UPDATE 2-Sabadell sees bad loans peaking mid-2010

* Net interest revenue to decline next year

* To play active part in sector consolidation - CEO

* Could hike capital in event of acquisition

* 9-mth net drops 38.5 pct,beats forecasts on provisions

* Sabadell shares down 1.5 pct

(Adds comments from CEO, analyst, byline)

By Judy MacInnes

MADRID, Oct 22 (Reuters) - Spanish retail bank Sabadell's
(SABE.MC) bad loan rate should peak next summer as the country's
economy begins to pick up, though a fall in income from lending
will accompany the recovery, its chief executive officer said.

Spain's fourth-largest listed lender will also be an active
player in any banking sector consolidation and does not rule out
making a capital hike in the right conditions, Jaime Guardiola
told Reuters in a telephone interview on Thursday following
nine-months results.

Sabadell's loan book is relatively less exposed than those
of its rivals to Spain's property sector, which has plummeted
after a decade-long boom.

Its non-performing loan rate should rise to 4 percent by the
end of 2009 compared to a financial sector average of 6 percent,
Guardiola said.

"We should see the turnaround in the trend in the second
half of 2010, with new bad loans on the books starting to grow
at a lower rate than recoveries. The peak in bad loans for us
will be June," Guardiola said.

Sabadell's bad loans rose to 3.47 percent at the end of
September from 3.19 percent at the end of June, below analysts'
estimates for a rise to around 3.5 percent.

MARGIN DECLINES

The bank earlier reported nine-month net profit fell to
468.4 million euros ($699.4 million) from 762.2 million a year
ago -- a sum swelled by 512 million in capital gains from the
sale of its insurance and pensions business to Zurich (ZURN.VX).
[ID:nLL134774]

Net interest income was in line with analysts forecasts,
rising 12.7 percent to 1.215 billion euros. It will continue to
grow in 2009, although the fourth quarter will be less robust
than the second and the third, Guardiola said.

As the economy picks up, savers will demand higher interest
rates on deposits more quickly than the bank can raise average
rates on its loan book, so "2010 will be a more difficult year.

"We will see declines in net interest revenue of between 5
and 10 percent, in line with analysts' estimates, although
Sabadell will survive better than others," due to lower exposure
to mortgages and an active hedging policy, Guardiola said.

At 1110 GMT, Sabadell shares fell 1.54 percent to 4.785
euros, compared with a 1.8 percent drop in the DJ Stoxx European
banking index .SX7P

Espirito Santo analysts said Sabadell's nine months numbers
were ahead of their estimates, but attributed this in part to
stronger than expected revenues from the bank's trading
business.

"We believe that net interest income will continue to
deteriorate in the coming quarters, as repricing on the asset
side remains," Espirito Santo said.

EXPANSION AT HOME

While interested in overseas expansion -- the
Barcelona-based bank owns two banks in Florida -- Sabadell
growth ambitions are focused on its home patch, particularly for
the time being, the CEO said.

"We need to get the critical mass in Spain first or it will
be difficult for us to grow overseas. We will be active in the
banking sector consolidation process in Spain," Guardiola said.

Sabadell is comfortable with its core capital ratio of 7.7
percent at end-September but does not rule out a capital hike in
the future if an acquisition opportunity arises, Guardiola said.

"We would go to the financial markets to raise capital if we
saw an opportunity. Whatsmore, there is a lot of appetite in the
markets for this type of operation," he said.

(Additional reporting by Jesus Aguado; Editing by John
Stonestreet)