United Overseas Bank, Singapore’s second-largest lender by market value, reported a 28% increase in quarterly profit as declining bad-loan charges offset a slump in client trading and share sales.

Net income jumped to $602 million in the three months ended June 30 from $470 million a year earlier, as non-interest income plunged 31%, the Singapore-based company said in a statement today.

 

Swings in stock and bond markets, and signs of economic headwinds in the U.S., Europe and China have deterred clients from trading and making share sales, trimming earnings’ gains. Singapore’s three-month interbank lending rate, or Sibor, has averaged 0.6% this year, hampering net interest margins.

 

“The numbers demonstrate the revenue challenges for the bank,” said Sanjay Jain, a Singapore-based analyst at Credit Suisse Group AG. “I’m hoping the margin decline will not be severe in the second half.”

 

United Overseas rose as much as 0.8% in Singapore trading and was 0.2% higher at $19.56 as of 2:44 p.m. local time. The shares have dropped 0.7% this year, compared with a 3.1% increase in the benchmark Straits Times Index.

 

Profit matched the $602.6 million average second-quarter estimate of eight analysts surveyed by Bloomberg.

 

Second-quarter bad-loan costs fell 88.9% to $52 million from a year ago, mainly because of lower collective and individual impairment on loans.

 

Non-interest income fell to $382 million in the period from $551 million a year ago, as trading and investment income tumbled 95% to $12 million, United Overseas said.

 

Net interest income, or the difference between what the bank makes from lending and what it pays on deposits, fell 2.6% to $884 million in the quarter mainly from lower interest margin. The net interest margin, a measure of loan profitability, narrowed to 2.14% from 2.35% a year earlier, it said.

 

Rival Oversea-Chinese Banking Corp.’s second-quarter profit missed analysts’ estimates, as its trading earnings also slumped and its lending margins narrowed. DBS Group Holdings, Southeast Asia’s biggest lender, last month reported an unexpected second-quarter loss of $300 million as it booked a one-time goodwill impairment charge at its Hong Kong unit because of pressure on interest margins.

 

United Overseas’ fees and commission income, including credit card and fund management fees, grew 27% to $285 million as economic conditions improved and net loans grew 6.1% to $103.8 billion from a year earlier as the bank lent more to home buyers and the general commerce sector.

 

The Singapore government expects the Southeast Asian island’s economy to expand 13% to 15% in 2010. Growth accelerated to 18.1% in the first half, the fastest pace since records began in 1975.