DBS <DBSM.SI>, Southeast Asia’s biggest lender, posted a record quartely profit, joining rivals in beating expectations but faces pressure from a low-interest rate environment and rival OCBC, which has delivered better quality earnings. 

Strong economic growth has boosted Singapore bank profits this year, helping cut bad debts and lift loan growth. 

But weak margins on loans, due to low U.S. interest rates, remain the Achilles’ heel for Singapore’s big three lenders and a test for DBS CEO Piyush Gupta, hired from Citigroup a year ago, as he tries to boost earnings outside Sinapore and Hong Kong. 

 

“Everyone expects Singapore’s GDP growth to moderate after a very strong first half of the year, while pressure on margins continues in the low-interest rate environment and we are also seeing costs start to pickup due to wage inflation,” said CLSA banking analyst Derek Ovington. 

 

DBS earnings, bolstered by strong trading income and falling debt charges, could also struggle against peers such Singapore’s No. 2 bank Oversea-Chinese Banking Corp (OCBC) <OCBC.SI>, which has delivered more quality earnings growth, analysts said. 

 

“Clearly OCBC has produced the best results of the three,” said Ovington. “All three beat expectations, but OCBC had best broad-based quality.” 

 

DBS loan growth rose 15% in the third quarter from a year earlier, slower than OCBC’s 29% expansion, but faster than smaller rival United Overseas Bank’s <UOBH.SI> 8.7% growth. 

 

OCBC expects loan growth of 8-12% in 2011. 

 

Fee and commission income unexpectedly declined for DBS compared with OCBC, which saw a 37% jump in the segment, fueled by contributions from its private bank which was formed following the acquisition of ING’s Asian private bank in January. 

     

LONG-TERM PLAN 

DBS posted a July-September net profit of $722 million, up 28% from S$563 million a year earlier. 

 

That compared with an average forecast of $645 million, according to seven analysts surveyed by Reuters. 

 

Bad debts declined 26% to $195 million from a year earlier. But net interest income fell 5% to $1.08 billion as net interest margins declined by 23 basis points, against an 18-basis-point decline for OCBC and 32 basis points for UOB. 

 

Fee and commission income for DBS fell 6% to $340 million, while trading income more than doubled to $235 million.DBS CEO Gupta said he is focusing on executing his long-term plan to ensure the bank continues to deliver quality earnings. 

 

“This year we have been able to leverage the strength of our customer franchise to expand our loan book and increase cross-sell, thus mitigating the effects of headwinds in a low rate market,” he said in a statement.  

 

The revival of Singapore’s IPO market this year is expected to help DBS earn more investment bank fees as it advised on the share sale of Global Logistic Properties’ <GLPL.SI> US$3 billion ($3.86 billion) and Mapletree Industrial Trust’s <MAPI.SI> US$720 million listing. 

 

Singapore bank shares have underperformed the broader market this year on concerns about weak margins and slowing economic growth after a strong performance in the first half of 2010. 

 

DBS shares were up 0.7% at $14.20 at 0210 GMT, slightly outperforming the benchmark Singapore index <.FTSTI>. 

 

They have fallen about 8% this year, underperforming their two main rivals. UOB shares are down about 6% while OCBC, which has been bolstered by its private bank, is the only Singapore bank in the black this year, up 2.2%. 

 

The overall Singapore index <.FTSTI> has climbed about 11% since the start of the year. 

 

“Overall the 3Q result was likely strong enough to halt the recent share price weakness, but still confirms our overall concern of further margin pressure for the sector,” said Citigroup’s Robert Kong in a note to clients after the result.