By Saeed Azhar

SINGAPORE, Nov 7 (Reuters) - DBS Group, Southeast Asia's biggest bank, posted a bigger-than-expected 38 percent drop in quarterly profit, as losses from bad debts quadrupled, and warned the financial crisis has made business challenging.
Singapore banks, which largely escaped the crippling effects of a meltdown in credit markets, are now threatened by Asia's slowing economies, sliding property prices and a sharp fall in capital market activity, with many stock markets having lost up to half their value this year.
"DBS confronts a challenging outlook -- we have a weak macroeconomic and credit cycle and brand damage from structured products," said Matthew Wilson, an analyst at Morgan Stanley.

The bank took S$319 million ($212.7) impairments on bad debt, including general writedowns of S$129 million to cover losses from risky derivatives, and took a S$70 million charge for compensating customers for Lehman-linked structured products.
DBS shares slumped 8.8 percent, underperforming Singapore's benchmark index which fell 5.5 percent. DBS shares are down 50 percent this year, more than its rivals.
JPMorgan analyst Harsh Wardhan Modi said in a note after the results that the bank's writedown addressed key market concerns about DBS' exposure to risky products, but warned that the stock may remain under pressure.
DBS CEO Richard Stanley said in a statement the bank's strong balance sheet will help it ride out the crisis.
July-September net profit dropped to S$379 million ($253 million) from S$610 million a year ago. Analysts had predicted S$475 million, according to five forecasts compiled by Reuters.

For a graphic of the results see https://customers.reuters.com/d/graphics/SG_DBSQ31108.jpg
DBS' non-asset backed debt portfolio was written down to 25 percent from 6 percent previously. It had already written down 90 percent of its asset-backed securities.
Analysts had expected DBS to take impairments of as much as S$200 million on corporate collateralised debt obligations.
The result came after smaller local rivals reported below-forecast earnings, hurt by writedowns on bad debts.
Second-ranked United Overseas Bank posted a 5 percent drop and Oversea-Chinese Banking Corp a 13 percent slide in third-quarter profit.

Analysts have warned that the end of cheap credit, a downturn in the property market and a slowdown in exports could further increase banks' bad debt charges.
Merrill Lynch expects the non-performing loan (NPL) ratio for local banks to double to 3 percent by 2010.
"Slowing economic growth and a likely lengthy local property market downturn will start to feed through into more NPLs in 2009," said Merrill analyst Andrew Maule in a note to clients.
DBS, 28 percent-owned by state investor Temasek Holdings , also faces pressure from retail investors to compensate them for selling Lehman-linked products that now may be worthless after Lehman Brothers collapsed.
Strong loan growth was offset by lower interest rate margins due to a drop in Singapore rates.
Lending in the third quarter was up 22 percent from a year earlier, but net interest income rose only 2 percent to S$1.07 billion.
Credit Suisse warned in a report that Singapore's loan growth could collapse to zero next year.

Net fees and commissions fell 22 percent amid volatile capital markets and DBS suffered trading losses of S$13 million that included unwinding of Lehman-exposed investment products. This was despite a S$74 million gain in the trading results, helped by an accounting change that allowed reclassification of certain trading assets.

(Editing by Neil Chatterjee & Ian Geoghegan) Reuters 3000 Xtra clients can now view daily data on how reported Asian company earnings compare with analysts' forecasts, as measured by Reuters Estimates. Double click on ($1=1.500 Singapore Dollar) Keywords: DBS/ (saeed.azhar@reuters.com, Reuters Messaging: saeed.azhar.reuters.com@reuters.net, +65 6403 5664)

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