UPDATE 2-Bank Hapoalim Q2 profit smaller than expected

* Net profit 382 million shekels, vs forecast 424 million

* Capital adequacy ratio rises to 12.83 percent

* Shares down 0.7 percent

(Adds analyst comments, shares)

By Tova Cohen

TEL AVIV, Aug 27 (Reuters) - Bank Hapoalim (POLI.TA), Israel's second-largest bank, posted a smaller-than-expected net profit, hit by higher bad debt provisions due to the fallout from economic weakness.

Its shares were down 0.7 percent at 13.01 shekels at midday, while the broader market was off 0.9 percent .TA100.

"The provision for doubtful debts was made on a conservative basis, with due regard for assessments of the risks in the credit portfolio," Hapoalim said in a statement on Thursday.

Hapoalim posted a 36 percent fall year-on-year in April-June net profit to 382 million shekels ($101 million), below a forecast for 424 million and after a first-quarter profit of 42 million.

Israel's economy, hit by the global slowdown, began to recover in the second quarter, growing by 1 percent following a contraction in the previous two quarters.

"While the Israeli economy seems to be bottoming out, the bad debt cycle usually peaks with a 6-12 month lag," Citi analyst Simon Nellis said in a note to clients.

Terence Klingman, an analyst at the Excellence Nessuah brokerage, said although loan loss provisions climbed, problematic debts remained stable. "It is possible that the high levels of LLPs reflects some house-cleaning ahead of the arrival of a new chairman and CEO," he said.

The bank appointed Yair Seroussi to replace former chairman Dan Dankner, who announced in June he would step down, citing differences with the Bank of Israel. It is also awaiting the central bank's approval of Zion Kenan as chief executive.

The bank's financing income before bad debt provisions in the second quarter was 1.955 billion shekels, compared with 1.943 billion a year earlier. Bad debt provision more than doubled to 538 million shekels.

Analysts had forecast financing income of 1.87 billion shekels and a debt provision of 462 million.

Yuval Ben Zeev, an analyst at brokerage Clal Finance, said Hapoalim should benefit from higher interest rates expected in coming quarters. This week, the Bank of Israel increased its key lending rate by a quarter point to 0.75 percent.

Hapoalim's capital adequacy ratio rose to 12.83 percent from 10.92 percent at the end of 2008, to be above its year-end target of 12 percent, a minimum mandated by the central bank.

The worsening economy pushed some Israeli banks to cut dividends to help boost capital ratios.

Ben Zeev said Hapoalim could soon seek approval from the supervisor of banks to pay a dividend next year.

Israel's biggest bank, Leumi (LUMI.TA), and the third biggest, Discount (DSCT.TA), were due to report results on Aug. 31. (Editing by Dan Lalor) ($1 = 3.79 shekels)