UPDATE 2-Doral Financial Q2 loss narrows; shares rise

(Recasts; adds details, share movement)

By Adheesha Sarkar

BANGALORE, Aug 8 (Reuters) - Doral Financial Corp (DRL.N) reported a significantly narrower loss for the second quarter on a rise in interest income and a fall in provision for bad loans, sending its shares up as much as 20 percent.

Two major factors that drove the results were improvement in net interest margin and asset quality. These are also the two elements troubling other banks in the same business, and improvement in these areas are positive for Doral, Joseph Gladue, analyst at B Riley and Co, said by phone.

"They are getting closer to profitablility," he added.

A reduction in leverage, combined with the faster decline in interest expense, resulted in an expansion in net interest margin to 2.02 percent from 1.30 percent last year, Doral said.

"There is more work to be done and we remain cautious about the economic environment as we move forward," Chief Executive Glen Wakeman said in a statement.

Doral has added new banking customers and increased mortgage production, while reducing expenses, and launched loss mitigation and restructuring programs, Wakeman said.

The provision for loan and lease losses fell about 44 percent to $10.7 million from a year ago, when the company's bad-loan provision rose by $8.8 million as it transferred $1.3 billion of loans from the loans held for sale portfolio to the loans receivable portfolio.

Doral has most of its operations in Puerto Rico, which has been in a recession for more than two years, with high gas prices and U.S. slowdown hurting the island.

The lender posted a loss attributable to common shareholders of $6.7 million, or 12 cents a share, compared with a loss of $45.8 million, or $8.49 a share, last year.

Analysts on average had expected a loss of 20 cents a share, before special items, according to Reuters Estimates.

Net interest income rose 41 percent to $48.9 million.

The jump in interest income was driven in part by a $6.8 million reduction in deposits costs and general decline in interest rates, the company said.

Non-interest expense fell about 27 percent to $55.6 million.

Total assets as of June 30 were $10.4 billion, an increase of 12 percent from December 31, 2007.