* Q3 net income rises 2.4 pct
* Retail, investment banking hit by economy and weak trading
* Balance-sheet strength a bright spot (Adds analyst comment, CEO comment, background)
By Lionel Laurent and Matthias Blamont
PARIS, Oct 31 (Reuters) - BNP Paribas, France's No. 1 bank, said third-quarter net income rose 2.4 percent as it fought fading growth and a lacklustre economic environment in its core European markets with cost cuts.
Banks across Europe are overhauling their businesses and chopping costs to appease regulators and protect profits in the wake of the financial crisis and a fragile economic recovery.
"Our cost-saving plan is proceeding swiftly," BNP Chief Executive Jean-Laurent Bonnafe said, adding that the bank would give new targets and a strategic plan near the end of March.
BNP has pledged to save 2 billion euros a year by 2015 through a cost-cutting drive, while at the same time reinvesting to grow beyond its core French, Italian and Belgian markets into faster-growing Asia, the United States and Germany.
The bank reported quarterly net income of 1.36 billion euros ($1.87 billion), up from 1.33 billion in the same period a year ago. Revenue fell 4.2 percent to 9.29 billion, however, as the euro zone's fragile exit from recession and a fall in fixed-income trading hit both retail and investment banking.
Analysts had forecast net income closer to 1.32 billion euros and revenue closer to 9.31 billion, according to the average of forecasts compiled by Thomson Reuters I/B/E/S.
Shares of BNP rose 2.5 percent, to 54.09 euros, outperforming a 0.4 percent rise for the European banks sector.
"Solid results...with a positive read-through for other French banks," Citigroup analysts wrote in a note to clients.
BNP's domestic rivals Societe Generale and Credit Agricole, which are pursuing efficiency drives of their own, are due to report results next week.
BNP's cuts have mostly focused on its retail business, which traditionally has been a cash cow - especially in France - but which suffered from a drop in loans and fees in the third quarter.
BNP's investment bank - which went through its own overhaul in 2012 - saw weaker fixed-income trading in the quarter, as did rivals Credit Suisse and JPMorgan, over fears that the U.S. Federal Reserve would reduce its bond-buying programme. The unit's pre-tax profits fell 22 percent.
Credit Suisse has said it will ramp down its rates business. UBS, Deutsche Bank and Barclays are all restructuring their investment banks, which have become less lucrative in volatile post-crisis markets.
BNP's balance-sheet strength, an area closely watched by investors as banks prepare for a sector health-check by the European Central Bank, was a bright spot. Its core Tier 1 capital ratio under tougher Basel III rules rose to 10.8 percent while its Basel III leverage ratio was 3.8 percent.
By comparison, UBS' core capital ratio is 11.9 percent, Deutsche Bank's is 9.7 percent and Barclays' is 9.6 percent.
Commenting on the ECB's asset quality review and forthcoming stress tests, Bonnafe said: "Even if some minor fine tuning could be required here or there, I'm confident that we shall be well above the required thresholds."
The bank is seen by analysts and investors as having the firepower to seal an acquisition. It is in the race to buy Poland's BGZ, sources have told Reuters, and is reportedly offering the highest bid.
Other recent deals include BNP's sale of a "limited" part of its stake in South Korean lender Shinhan Financial Group Co Ltd and the purchase of $350 million worth of Asia loans from South Africa's Standard Bank Group, according to a source, though BNP declined to comment. ($1 = 0.7262 euros) (Reporting by Lionel Laurent and Matthias Blamont; Editing by James Regan)