Singapore's banks may steady their bad loans and net interest margins after a pandemic-ridden first half of the year, analysts say, an indication that the worst may be over for the local lenders.

Profits at the three Singapore-listed local banks came under pressure during the first half of 2020 as the coronavirus hurt borrowers' finances, requiring the lenders to step up provisions for possible bad loans. After a weak first quarter, Oversea-Chinese Banking Corp. Ltd. and United Overseas Bank Ltd. both posted a 40% year-over-year decline in net profit for the second quarter, while DBS Group Holdings Ltd.'s earnings dropped 22% in the April-to-June period.

DBS's net interest margin dropped to 1.62% in the second quarter, from 1.91% in the same quarter of last year and 1.86% in the January-to-March period, dragged by lower interest rates. DBS expects the full-year number to be about 1.60%. UOB's net interest margin in the June quarter was at 1.48% and OCBC's at 1.60%. UOB expects "some upside" to its margins, while OCBC guided for its NIM to stay in the mid-to-high 1.5% range.

"We expect sequential NIM pressure [for the three lenders] to ease as benchmark rates bottom," Andrea Choong, an analyst at CGS-CIMB, wrote in an Aug. 10 research note.

Choong said that asset quality trends, once the payment moratoriums being offered by the banks run their course, will be a "key guiding point in [the] reliability of Singapore banks' credit cost guidance." The proportion of group loans under moratorium currently is largest for UOB at 16%, compared with 10% at OCBC and 5% at DBS. Several countries, including Singapore and Malaysia, have allowed borrowers to temporarily halt repayments of certain categories of loans to mitigate the hardships caused by the pandemic.

"We expect UOB's credit costs to remain elevated, but for DBS and OCBC's to taper off in 2H20," she said.

In the second quarter of 2020, Singapore's economy contracted 13.2% on a year-on-year basis as a result of the "circuit breaker" period, a preventive stay-at-home order from April 7 to June 1 to slow the spread of the virus, Ministry of Trade and Industry data show. The ministry on Aug. 11 said it expects GDP to contract between 7.0% and 5.0% in 2020, citing "significant uncertainty over how the COVID-19 situation will evolve in the coming quarters".

Tay Wee Kuang, a research analyst at Phillip Securities Research expects nonperforming loan ratios to remain within 2%, though higher than the current level of about 1.5% across the three lenders.

Tay also expects the banks' margins to stabilize. "We will start to see net interest margin (NIM) stabilizing as the lag effect from asset pricing kicks in over the subsequent quarters," he told S&P Global Market Intelligence. "Quarterly NIM may see recovery by low single-digits in basis points from reported NIM in [the second quarter of 2020] but full-year NIM will still come in lower than reported" in the first half of the year.

Singaporean banks have set aside more capital as provisions in a conservative approach against the virus-induced economic downturn. DBS increased its allowance coverage to nearly twice its bad loans at 199% as at June 30 after taking collateral into account, and UOB's cover is at 230%. OCBC has also increased its unsecured non-performing asset coverage to 284%. The buffer may leave room for some write-backs of provisions later.

The nation's central bank has also announced a 60% cap for the banks' dividend payouts this year in an effort to conserve cash during an uncertain economic environment.

"While the local banks' capital positions are strong, the dividend restrictions are a preemptive measure to bolster their resilience and capacity to support lending to businesses and individuals through an uncertain period ahead for our economy," the Singapore central bank said on the announcement on July 29.

As of Aug. 21, US$1 was equivalent to S$1.37.