UOB posts surprise profit gain, outlook tough

By Saeed Azhar

SINGAPORE (Reuters) - Singapore's second-largest lender, United Overseas Bank (UOBH.SI), posted an unexpected 2.7 percent rise in quarterly profit in spite of market turmoil, due to strong loan growth, but warned of a challenging outlook.

Singapore banks have weathered the financial crisis better than Western banks because of strong demand for loans, which grew 25 percent in the second quarter from a year earlier, the fastest pace since 1990, underpinned by a construction boom.

But economic growth is expected to slow this year, while inflation may climb to as high as 7 percent, curbing loan demand.

"The past six months have been challenging, and it's not going to be any easier as global institutions seek ways to rebuild their balance sheets and economies cope with slowdown and inflation," Wee Ee Cheong, UOB's chief executive, said in a statement.

UOB's April-June net profit rose to S$601 million ($438 million) from S$585 million a year ago. Analysts had predicted net profit of S$530 million or a drop of 9.4 percent, according to the average of four forecasts compiled by Reuters.

Singapore's biggest lender, DBS Group Holdings (DBSM.SI), and third-ranked Oversea-Chinese Banking Corp (OCBC.SI) report their earnings on Thursday.

FEES FALL

UOB, controlled by Chairman Wee Cho Yaw and his family, is considered the leader in Singapore's loan market for small- and medium-sized businesses, and has benefited from demand for property and construction.

Net lending grew 18.1 percent in the second quarter, slowing from 19.4 percent reported in the first quarter.

Net interest income rose 14.7 percent to S$873 million from a year earlier and versus 2.5 percent higher from the first-quarter, while non-interest earnings, which includes commissions and fees, rose 2.7 from a year earlier to S$550 million due to investment gains.

Fees and commissions fell 12.4 percent as fund management income more than halved.

But UOB posted impairment charges of S$180 million in the second quarter, more than doubled from the first quarter as well as from the same period a year earlier on bad loans and losses on risky debt.

Analysts have raised concerns about credit quality as a property boom ended and Asian economies slowed down.

"The reason why provisioning was low in the past few years was because there were a lot a recoveries and writebacks," David Lum, an analyst at Daiwa Institute of Research, said before Tuesday's results.

"The property market has slowed and we won't see the same pace of economic growth, which suggests provisions may creep up."

UOB shares fell 2.7 percent in April-June, underperforming DBS, which rose 4.8 percent, and OCBC's 0.9 percent rise. The benchmark Straits Times Index .FTSTI fell 2 percent.

(Editing by Jan Dahinten)