UPDATE 2-BBVA profit leap masks weak lending in Spain
* Q1 net profit up 73 pct to 1.73 bln euros
* Boosted by gains from disposals
* Net interest income 3.62 bln euros vs 3.75 bln forecast
* Shares down 1.9 pct, underperform European banks (Adds details on property losses, CEO quote, analyst, shares)
By Sarah White
MADRID, April 26 (Reuters) - Spain's second-biggest bank BBVA felt the pain of recession in its home market where lending income dropped and it made more property losses in the first quarter, overshadowing a sharp rise in net profit.
Sales of Latin American businesses and steady earnings from overseas markets such as Mexico offset some of BBVA's underlying domestic problems and helped push net profit up 73 percent, making it Spain's most profitable bank in the quarter.
BBVA is among a handful of healthier Spanish banks that survived a real estate market crash without taking aid from a 41 billion euro European rescue line last year.
Like its bigger rival Santander, it relies on overseas revenues to offset problems in Spain, where unemployment has rocketed to 27 percent.
BBVA's jump in profit, which beat analysts' forecasts, contrasted with the 26 percent drop in first-quarter earnings that Santander reported on Thursday. But both banks disappointed on some of the other important metrics in their results.
Net interest income at BBVA, a measure of earnings from loans, missed the average forecast in a Reuters poll of analysts, held back by a 9 percent drop in Spain from a year ago. Santander also missed forecasts for net interest income.
BBVA Chief Executive Angel Cano said net interest income in Spain would gradually improve this year.
Shares in BBVA, Spain's second-biggest bank by market capitalisation, were down 1.9 percent by 1100 GMT, underperforming European financial stocks.
The bank swung to a quarterly profit in Spain, after a full-year loss in 2012 helped by lower provisions. It also accounted for soured property assets in a separate off-balance sheet unit, making like-for-like comparisons difficult.
The bank booked a 346 million euro ($450 million) quarterly loss on those real estate exposures.
Cano said the bank was speeding up sales of properties. "That will lead to slightly bigger losses than we might have expected (there) for the year," he said.
Lending income at BBVA's Mexican business rose 7 percent, helping to boost net profit.
The division, which contributed 28 percent of gross income, has been more helpful to BBVA than Santander's South America business which is more exposed to Brazil. Tepid growth there last year gave way to rising bad debts for Santander in the first quarter.
BBVA's net profit was also helped by a net gain of 800 million euros from the sale of its Mexican pensions unit, most of which was booked in the first quarter, and big trading gains, which nearly doubled to 719 million euros from a year ago.
However some analysts said trading gains made revenues less stable. "High trading gains makes the numbers low quality," JPMorgan analysts said in a note to clients.
Like Santander, BBVA is planning to increase its market share further in Spain to around 20 percent, from roughly 12.5 percent now, as it takes business from weaker lenders hurt by the property crash.
It last year bought rescued savings bank Unnim, boosting its presence in the wealthy northern region of Catalonia and overall gross lending in Spain.
BBVA's bad debt ratio rose slightly to 5.3 percent at the end of March from 5.1 percent at the end of December, though it remained well below the country's average.
Other Spanish-focused banks, especially those that also snapped up ailing lenders in a massive consolidation of the sector, saw a bigger jump in bad debts. ($1 = 0.7689 euros) (Reporting by Sarah White; Editing by Julien Toyer and Erica Billingham)
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