SINGAPORE - As the three Singapore banks get ready to announce their financial results for the quarter ended December, investors will be looking for signs that their earnings this year will break free of the constraints of low short-term interest rates.

The benchmark three-month Singapore Interbank Offered Rate (Sibor) is currently at 0.44 per cent, the lowest in more than two decades. Investors had been bearish on Singapore banks last year as low short-term rates are a drag on profitability.

One way in which DBS, the biggest Singapore bank, may deal with the challenge posed by low short-term rates is to lend more money for the longer term, according to a recent study by JP Morgan.

Longer-term rates are already on the rise, reflecting concerns about inflation, which hit 4.6 per cent in December.

Singapore banks' profits may also be helped by non-interest income, which includes fees, commissions and revenue from trading.

" Non-interest income should remain buoyant, with a healthy capital to lift fees and trading income," said Mr James Koh, an analyst at Kim Eng Securities.

But not all analysts agree that non-interest income will be large enough to weather the impact of a slowdown in mortgage demand.

Half of the incremental loan demand last year came from housing, which may see a moderation in transaction volumes in response to the Jan 14 Government measures to rein in speculation.

" When we look at the fee and commission segment, it only contributes about 20 per cent to total revenue," said Ms Magdalene Choong, an analyst at Phillip Securities Research.

" So, any increase in these areas may not be able to mitigate the decline in net interest income if the loan growth volume does fall because of the property curbs."

Some of the slack in mortgage demand may be taken up by more loans to developers looking to build land banks, according to Mr Prabodh Agrawal, an analyst at brokerage IIFL.

Nevertheless, loan growth at Singapore banks will slow down this year to a more normal 8 per cent, from " exceptionally high" levels of 14.7 per cent last year, he added.

If interest rates in Singapore climb this year, they may more than compensate banks for the slowdown in loan growth. With monetary screws being tightened globally to combat inflation, longer-term interest rates in Singapore have already started rising. The yield on the 10-year Singapore government bond has shot up almost one percentage point in the past six months.

The short-term rates may follow suit, according to some analysts. While that will give a boost to Singapore banks' margins, it will also present them with an opportunity to make their balance sheets more robust.

" With the margin crunch being lifted, I think the next thing they should look at now is the quality of the loans - they should start picking customers," said Mr Roger Tan, vice-president at SIAS Research. " They should be able to do that in 2011, given that they don't need to set aside as much for non-performing loans as in 2009 and 2010."

DBS will be the first to report quarterly earnings today, followed by OCBC a week later and UOB on Feb 25.