UPDATE 6-DBS profit soars to record, flags risks of rising rates to growth

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Q3 net profit S$2.24 bln vs S$1.97 bln market estimate

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Return on equity surges to record 16.3%

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CEO warns of risks from U.S. interest rate hikes

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DBS shares drop in a weak broader market

(Recasts story with comments from CEO, impact of higher rates)

By Anshuman Daga

SINGAPORE, Nov 3 (Reuters) - DBS Group reported a forecast-beating 32% jump in quarterly profit to a record high as banks rake in the benefits of higher interest rates, but Southeast Asia's largest lender cautioned on the potential damage to economic activity.

Singapore lenders, among the most well capitalised in the world, have effectively weathered the COVID-induced slump, and are now taking advantage of rebounding Asian economies.

But analysts have warned that a big increase in U.S. rates - already at multi-year highs - as central banks try and tackle soaring inflation, could puncture economic growth.

"My current thinking is that you could wind up seeing a recession in the U.S. if rates hit north of 5% and therefore you will see a sharper slowdown in Asia if that's the case," DBS CEO Piyush Gupta told reporters on Thursday.

The Singapore-based bank's shares dropped 1.6% in a weak broader market but are trading just 9% below a record high struck in February.

On Wednesday, the Federal Reserve

raised interest rates

by 75 basis points to 3.75-4% as widely expected and hinted at smaller increases ahead.

DBS posted net profit of S$2.24 billion ($1.58 billion) in July-September, beating an average estimate of S$1.97 billion from four analysts, according to Refinitiv data.

The bank saw sustained business momentum in the quarter and asset quality remained resilient, Gupta said. Looking ahead to next year, he said the loan pipeline remained healthy and could reach mid-single digit growth.

DBS, which earns most of its profit from Singapore and Hong Kong, said net fee and commission income fell 13% in the quarter, hurt by weakness in the wealth management business in depressed markets. But Gupta forecast double-digit fee income growth for next year, led by wealth management and credit cards.

Local peer UOB Group beat market estimates last week with a record quarterly net profit as net interest income swelled and credit allowances declined. OCBC reports results on Friday.

Annualised return on equity at DBS rose to a record 16.3% in the quarter and net interest income surged 44%. Its net interest margin, a key profitability gauge, improved to 1.90% in the quarter from 1.43% a year earlier.

Shares of Singapore banks have risen about 4% so far this year in a flat broader market on expectations of big expansions in their net interest margins. (Reporting by Anshuman Daga; Editing by Muralikumar Anantharaman, Richard Pullin and Kim Coghill)