Singapore's three major banks will continue to face pressure on their margins this year, though they may maintain their earnings momentum as the pace of loan growth may improve with the expected economic recovery, analysts say.

DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. Ltd. and United Overseas Bank Ltd. reported unchanged net interest margins in the first quarter of 2021 over the fourth quarter of 2020. However, NIMs, a key measure of banks' profitability, were lower than the year-ago period at all three lenders. For example, DBS, the biggest bank in Southeast Asia by assets, reported that its NIM fell to 1.49% in the March quarter, from 1.86% a year ago.

"NIMs are likely to display some stability going forward. Rising loan growth, steeper yield curves and a slower pace of deposit growth should help," said Thilan Wickramasinghe, Maybank Kim Eng's head of regional financials.

Singapore's gross domestic product grew 0.2% on year in the first quarter following three consecutive quarters of decline, according to advance estimates released by the government on April 14. The government expects the economy to grow between 4% and 6% this year, though the Monetary Authority of Singapore said GDP growth this year is likely to "exceed the upper end" of the official forecast range, barring a setback to the global economy. The recovery, especially in the second half of the year, is expected to drive up demand for loans, giving banks better choice of customers, unless the resurgence of the COVID-19 pandemic emerges as a significant drag.

Margin pressure may persist in the current quarter, mainly driven by competition among banks amid low interest rates, said Michael Wu, a senior equity analyst at Morningstar. The analyst noted that in a weak economic environment, all banks chase the same borrowers and tend to focus on high-quality corporates, with whom they have limited pricing power. However, when the economy recovers later in the year, the pool of corporates that banks are comfortable doing business with will widen, allowing for more lucrative deals for the lenders.

Profit jump

All three banks reported higher income in the first quarter, with DBS posting a 72% year-over-year net profit increase and crossing the S$2 billion quarterly income mark for the first time. OCBC's net profit for the quarter more than doubled from the prior-year quarter to S$1.50 billion, while UOB logged an 18% year-on-year rise in net profit to S$1.01 billion.

Loan growth was up 3% quarter on quarter for DBS, 1% for OCBC and 4% for UOB, which is a "credible" expansion that has allowed banks to raise their guidance for the year, said Maybank's Wickramasinghe. "We expect to see robust loan growth coming through from key markets such as Singapore and North Asia – particularly from mortgages, wholesale and trade loans, manufacturing, and private banking," he said.

However, the pandemic remains a key risk. "Loan growth in ASEAN may have a slower start given continued border closures and resurging COVID," Wickramasinghe said. Singapore announced new restrictions on social gathering from May 16 after a rise in locally transmitted cases of the disease.

"We believe the biggest risk from a new wave of COVID-19 is the imposition of lockdowns by the government, which will drastically slow down economic activity and stall the overall economic recovery," said Terence Chua, senior research analyst at Phillip Securities.

Singapore's banks have built buffers in the form of stronger capital ratios and provisions for possible bad loans, mostly in the early months of the pandemic in 2020. The asset quality of three banking groups stayed resilient against the backdrop of an improving economy, a relatively better contained COVID-19 situation in the city-state, as well as the vaccine rollout.

"We see the banks' asset quality as healthy overall," Chua said. "With the banks' general provisions reserves all exceeding the MAS requirement by 25% to 30%, we believe sufficient provisions have already been made."

DBS and UOB reported that their nonperforming loan ratios for the quarter stood at 1.5%, down from 1.6% in the previous three months and also in the same quarter of the prior year. OCBC's NPL ratio stayed stable at 1.5%.

"We expect NPLs to still grow in 2021, but at a more measured pace," Wickramasinghe said. Provision write-backs are likely to pick up pace towards the second half of 2021 or in 2022, "when indications of herd immunity and border openings become clearer."

As of May 18, US$1 was equivalent to S$1.33.