ALL three Singapore banks exceeded analysts' expectations in the third quarter, boosted by the recovery in financial markets that led to much lower provisions for bad loans and impairments of investment securities.

Analysts said that the troubles caused by the recession are likely behind them, unless the economy takes a sudden turn for the worse.

'The key thing that's quite evident for all three banks is that the credit cycle has peaked,' said CIMB banking analyst Kenneth Ng.

'Both DBS and OCBC saw their NPL (non-performing loan) ratios fall. UOB's NPLs were flat over the quarter merely because they took some pre-emptive recognition of an offshore NPL, which returned to performing status - meaning it was no longer an NPL - by October. So all three banks have seen the peak of the credit cycle.'

The three banks' combined NPLs fell 6 per cent to $7.33 billion at end-September, compared to three months earlier.

The improving outlook for loans, as well as the rally in financial markets since March meant that the impairment charges for loans, investment securities and other assets fell by nearly half to $552 million in Q3 compared to $1.04 billion in Q2, reducing the drag on the banks' profits.

Their combined earnings rose to $1.51 billion in the third quarter, compared to $1.49 billon in Q2 and $1.26 billion in Q3 last year.

'It's a good set of results for all three banks. It shows that the recovery seems to be faster than what the market had expected,' said Pauline Lee, a banking analyst at Kim Eng Securities.

But renewed competition among banks and the return of risk appetite among institutional investors have caused credit spreads on loans and debt securities to narrow, reducing the banks' profits on their lending or trading activities compared to earlier this year.

Non-interest income fell 29 per cent to $1.23 billion in Q3 compared to Q2, due to lower trading and investment income at DBS and UOB, and a one-time hit of $213 million at OCBC from the redemption of GreatLink Choice structured investment products by its subsidiary, Great Eastern.

Compared to the second quarter, net interest income grew at DBS and UOB, which managed to keep their loan volumes steady while expanding their net interest margins - the interest earned on loans to customers, interbank lending, and investments in securities such as bonds after deducting funding costs. But OCBC's net interest income fell as both its loan book and net interest margin shrank.

Indeed, 'all three banks did not see much loan growth' in Q3, Mr Ng said. Their combined net customer loans - after deducting allowances for bad loans - of $303.9 billion at end-September was almost unchanged from the $303.4 billion at the end of June.

Encouragingly, 'they all saw sustainable fee income revival', Mr Ng said. 'But the key issue confronting the Singapore banks now would be where to find growth, not just the usual bad-debt problems of a recession. The best of the loan growth is over and Singapore is not a very big market.'

This article was first published in The Business Times.