UPDATE 2-Popular keeps targets as 9-mth gains beat forecasts

* Still confident of meeting '09 targets

* 9M net profit down 32.1 pct to 651 mln euros ($977 mln)

* Analysts average forecast was for 621 mln euros

* Bad loan provisions double yr/yr to 1.223 bln euros

* Shares up 0.08 pct at 6.50 euros

(Adds details from conference call, analysts)

By Judy MacInnes

MADRID, Oct 26 (Reuters) - Spain's third-largest bank Popular (POP.MC) stood by its 2009 targets on Monday after posting better-than-forecast nine month results.

Popular is cautious about the economic outlook at a time when Spain is in deep recession, but the rate of increase in bad loans is slowing, the bank's chief financial officer said.

"We are still in a tough cycle but trends are improving substantially. We stand by our end-2009 guidance," CFO Jacobo Robatto told analysts during a conference call.

Nine-month net profit at Banco Popular, more exposed than some of its peers to Spain's ailing property sector, tumbled by a third as provisions for bad loans nearly doubled.

But pre-provisioning profit rose 16.6 percent to 2.068 billion euros, compared with Popular's year-end target for a 10 pct rise.

The bank's bottom-line figure beat forecasts, boosted by solid revenue growth as loans rose 4.7 percent and deposits increased 23.6 percent, above the sector average, and thanks to ongoing cost containment.

Popular shares had risen 0.08 percent to 6.50 euros at 1213 GMT compared with a 0.49 percent drop on the Dow Jones Bank index .SX7P.

"The 9-month results are surprisingly sound. The net interest income trend was better than Popular's retail peers. It's also positive that loans are still growing nearly 5 percent compared to flat or negative lending rates at other banks," Renta 4 bank analyst Nuria Alvarez said.

"It looks like Popular's strategy of pushing for increased market share (in loans) is paying off."

Net interest income rose 11.6 percent to 2.119 billion euros from a year ago, beating analysts' forecasts. [ID:nLK158911]

Robatto declined to provide any guidance for net interest income in 2010. Analysts see average high single-digit declines at most Spanish banks as pressure on margins increase.

"It's difficult to predict, but we will definitely be better than the average," the CFO said.

NEW BAD LOANS FALL

Bad loans as a percentage of total lending rose to 4.63 percent at the end of September from 4.39 percent at the end of June.

But growth in new bad loans slowed in the third quarter from the second, in line with the trend seen at other Spanish retail banks.

"We have seen a sharp decrease in gross entries accompanied by sustained recovery rates with high quality," Robatto said.

Popular's year-target for bad loans is below 5.5 percent, which the CFO is confident the bank will meet.

Popular's core capital reached 8.62 percent at the end of September, strengthened by a recent 1.2 billion euros capital hike, and positioning the bank well ahead of expected higher regulatory requirements, Robatto said.

Popular will also use excess cash to take advantage of any opportunity to grow in the domestic banking market, he added.

"Spain is not over banked, but over-branched. We need to rationalise the number of outlets in the industry," he said.

Between 2008 and 2009, Popular will close down about 10 percent of its branch network, he said. ($1=.6664 Euro) (Editing by Will Waterman and Karen Foster)