SINGAPORE - Analysts are positive on DBS and OCBC after the two banks posted strong third-quarter results, but more wary of UOB, whose earnings for the period were hit by higher loan provisions.

They also cautioned that all three banks could face more pressure on lending margins as interest rates fall and earlier hedges expire, even though DBS’s hedging strategy has helped cushion the impact of lower Singapore and Hong Kong benchmark rates so far.

Interest rate hedges are financial contracts that help banks keep earning a steady interest income even when market rates fall.

The analysts added that an earnings rebound at UOB could be on the cards with its provision buffers now built up and credit costs expected to return to normal.

Singapore’s three largest banks posted mixed third-quarter results last week, with DBS and OCBC beating forecasts, and UOB falling short of expectations on the back of a $1 billion hike in credit provisions.

DBS’s group net interest income (NII) for the quarter was mostly unchanged from a year ago at $3.58 billion, due to strong deposit growth and hedging strategies. This was despite net interest margins (NIM) falling to 1.96 per cent from 2.11 per cent a year earlier.

NIMs are the difference between what a bank earns from loans and what it pays on deposits.

DBS shares hit a high of $55.59 on Nov 7. The stock closed down 0.41 per cent at $53.99 on Nov 14.

However, as its hedges roll off, or expire, and interest rates continue to decline, the bank’s NIM is expected to come under pressure going forward, said Morningstar’s director of Asia equity research Lorraine Tan.

This is because banks often use hedges to lock in higher interest rates for a period. But once they expire, the bank is exposed to the current, lower-rate environment, which can squeeze NIMs.

Macquarie Group’s head of Asean equity research Jayden Vantarakis said DBS has a total of $200 billion in fixed rate asset...