBS bonds remain suitable for investors seeking high-quality exposure to a well-established Asian banking franchise and who are comfortable accepting relatively limited additional spread. Investors should also consider the foreign-exchange risk associated with USD- and AUD-denominated bonds.

Table 2: DBS Bonds Peer Comparison (AUD)