Singapore banks, among the most well capitalised in the world, are also expected to report record full-year results, stoking market expectations of special dividends.

However, while DBS, OCBC and UOB benefited from an early rebound in the city-state's pandemic-hit economy last year, higher funding costs and weak wealth management fees are emerging as key risks for the sector.

"For 2023, we are watching if Singapore banks will be able to expand net interest margins amid higher funding costs and rising share of term deposits," said Eugene Tarzimanov, a senior credit officer at Moody's Investors Service.

Net profit at DBS, Southeast Asia's biggest bank with $579 billion in assets as of end-September, is expected to jump 55% to an average of S$2.16 billion ($1.63 billion)in the quarter to December from a year earlier, Refinitiv data shows.

But the bank, which earns 70% of its profits from Singapore, is set to report on Monday a 3.8% drop in profit on the quarter.

OCBC and UOB are also expected to report a sharp rise in annual profits but flat to small declines on the quarter. UOB reports on Feb. 23 and OCBC a day later.

Analysts expect the banks' net interest margins, a key gauge of profitability, to climb to between 2.1 to 2.2%, the strongest in more than a decade, before peaking later this year, in line with the anticipated trend in U.S. rates.

Morgan Stanley analysts expect a strong second half for Singapore banks for net interest margins, with some of this benefit likely to continue.

"Stronger loan growth in Singapore also means that they are finding it easier to reprice assets. However, funding costs are catching up, as the cost and proportion of time deposits continues," they said.

Some local banks are offering fixed deposit rates of up to 3.95% for 12 months, the highest in decades, as they try to lock in funds from customers.

DBS, OCBC and UOB shares have gained 10% to 14% from late October when Singapore's key market index fell to 20-month lows. The gauge has since recovered by 12%.

Analysts say credit quality at banks remains strong.

"We expect a modest increase in credit costs in 2023 because some financially vulnerable borrowers are squeezed by inflation and higher interest rates. Yet the annual credit costs will not be materially higher than the 0.2% of gross loans posted historically by the Singapore banks," said Tarzimanov from Moody's.

SLOWING ECONOMIES

Last week, IMF economists said Singapore and other Southeast Asian economies are seeing downgrades to their 2023 outlooks as slowing global growth outweighs the positive impact from China's economic reopening.

In a report on Singapore banks, Maybank analyst Thilan Wickramasinghe, said: "While China's abrupt re-opening is a tailwind for asset quality, higher interest rates, rising input costs and weaker global growth is likely to drive more cautious management guidance for credit costs in 2023."

In Asia, Japanese banks have reported strong quarterly profits in their core businesses, while Australia's "big four" banks are on track to post bumper profits in their current financial years, though a cooling economy portends slower credit growth.

($1 = 1.3231 Singapore dollars)

(Reporting by Anshuman Daga; Editing by Kim Coghill)

By Anshuman Daga