by Saeed Azhar

OCBC , Singapore's smallest listed bank, signalled the worst may be over for the banking sector as it posted an unexpected 10 per cent rise in quarterly profit fueled by strong trading gains and loan margins.

Shares of Oversea-Chinese Banking Corp fell ahead of the result after it shocked investors with a late Friday announcement that it will take a one-time charge in the third quarter linked to its insurance arm that is redeeming policy holders burnt by risky debt products.

But OCBC CEO David Conner said on Monday there is growing consensus the worst is over for the global economy and financial markets, although the pace of recovery remains uncertain.

For the last quarter, OCBC's result was broadly in line with several Asian banks, which have escaped a sharp deterioration in credit quality and are seeing improving prospects for loan growth as the region crawls out of an economic slump.

"It signals that the revenue is coming back from the non-interest side and things are stable as far as non-performing loans are concerned," said Brian Hunsaker, banking analyst at Fox-Pitt Kelton in Hong Kong. "Certainly you can expect the same trend for the other banks."

April-June net profit rose to S$466 million from S$425 million a year ago, OCBC said.

Analysts had predicted a net profit of S$356 million, according to the average of six forecasts compiled by Reuters.

OCBC kicked off the earnings season for Singapore banks. Second-ranked United Overseas Bank will announce earnings on Wednesday and DBS , Southeast Asia's biggest bank, on Friday.

"We are more bullish compared to a month ago as more signs have emerged in the past month to fuel the market's confidence on the outlook ahead," Alistair Scarff, research analyst at Bank of America-Merrill Lynch, said in a note ahead of the earnings.

"Recent second quarter GDP and property data reaffirm that the economy is already past the trough. Meanwhile, our own channel checks suggest that asset quality is holding up better than we thought."

Bad Debt

Bad debt charges rose to S$104 million in the second-quarter from S$55 million a year earlier, but below S$197 million recorded in the first quarter.

OCBC's net interest income rose 5 per cent from a year ago to S$710 million in the last quarter, as interest rate margins widened by 5 basis points to 2.29 per cent.

But non-interest income, which includes commissions and fees on investment products such as mutual funds, surged 37 per cent.

OCBC saw an almost four times higher contribution from its insurance arm Great Eastern of S$125 million from S$33 million a year earlier, while trading income almost tripled.

OCBC shares were down 1.4 per cent at the midday break, after slumping by as much as 2.7 per cent on news that it will take a S$218 million hit in its third quarter linked to Great Eastern.

Shares of OCBC are up 54 per cent so far this year, underperforming DBS's 65 per cent surge, but outperforming UOB's 35 per cent rise.

Singapore's benchmark Straits Times Index is up by half so far this year.