BANKS here reported better first-quarter earnings than many expected, but analysts warned that the recovery in profits will likely be muted for some time.

Net profit at each of the three Singapore-listed banks surpassed analysts' estimates, as income from their main lending business proved more resilient than expected, trading profits returned and expenses were slashed.

Provisions for bad loans and other assets also rose more slowly than feared, after an initial surge in the previous quarter.

'All three exceeded expectations,' said Pauline Lee, an analyst at Kim Eng Securities. 'I would say the worst is over, but provisions are likely to remain high, so the earnings recovery is likely to be a slow one.'

The banks' combined net profit for the three months to end-March fell 21 per cent to $1.39 billion, from $1.75 billion a year earlier. Compared with the preceding quarter, however, combined earnings jumped 49 per cent.

'It's partly because Q4 was such a depressed quarter,' said CIMB analyst Kenneth Ng.

Crucially, expenses as a proportion of total income fell at all three banks.

The cost-to-income ratio at DBS Group for Q1 was 38.4 per cent, compared with 42 per cent a year earlier and 46.8 per cent in Q4 last year.

At OCBC Bank, expenses as a percentage of income fell the fastest, to 30.7 per cent, from 42 per cent a year earlier and 44.5 per cent the previous quarter.

And at United Overseas Bank, the cost-to-income ratio fell to 35.5 per cent, from 39.2 per cent a year earlier and 39.4 per cent in the fourth quarter.

'It looks like the new positive factor that emerged in this quarter's results was that with the foreign banks retreating from Singapore, there is little cost pressure for the Singapore banks,' Mr Ng said.

Importantly, costs are likely to stay low in the coming months, he added. Much of the savings came from tighter control of headcount and paring business expenses such as travel. One-time savings, including subsidies from the government's Jobs Credit Scheme, formed just a small part of the cost reductions, Mr Ng noted.

Another bright spot was the banks' non-interest income, especially from trading activity, which rose sharply from the previous quarter. 'All three banks saw a good rebound in treasury gains,' he said.

Their combined non-interest income rose 11 per cent over the year to $1.63 billion for the January-March period. Compared with the previous quarter, it was up 61 per cent.

Allowances for bad loans and other assets at the three banks rose to $1.01 billion, more than four times the $221 million set aside a year earlier. But the charges were just 8 per cent higher than in the previous quarter - less than some analysts feared. At OCBC and UOB, provisions for bad loans and other assets actually fell, compared with Q4 last year.

'Non-performing loans are still a risk factor. But very nasty surprises are unlikely,' said Ms Lee.

'I think the risk for the local banks will be their overseas lending. But overseas business accounts for less than 30 per cent of total revenue, so it won't make for nasty surprises.'

Combined net interest income from the banks' main lending business grew 9 per cent to $2.77 billion from a year earlier, due to the rapid expansion in their loan books. Compared with the previous quarter, net interest income fell just 3 per cent, as the gap between the interest earned on loans and the cost of funding those loans narrowed only slightly. 'Net interest margins didn't fall as much as expected,' Mr Ng said.

The banks' combined net customer loans - which include deductions of allowances for bad loans - rose one per cent over the quarter to $309 billion at end-March. The growth was concentrated at DBS, where net customer loans rose 3 per cent over the three months to $130.6 billion. OCBC's net customer loans fell one per cent over the quarter to $78.8 billion, while UOB's stayed flat at $99.6 billion.+

The growth in customer loans at DBS is a positive sign for the bank, Ms Lee said. 'It means they are gaining market share.'

Overall, 'the worst of the earnings downgrade cycle is probably over for the banks', Mr Ng said. 'That's a big reason why the bank stocks have rallied.'