UPDATE 2-Bad loans weigh on Spain's Caixabank and Banco Popular

Fri Jul 26, 2013 5:07am EDT

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(Adds Popular results, analyst comments, shares)

By Sarah White

MADRID, July 26 (Reuters) - Bad debts rose in the first half of the year at Spanish lenders Caixabank and Banco Popular, weighing on their earnings even as income from lending began to show signs of improvement.

A deep recession in Spain has hampered banks' recovery from a real estate crash that ate into profits last year and forced the state to bail out some lenders as more households and companies fell into arrears.

Regulatory pressure is also taking its toll, as the Bank of Spain urges lenders to take a stricter stance on how they treat souring loans.

At Barcelona-based Caixabank, Spain's third-biggest banking group, losses on deteriorating assets grew by more than 50 percent in the first half of the year despite having made hefty provisions last year against losses on troubled property assets.

The bank took a further 540 million euro ($715 million) hit in provisions against possible losses after reclassifying more of its refinanced loans as non-performing, under instructions from the Bank of Spain.

That pushed the ratio of bad loans in its credit book to 11.17 percent at the end of June, from 9.4 percent at the end of March.

While Caixabank benefits from government-funded protection against losses on some of its assets, after it bought bailed out lender Banco de Valencia, mid-sized Banco Popular does not.

Banco Popular's bad loans ratio was 10.84 percent at the end of the first half, up from 9.94 percent at the end of March and 6.98 percent at the end of June 2012.

The bank said that growth in non-performing loans would slow in the coming quarters, though analysts still flagged this as a problem area for the bank, which posted net profit down 3 percent from a year ago.

"New non-performing loan entries are still high and there are still worries there," Norbolsa analyst Nagore Diez said.

Banco Popular said that it does not expect a large hit from reclassifying its refinanced debts in the coming months.

LENDING INCOME BRIGHTER

Caixabank still managed to more than double net profit to 408 million euros, beating analysts' expectations, though that was partly thanks to a large jump in trading gains on bonds.

Net interest income, a closely watched measure of income on loans, rose 10 percent from a year earlier. The lender's acquisition of Banca Civica and bailed-out Banco de Valencia last year helped in this regard, but analysts said that underlying trends, such as falling deposit rates, also looked positive.

"As Caixa digests the acquisition of Banco de Valencia, both lending and deposit spreads should improve," Citi analysts said in a note.

At Popular, which managed to ward off the need for state help last year through a rights issue, net interest income fell 13 percent on the same period last year. But the bank said net interest income in the second quarter had been up 11 percent on the first three months of this year.

Shares in Popular were up 2.9 percent at 0854 GMT, with Caixabank up by 0.54 percent.

Popular's net profit fell 3 percent from a year ago to 170 million euros. It beat analysts' expectations, also partly because of high trading gains.

Aside from the new rules on refinanced debts, regulatory pressure has also pushed Caixabank to shift its dividend policy.

The bank revealed late on Wednesday that it would offer shareholders a payment in shares or cash for its second-quarter dividend after the Bank of Spain's recent recommendation that banks restrict cash dividends to no more than 25 percent of profit. ($1 = 0.7555 euros)

(Additional reporting by Jesus Aguado and Tomas Cobos; Editing by Paul Day and David Goodman)

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