Feb. 27 (Bloomberg) -- United Overseas Bank Ltd., Singapore’s second-largest lender, reported lower-than-expected fourth-quarter profit as a slowing economy eroded fee income and pushed bad loans higher.

Net income declined 34 percent to S$332 million ($215 million) in the three months ended Dec. 31 from S$506 million a year earlier, the bank said in a statement to Singapore’s stock exchange today. That’s lower than the mean estimate of S$443 million of seven analysts surveyed by Bloomberg News.

United Overseas Bank is contending with a local economy that shrank the most in 33 years in the last quarter. DBS Group Holdings Ltd. and Oversea-Chinese Banking Corp., its two Singapore-traded rivals, this month reported declining profits as the worst worldwide recession since the 1930s cut income.

“It looks like there’ll be more bad news down the road,” said Tay Chin Seng, a Singapore-based analyst at Macquaire Bank Ltd., who rates United Overseas “outperform.”

United Overseas shares dropped 43 percent in the past 12 months. DBS, Southeast Asia’s largest bank, tumbled 48 percent and OCBC slipped 41 percent. The stock rose 1.5 percent to S$10.52 at the midday trading break in Singapore today, before earnings were announced.

Fourth-quarter net interest income rose to S$957 million from S$743 million a year earlier, while non-interest income fell to S$391 million from S$532 million, the bank said. Net interest margin, or the difference between what it earned on loans and paid for funds, rose to 2.45 percent from 1.94 percent last year.

Impairment Charges

The gains from interest income were erased by the nearly doubling amortization and impairment charges to S$383 million in the quarter.

A freezing of the global credit markets, deepened by the collapse of Lehman Brothers Holdings Inc. in September, has prompted banks across the Asia-Pacific region to write down the value of investments tied to U.S. home loans.

Total loans in Singapore shrank to S$272.2 billion in December from S$273.2 billion a month earlier, as lending to businesses dropped to S$157.8 billion from S$159.6 billion, data from the Monetary Authority of Singapore show.

Loans rose 7.7 percent to S$99.8 billion from S$92.7 billion a year earlier. Non-performing ratio rose to 2 percent from 1.8 percent a year earlier.

To contact the reporter on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net

Last Updated: February 27, 2009 00:31 EST