UPDATE 2-KBC profit falls less than expected even after Hungary hit
* Q2 adjusted net profit 287 mln euros vs 241 mln consensus
* Takes 231 mln euro provision for Hungary
* Sees loan-loss provision for Ireland at high end of range
* Shares up 4 pct, among strongest of Europe's blue-chips (Adds shares, analyst comment, more on Hungary)
BRUSSELS, Aug 7 (Reuters) - Belgian financial group KBC's profit fell by less than expected in the second quarter even after taking a provision related to a new law on retail loans in Hungary, which KBC hopes to challenge.
KBC, which still owes 2 billion euros ($2.68 billion) of the 7 billion euros state aid received in the financial crisis, said on Thursday its results were overshadowed by a 231 million euro provision for Hungary.
A Hungarian court ruled in June that banks had previously overcharged customers for some loans. A law drafted by Prime Minister Viktor Orban's government and passed last month will force banks to repay customers for charges and interest rate hikes on loans deemed unfair.
The loans, mostly in Swiss francs, were once popular for their low interest rates but turned sour in the crisis partly due to the weakening of Hungary's forint. Banks with businesses in Hungary include KBC, Austria's Raiffeisen Bank and Erste Bank, Italy's UniCredit and Intesa Sanpaolo.
Hungary's central bank has estimated the cost of compensating borrowers for interest rate rises and fees could be 600-900 billion forints ($2.5-3.8 billion) for the banking sector as a whole.
The European Central Bank has warned this could destabilise Hungary's financial sector and questioned whether the retroactive effect of the law violated European Union rules.
"We feel further supported in our original stance that we will challenge this act," CEO Johan Thijs told a news conference.
Thijs nevertheless said KBC had no intention of pulling out of Hungary, even if the provision meant the group would incur a loss there this year.
"The base is healthy, there's a certain stability. It is one of our core countries," he said.
KBC had 5.1 billion euros of outstanding loans in Hungary at the end of June, of which 1.5 billion in foreign currencies. Overall group loans totalled 121 billion euros.
For KBC as a whole, underlying net profit dropped 41 percent in the second quarter to 287 million euros. That was above a 241 million euro average expectation in a Reuters poll of seven analysts.
KBC shares rose as much as 4.8 percent to 41.49 euros in early trading, making them among the strongest in the FTSEurofirst 300 index of leading European stocks and also recovering the losses of the previous two trading sessions.
"Capital generation was a bit better than expected, other things more or less in line," ING analyst Albert Ploegh said. "The shares have been rather weak so I can understand the price reaction."
KBC said that the results of its main Belgium and Czech Republic businesses were in line with the average of the preceding four quarters.
In its international business, a net loss of 176 million euros was slightly better than the average of the past year, with the positive results in Bulgaria and Slovakia wiped out by Hungary and Ireland.
KBC took a 62 million loan-loss provision on its 15.0 billion euros Irish book of mostly residential mortgages.
It said it now saw full-year loan-loss provisions for Ireland at the high end of its previous guidance of 150-200 million euros. KBC has said it hopes its loss-making Irish unit will become profitable by 2016.
It also aims to have repaid all outstanding state aid by the end of 2017. ($1 = 0.7475 Euros) ($1 = 236.3800 Hungarian Forints) (Editing by Robert-Jan Bartunek and Jane Merriman)