UPDATE 2-Lending revenue turnaround boosts Spain's Sabadell
* 2013 net profit 247.8 mln euros vs 216.2 mln Reuters poll
* Profit triples on lower losses on property assets
* Net interest income 1.815 bln euros vs 1.791 bln consensus
* Sabadell shares up over 5 percent (Recasts with shares and sector outlook, adds analyst, chairman quotes)
By Sarah White
MADRID, Jan 23 (Reuters) - Spain's Banco Sabadell on Thursday posted better-than-expected income from lending in the fourth quarter, sending its shares up more than 5 percent as the outlook for the country's battered financial sector begins to brighten.
Spain's banks were hit hard by a real estate crash that gutted 2012 earnings, and credit fell during a prolonged recession that ended in the third quarter of last year.
Sabadell, Spain's sixth-biggest bank, relied heavily in 2013 on bond trading gains and a drop in provisions against losses on soured property assets to offset ailing revenues from lending.
But in the fourth quarter Sabadell's net interest income (NII), which tracks the difference between funding costs and payouts on loans, rose 2.1 percent to 497.8 million euros ($675 million) compared to the same period a year ago.
That was above the 474 million euros expected by analysts in a Reuters poll. It also marked the second consecutive quarterly rise in NII at Sabadell - confirming a trend of gradual improvements also echoed by smaller peer Bankinter, even though interest rates remain low.
Bigger peers such as Santander and BBVA are likely to start showing similar rises in their Spanish businesses, helped by falling deposit costs.
"Throughout this year we will be returning to more balanced net interest income," Sabadell Chairman Josep Oliu told a news conference.
A broader client base also helped after Sabadell made a series of acquisitions last year, including the purchase of the Spanish retail arm of Britain's Lloyds.
Sabadell shares, which have risen nearly 7 percent in the year to date, were up 5.4 percent at 2.13 euros per share at 1300 GMT, outperforming the broader European banking index .
Spain emerged from a prolonged recession in the third quarter of last year and the government forecasts economic growth of 0.7 percent for 2014.
But the recovery is expected to be slow and is has not yet fully fed through to the country's banks. Their turnaround will partly hinge on whether credit demand picks up in 2014, and lenders still face challenges such as Europe-wide health checks of their balance sheets.
While Spain's listed lenders are widely expected to pass these stress tests, many have had to strengthen their solvency, selling assets or shares in the process. Sabadell raised 1.4 billion euros last year from existing shareholders and new investors.
Sabadell forecast that overall lending would fall around 2 percent in 2014. However, it is targeting a 20 percent rise in lending to companies. Gross loans were up 4.2 percent in 2013 after the bank's acquisitions.
While provisions against losses have subsided since 2012, many lenders are also still having to cough up cash to cover souring loans. Sabadell's bad debt as a percentage of total credit jumped to 13.6 percent as at the end of December, higher than the sector average of 13.08 percent in November.
On the bright side, its loans are turning bad at a slower rate, with net entries of non-performing loans dropping in the last three months of 2013 for the fourth quarter in a row.
"On the asset quality front... a more stable trend seems to be arising, which if confirmed would at some point lead to lower loan loss provisions and hence be supportive of earnings," analysts at Credit Suisse said in a note.
Sabadell's 2013 net profit was 247.8 million euros, above an average of 216 million euros in a Reuters poll of analysts.
That was in part helped by trading gains, which nearly tripled to 1.48 billion euros last year. Net interest income was down 2.9 percent for the full year at 1.81 billion euros. ($1 = 0.7372 euros) (Editing by Julien Toyer, Christopher Cushing and Matthias Williams)