UPDATE 1-UOB, OCBC surprise with smaller Q1 profit drops

* UOB's Q1 net profit down 23 pct, OCBC's net falls 12 pct

* Both banks say outlook tough

* Analysts say asset quality not very bad, interest income up

* UOB shrs erase losses, up 0.2 pct after results, OCBC flat (Updates throughout with OCBC results, comments)

By Saeed Azhar

SINGAPORE, May 6 (Reuters) - UOB (UOBH.SI) and OCBC (OCBC.SI), Singapore's second and third-biggest banks, posted smaller-than-expected falls in net profits on Wednesday as they made more loans at higher rates which partially offset jumps in bad-debt charges.

Asia's economic slump is gradually showing up in soured loans and lower investment gains for banks, but analysts said the outlook would improve after the city-state suffered from its worst ever GDP contraction in the first quarter.

"The economy was very weak in the first quarter and the results were fairly resilient. If this is as bad as it gets, going forward results should be better," said David Lum, a banking analyst at Daiwa Institute of Research.

"The asset quality is not as alarming and the year-on-year loans and margins have improved."

Both United Overseas Bank (UOB) and Oversea-Chinese Banking Corp (OCBC) sounded cautiously optimistic.

"The journey ahead remains tough, but we are confident that we will come out of the crisis stronger," UOB CEO Wee Ee Cheong said in a statement.

OCBC's chief executive David Conner said the economic outlook remains difficult and uncertain.

UOB's Jan-March net profit fell to S$409 million ($278 million) from S$529 million a year ago, against an average forecast of S$387 million by four analysts.

Bad-debt charges rose more than four-fold to S$378 million for the quarter from S$89 million in the year-ago quarter, largely due to losses on loans and investments due to the global economic downturn, the bank said.

OCBC's first-quarter net profit fell to S$545 million from S$622 million a year ago. Analysts had predicted a net profit of S$293 million, according to the average of five forecasts compiled by Reuters against a comparable figure of S$460 million a year ago that excluded exceptional items.

The bank benefited from higher insurance income from its subsidiary Great Eastern (GELA.SI).