* DBS net profit S$552 mln vs S$455 mln consensus
* Bad debt charges jump to S$466 mln vs S$56 mln yr ago
* Non-performing loan rate at 2.8 pct vs 2.0 pct Q1
* Shares falls 2.7 pct, stock up about 55 pct this year
* Chairman says well positioned to weather uncertainties (adds share reaction, analysts' comments)
By Saeed Azhar
SINGAPORE, Aug 7 (Reuters) - Southeast Asia's biggest bank DBS's quarterly earnings raised red flags about deteriorating asset quality, reporting a rise in bad debts even as business conditions start to improve.
DBS's shares slipped as much as 2.7 percent in early trade after a spike in bad debts overshadowed better-than-expected net profits, but the outlook for the bank has improved as it continues to seize market share from foreign rivals on loans.
The bank's earnings are more sensitive to an economic recovery than its Singapore rivals because of its strong corporate and investment banking franchise, and its ability to take advantage of low deposit costs to boost loans margins.
"This was actually a very, very strong set of results at the operating level," said Trevor Kalcic, a banking analyst at RBS in Singapore, who has a "hold" rating on DBS due to the recent strong share rally.
"The real negative out of this result was asset quality."
Bad debt charges climbed about eight times to S$466 million ($325 million) from a year ago, hit by exposure to shipping and Middle East firms. The non-performing loan rate rose to 2.8 percent from 2.0 percent in the first quarter and 1.4 percent a year ago.
Rivals Oversea-Chinese Banking Corp and United Overseas Bank reported bad debt ratios of 2.1 percent and 2.4 percent, respectively.
Kalcic said non-performing loans may continue to rise for banks in the coming quarters, but were "not going to blow up" since Asian banks have strong capital bases to buffer them.
DBS Group's Chairman Koh Boon Hwee, who has been running the bank since January, said the result reflects the underlying strength of its business and it will continue to manage risks and costs.
"DBS is well positioned to weather the uncertainties ahead as our balance sheet remains strong," he said in a statement.
The bank, which is 28-percent owned by state investor Temasek, did not make any announcement about its next chief executive after its last CEO Richard Stanley, died of cancer.
SENSITIVE TO RECOVERY
DBS's April-June net profit fell to S$552 million ($384 million) from S$652 million a year ago, it said on Friday, above analysts' average forecast of S$455 million.
For a graphic on DBS earnings click on: http://graphics.thomsonreuters.com/089/SG_DBSQ10809.jpg
Analysts were expecting a strong result from the bank after rivals UOB and OCBC announced better-than-expected earnings this week.
DBS, which generates 90 percent of its earnings from Singapore and Hong Kong, saw loan growth of 8 percent in the second quarter from the year-ago period, the fastest among the three listed Singapore banks.
"I think if they continue this strategy of concentrating on Singapore and Hong Kong and you start to see Hong Kong having a turnaround, that's a positive for them," said CLSA analyst Thilan Wickramasinghe.
DBS said quarterly net interest income rose 5 percent to S$1.1 billion from a year ago, and fee and commission income also climbed by 5 percent. Trading and investment gains boosted other non-interest income, which surged 62 percent.
Shares of DBS have outperformed rivals and the benchmark stock index this year. DBS shares are up around 55 percent this year against a 47 percent rise in the benchmark Straits Times Index. ($1=1.436 Singapore Dollar) (Editing by Neil Chatterjee and Lincoln Feast)