The cost of equity for Singapore financial services firms historically averages 9–11%, representing a significant annual carry cost on held capital.

The Cost of Equity Baseline

For investors in Singapore's financial services sector, the cost of equity is the minimum return required to compensate for the risk of holding shares. DBS Group Research, in its January 2026 analysis of Singapore banks, explicitly uses a 9% cost of equity assumption for OCBC in its Gordon Growth Model valuation, having revised it downward from 10% previously. This single data point from a leading sell-side analyst anchors the lower bound of the 9–11% historical range. The revision reflects improved visibility on capital returns and a stable operating environment.

The cost of equity is not merely an academic input. It represents the annualised return equity holders demand. For a bank holding SGD 1 billion in shareholders' equity, a 10% cost of equity implies a SGD 100 million annual carry cost — profit that must be earned before value is created for shareholders. In an industry where return on equity (ROE) for Singapore banks has hovered in the low-to-mid teens, this cost of equity leaves a slim margin for value creation.

Market Context and Rates

Singapore's financial environment provides the macroeconomic backdrop for equity pricing. The Monetary Authority of Singapore's Financial Stability Review 2025 notes that while "extreme tariffs and all-out retaliatory trade wars have been avoided thus far," the potential for further volatility persists. Equity markets are trading at "relatively stretched valuations," with the Straits Times Index at 4,930.03 as of late January 2026.

The risk-free rate anchor in Singapore has remained moderate, supported by the SGD's defensive characteristics. DBS Research highlights that "the SGD exhibiting defensive characteristics and a safe haven" has driven "ongoing fund inflows to continue to benefit Singapore banks." This currency stability acts as a dampener on the equity risk premium, keeping the cost of equity within the historical 9–11% band rather than pushing it higher.

Cost of Equity (%)Source: Orionmano Industries

Implications for Bank Valuations

The cost of equity directly determines valuation multiples. DBS's revised OCBC target price of SGD 23 — up 18% since the upgrade to BUY in November 2025 — is based on a 1.5x forward P/BV, "2 S.D. above OCBC's historical 12-year average P/BV." This re-rating is justified by expectations of "a more progressive capital return plan."

DBS Research notes that OCBC's dividend payout ratio policy is currently 50%, with upside potential if management provides "clear commentary on capital returns on a forward-looking basis." The cost of equity reduction from 10% to 9% alone mechanically increases the justified P/BV by over 11%, all else equal.

The broader sector context shows that Singapore banks continue to benefit from resilient earnings. DBS expects "stable capital returns in SGD remain attractive" and anticipates "largely stable credit costs during 4Q25." However, UOB's credit costs are "still expected to be elevated at 25–30bps compared to peers," with ongoing concerns about "restructuring and extension of real estate-related loans."

Sector-Specific Risk Adjustments

Not all financial services firms command the same cost of equity. The 9–11% range encompasses variations based on business model, leverage, and exposure to cyclical assets. DBS's analysis explicitly notes that UOB's higher credit cost profile and unresolved asset quality issues would warrant a higher cost of equity within the range.

Specialist financial platforms, such as maritime finance firms, may command premium valuations. Phillip Securities Research recently initiated coverage on one such platform with a BUY rating and target price of S$0.69, based on a 1.0x price-to-book FY26e valuation — an 11% premium to peer valuations of 0.9x price-to-book. The justification includes a "substantial net cash position" and "rapid book value growth trajectory from S$0.5bn to S$2.0bn in net assets over three years." The unleveraged positioning offers "substantial financial flexibility," with management planning to introduce leverage through bank borrowings, convertible notes, and asset-backed loans, potentially boosting project internal rates of return from 10–15% to 20–30%.

Carry Cost Implications

The annual carry cost represented by a 9–11% cost of equity is a structural feature of the sector. For a typical Singapore bank with SGD 50 billion in equity capital, the annual equity cost ranges from SGD 4.5 billion to SGD 5.5 billion. This must be covered by net interest income, fees, and trading revenue before any residual profit flows to shareholders.

The practical implication: in a low-growth environment where loan growth averages in the mid-single digits (DBS projects loan growth for Singapore banks in 2025F–2026F), banks must rely on non-interest income growth, cost discipline, and capital management to deliver returns above their cost of equity. The EQDP (Equity Market Development Programme) fund deployments represent a tailwind, with DBS noting "increased deployment of the first batch of EQDP funds, alongside the fresh deployment of the second batch of funds."

Outlook

The 9–11% cost of equity range is likely to persist in the near term. Downside risks include the MAS-identified potential for "disorderly corrections in the event of shocks" given stretched equity valuations. Upside risks include continued SGD strength, further capital return initiatives from banks, and the deployment of EQDP funds supporting equity market liquidity. The recent downward revision by DBS from 10% to 9% for OCBC suggests the band may be compressing toward the lower end for well-capitalised, transparent institutions. However, elevated geopolitical uncertainty and credit risks at certain institutions will continue to justify a range rather than a single point estimate.