UPDATE 3-DBS's Gupta cleans up books, but faces challenges

* Net loss of S$300 mln vs Reuters consensus profit S$564 mln

* Q2 net profit up 30 pct to S$718 mln before charge

* Impairment of S$1.02 bln in HK; analysts expect more

* CEO says loan growth to slow in H2 as economies weaken

* Shares slip, underperform peers this year (Recasts, adds quote from CEO, analyst)

By Saeed Azhar

SINGAPORE, July 30 (Reuters) - DBS CEO Piyush Gupta is cleaning up the Singapore bank's books early in his tenure but fickle markets and low interest rates are challenging his robust profit outlook.

The former Citibanker, who took over Southeast Asia's biggest bank in November, reported a S$1.02 billion ($750 million) writedown on Friday, the second-biggest since 2005, to reflect the market value of the bank's struggling Hong Kong business.

The charge pushed DBS to a surprising second-quarter loss, the first in nearly five years, but core earnings beat market expectations. The shares initially rose, but then edged down in line with a weak market.

Gupta is under pressure from investors not only to deliver strong earnings, but also expand the bank's footprint beyond its core Singapore and Hong Kong markets.

"Overall, we believe this is a good set of results... Margins are a worry but we believe there are reasonable offsets such as loan growth," Harsh Wardhan Modi, an analyst at JPMorgan.

DBS, whose results have underperformed rivals United Overseas Bank and Oversea-Chinese Banking Corp in the first quarter, is aiming to raise market share in Southeast Asia, where it lags the other two Singapore lenders.

UOB and OCBC have a price to book ratio of 1.8 and 1.7 respectively to 1.3 for DBS.

Singapore banks have survived the financial crisis in good shape, but are struggling to take full advantage of fast loan growth and reduced loan-losses this year due to historically low interest rates.

Gupta told a news conference he was hopeful of strong earnings this year despite a likely economic slowdown in Asia in the second half of the year.

"I think the slowdown is frankly visible," he said, but added the bank will continue to gain market share in areas such as the corporate business. "Internally our forecast for this year is still bang on budget," he said without giving details.

Singapore's economy is set to grow as much as 15 percent this year, making the city-state one of the fastest-growing economies in the world this year.

ANALYSTS SEE MORE IMPAIRMENTS

Gupta, who spent most of his time in Southeast Asia and Hong Kong during his nearly three-decade stint with Citigroup, said the bank's loan growth would slow to about 8 percent year-on-year in the second half. It grew 12 percent in the first half.

He said further writedowns in the Hong Kong unit were unlikely, but analysts see more impairments in the business which DBS acquired it in 2001 in an expensive $5.8 billion deal.

"DBS could have written down more on Dao Heng," said Sanjay Jain, a regional banking analyst at Credit Suisse, referring to the Hong Kong unit, which was called Dao Heng.

Jain estimated the Hong Kong unit was still carrying goodwill of S$4.5 billion, against a book value of S$3.8 billion on DBS's books.

The latest charge brings down the value of its Hong Kong operation to 2.2 times from a previous 2.5 times book.

DBS said there have been "noticeable and persistent strains" in wholesale funding markets, which is forcing banks to adjust their funding strategies.

It said net interest income fell almost 4 percent to S$1.07 billion, although loans in the second quarter expanded 14 percent from a year ago. Net interest margins declined 17 basis points.

With money market rates languishing near record lows, DBS is more vulnerable than its rivals due to its dominant position in the interbank market.

DBS said April-June net profit was S$718 million -- its strongest -- if the goodwill impairment was excluded, and up 30 percent versus S$552 million a year ago.

Analysts had predicted a net profit of S$564 million, according to the average of eight forecasts in a Reuters survey.

Before the results, DBS shares were down about 6 percent so far this year while rival Oversea-Chinese Banking Corp was down 0.9 percent and United Overseas Bank was up 0.9 percent. The benchmark Singapore index .FTSTI> fell about 3 percent. ($1=1.362 Singapore Dollar) (Additional reporting by Kevin Lim; Editing by Anshuman Daga)