UOB <UOBH.SI>, Singapore’s third-biggest bank, posted a 28% rise in quarterly profit on Tuesday, capping a strong first half for the city-state’s banks as the economy surged. Singapore’s best-ever economic expansion in the first half and reduced bad debt charges have boosted bank earnings this year, but rock bottom interest rates are keeping margins under pressure.

United Overseas Bank (UOB), which has been very cautious during the financial crisis, said it cut its exposure to the West in the first half of the year and grew loans selectively.

 

UOB’s net loans grew 6.1% from a year earlier. Bigger rival DBS <DBSM.SI> saw a 14% loan growth and Oversea-Chinese Banking Corp <OCBC.SI>, a 21% expansion from a year earlier.

 

“They are just being ultra cautious,” said Anand Pathmakanthan, a banking analyst at Nomura. “Investors who are looking for something a bit more aggressive will be disappointed by these results.”

 

Loan growth may slow in the second half amid a slowdown in the city-state’s economy after expanding 24% on an annualised basis in the second quarter, analysts said.

 

“Growth-wise you are seeing a divergence. Definitely DBS is at the high end, OCBC in the middle and UOB right at the bottom,” said Nomura’s Pathmakanthan.

 

UOB posted a net profit of $602 million in April-June versus $470 million a year earlier.

 

That compared with an average forecast of S$576 million, according to eight analysts polled by Reuters.

 

UOB benefited from an 89% drop in bad debt charges from a year earlier.

 

Bigger rival DBS Group last month posted an unexpected loss due to a one-time goodwill charge on its Hong Kong business, but excluding the charge, net profit was up 30%.

 

OCBC last week reported an eight% rise in quarterly profit, slightly below forecasts, as staff costs surged.

 

 

UOB said it has a strong balance sheet which would allow it to tap growth opportunities.

 

“We continue to adopt a disciplined approach in executing our strategy and are confident of delivering in our key markets, even as we continue to invest in building our regional franchise,” said CEO Wee Ee Cheong in a statement.

 

UOB, which is a market leader in Singapore in the private residential home loan market, lost its status as Singapore’s second-biggest bank by assets to OCBC, which bought ING’s private bank in Asia in a US$1.4 billion ($1.89 billion) deal.

 

UOB’s net interest income fell 2.6% to $884 million, as margins declined.

 

Interest rate margins fell 21 basis points in the second quarter from a year earlier, compared to 33 basis points for OCBC and DBS’s 17 basis points decline in margins.

 

Fee and commission income rose 27% for UOB.

 

Singapore banks have underperformed the benchmark Straits Times Index <.FTSTI>, which is up 3.3%, due to concerns over margins and risk-aversion following the debt crisis in Europe.

 

UOB shares have fallen 0.7% so far this year, less than DBS’s 6% drop and OCBC’s 3% decline.