SINGAPORE (Reuters) - DBS Group, Southeast Asia's biggest bank, posted a smaller-than-expected 28 percent
drop in quarterly profit, as trading gains partially offset a jump in soured loans, but it warned bad debts may rise.

Singapore's banks are facing a growing risk of rising bad debts as Asian economies weaken, but at the same time are trying to seize market share for loans and bonds from foreign banks, forced to scale back due to the global financial crisis.

DBS saw loan growth of 14 percent in the first quarter from a year earlier, the fastest among the three listed Singapore banks.

"What drove the good results was that net income and margins were fairly robust, with prospects for loan volume
pickup and wider lending spreads in 2009," said Citigroup's Robert Kong after the result.

Jan-March net profit fell to S$433 million from S$603 million a year ago, the bank said on Friday.

Analysts had forecast a net profit of S$321 million, according to the average of five forecasts compiled by Reuters.

DBS wrote down S$414 million for bad debts, a rise from S$140 million a year earlier, led by higher charges for loans to small-and-medium businesses turning sour in Hong Kong, and for corporate loans. DBS generates about 90 percent of its earnings from Singapore and Hong Kong.

"Operating outlook remains uncertain, with non-performing loans expected to increase in line with economic weakness," DBS said in a statement.

DBS's smaller rivals, United Overseas Bank and Oversea-Chinese Banking Corp , had reported a 23 percent and 12 percent drop in quarterly profit, respectively, on Wednesday, which were also not as bad as feared.

DBS said quarterly net interest income rose 2 percent to almost S$1.1 billion but trading gains helped boost
non-interest income by 76 percent to S$269 million despite a 10 percent drop in fee and commission income as capital markets faltered.

DBS shares have risen around 43 percent since the start of the year, fired up by a recent rally in banking shares around the world. Shares of smaller rivals UOB are up 17 perecent and OCBC has gained 41 percent, while the benchmark Straits Times Index is up 27 percent.