UPDATE 3-Raiffeisen Bank Int'l readies 'painful' cost cuts
* Q2 profit falls to 120 mln euros vs Reuters poll 144 mln
* Books one-off Q2 cost for Hungary bank levy
* Sees steady 2013 provisioning, interest margin up
* Reiterates that capital increase an option
* Shares up 2.4 percent, outpace bank sector index (Recasts with comments from news conference)
VIENNA, Aug 22 (Reuters) - Raiffeisen Bank International will adopt "painful" cost cuts that include forced lay-offs, new Chief Executive Karl Sevelda said on Thursday, reining in the emerging Europe empire that he took over in June.
Presenting his first results as boss after Herbert Stepic quit in a row over his personal finances, Sevelda took a much more conservative line than the forceful, ambitious Stepic, who built the bank into central and eastern Europe's second-biggest lender.
"Compared with our peers there is room for improvement" on costs, he told reporters. The review "will inevitably bring painful cuts with it".
Sevelda mentioned back-office functions as one target for efficiency gains but gave no further details before he presents the cost cuts proposed by an internal task force to the supervisory board and staff in late September.
The regional powerhouse spanning 18 markets that Stepic built during four decades at the bank is less efficient than its main competitors, Austrian peers Bank Austria and Erste Group Bank.
Raiffeisen had a cost-to-income ratio of 60.2 percent in the first half of 2013, compared to 54.9 percent at Bank Austria and 52.8 percent at Erste Group.
Despite ongoing efforts to cut costs, Raiffeisen's administrative expenses grew 6.5 percent in the period, bloated by the integration of new Polish unit Polbank and pay rises in Russia.
Sevelda said Raiffeisen was scaling back in Hungary, Slovenia and perhaps Croatia, while focusing on Russia, Poland, Austria, Romania, Slovakia and the Czech Republic.
Second-quarter group profit fell by a quarter to 120 million euros ($160 million), missing market estimates as costs rose more than expected and it took a one-off hit of 20 million euros for an upfront booking of a Hungarian bank levy.
But its shares rose as it talked up prospects for 2013, net interest income - its main profit driver - rose and it forecast its net interest margin would rise rather than stay flat. The margin grew 42 basis points to 3.06 percent in the first half.
"The key positive surprise is stronger than expected net interest income that may lead to slight consensus upgrades. However, the capital overhang remains unresolved," said Berenberg analyst Eleni Papoula.
Raiffeisen reiterated that a capital increase was an option depending on market conditions.
It was not in talks with any Arab sovereign funds about taking a stake, Sevelda said, having said last month that a Middle East investor would be welcome to help bolster its balance sheet.
Prospects for a share sale - especially after Erste repaid state aid this month with the help of a 660-million-euro rights issue - have kept Raiffeisen stock under pressure.
Raiffeisen also has to pay back state aid and private participation capital of 2.5 billion euros by 2017, on top of which analysts estimate it needs around 2 billion euros to meet upcoming capital requirements from regulators.
The shares trade at around eight times 12-month forward earnings, a discount to Erste's 12 times, according to StarMine, which weights analysts' estimates by their previous accuracy.
Raiffeisen shares, which touched a year-and-a-half low of 19.87 euros in July, rose 2.4 percent to 26.005 euros by 1233 GMT. The Stoxx European bank index rose 1.8 percent.
Raiffeisen stuck to a forecast that its net provisioning requirement this year would be similar to that of 2012, but now said loans and advances to customers would be steady rather than rise. First-half provisioning rose 17 percent to 469 million.
It lost 65 million euros before tax in the quarter in Hungary, where banks are tangling with the government which wants to rewrite loan terms for hundreds of thousands of Hungarian borrowers who took on Swiss franc or euro debt and lost out when the exchange rate shifted.
"Things that were under discussion would do massive damage to the Hungarian banking sector. We're no longer talking about millions but billions," Sevelda said. "We hope that we can head off these developments in talks with the Hungarian government."
Raiffeisen said its core tier 1 capital ratio fell to 10.4 percent at the end of the first half from 10.7 percent at the end of 2012, while its leverage ratio - which measures equity against total assets - stood at 5.5 percent, well above the 3 percent regulatory minimum. ($1 = 0.7476 euros) (Editing by Georgina Prodhan and Tom Pfeiffer)