UPDATE 1-S.Korea KB Fin Q3 net down; margin recovery slows

* Q3 net slides by 69 pct y/y, missing market consensus

* Provisioning costs barely changed vs Q2

* Net interest margin up 4 basis points vs Q2

* KB Fin shares close down 2.6 pct before results (Adds details from statement)

SEOUL, Oct 29 (Reuters) - KB Financial Group (105560.KS), the parent company of South Korea's largest bank Kookmin, posted a bigger-than-expected drop in quarterly earnings, dented by provisioning costs and slow recovery in interest margins.

Lending margins have been improving since the third quarter following a plunge in the first half of this year. The gap between deposit and lending rates have been widening, with new household loan rates leaping to their highest this year in September on signs of an economic turnaround.

South Korean banks are expected to stage a significant recovery from the first quarter, driven by declining new loan delinquencies and a looming shake-up in the industry with stakes in major lenders, including Korea Exchange Bank (004940.KS), set to be put up for sale.

KB Financial (KB.N) posted a net profit of 173.7 billion won ($145 million) in the quarter ended September, below an average forecast of 306.8 billion won from analysts surveyed by Thomson Reuters I/B/E/S.

That compared with 568.0 billion won a year ago and 109.9 billion won in the second quarter.

For a graphic please click: here

Kookmin Bank, which accounts for 90 percent of the group assets, saw its net interest margin (NIM) rise only 4 basis points to 2.20 percent from the second quarter, when the NIM tumbled by 54 basis points from the first.

KB Financial has lagged domestic rivals such as Shinhan Financial Group (055550.KS) and Hana Financial Group (086790.KS) in the pace of recovery in net interest margins and provisioning costs because of its heavy exposure to small-sized companies.

KB set aside 552 billion won to cover its exposure to bad loans in the third quarter, barely changed from 556 billion won in the second.

Provisioning expenses are unlikely to fall sharply for the rest of this year. Banks are required to dispose of a chunk of their problem loans to follow government advice to lower their bad loan ratios to 1 percent by year end from an average 1.5 percent in June.

Earlier in the day, third-ranked Woori Finance Holdings (053000.KS) posted a stronger-than-expected rise in third-quarter profits to 483.8 billion won, supported by a NIM increase and shrinking provisioning charges against bad loans.

Fourth-ranked Hana Financial (086790.KS) reported a 240.0 billion won net profit in the third quarter, with the net interest margin up 29 basis points from the second.

Shares in KB Financial closed down 2.6 percent at 59,700 won prior to the results. They have more than doubled from March lows versus a 60 percent jump in the wider market .KS11.

($1=1198.9 Won)

(Reporting by Kim Yeon-hee; Editing by Jonathan Hopfner)