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* BBVA reports 44 pct drop in profit
* Caixabank profit down 78 pct
* Banco Popular makes biggest ever annual loss
* Spanish bad loans up in 2012, expected to rise in 2013
By Sarah White and Jesús Aguado
MADRID/BARCELONA, Spain, Feb 1 (Reuters) - Spanish banks face rising bad loans in a deep recession that shows no sign of easing after getting through the worst of a deep clean of rotten property assets that gutted profits last year.
BBVA, Spain's second-largest bank, and Barcelona-based Caixabank both reported sharp falls in 2012 profit on Friday, while Popular made its biggest ever annual loss.
The banks wrote billions of euros off the value of loans to real estate developers and foreclosed land and buildings, after Spain enforced a cleanup of their books last year following a property crash five years ago.
Their loans in arrears also rose as businesses and homeowners struggled to repay debt in a country where one in four workers is out of a job, indicating more pain to come.
The real estate cleanup is coming to an end and bank's earnings should improve as provisions tail off this year. But bad loans, which reached a new high in November of 11.4 percent of banks' outstanding portfolios, will still weigh.
"Bad loans will continue to grow this year, it wouldn't be realistic to think otherwise," said Angel Ron, Chairman of Banco Popular, which reported a loss of 2.46 billion euros for 2012, slightly wider than analysts had expected.
BBVA's Chairman Francisco Gonzalez said Spain's economy would likely reach a turning point at the end of 2013.
BBVA which makes half its gross income in South America and Mexico, lost over 1 billion euros ($1.4 billion) in its Spanish business last year. It put aside 9.5 billion euros across the group, about half which was writedowns on Spanish property assets.
Lenders are hoping they are past the worst, as the Spanish government's funding problems ease and the euro-zone debt crisis abates.
Spain's weakest banks have taken around 40 billion euros ($53 billion) of European rescue funds to rebuild their capital.
"2012 was probably the worst year of the crisis, there's no doubt it will go down in history books," Isidro Faine, Chairman of Caixabank told a news conference in Barcelona.
He added that the bank still had 900 million euros of property provisions to take in the first half of 2013, after writedowns last year pushed profit down 78 percent. Its loans in arrears rose to 8.62 percent of its total loan book after it bought state-rescued Banco de Valencia.
BBVA fared better than its smaller peers supported by a sound performance in Mexico, where it runs the country's biggest bank and which provides 25 percent of BBVA's gross income, almost as much as Spain.
"Strong profits in Latin America offset further provisions in Spain," Jaime Becerril, an analyst at JPMorgan, said in a note to clients.
Other analysts also pointed to fourth-quarter growth in BBVA's net interest income, broadly the difference between what a bank earns on loans and pays out on deposits, as an encouraging sign for earnings next year.
BBVA's annual profit fell 44 percent to 1.67 billion euros, in line with analyst forecasts.
BBVA's larger rival Santander is also shielded to some degree from problems in Spain by large overseas businesses, although it is more exposed to Brazil, where the economy is slowing and bad loans are rising.
Santander and BBVA are looking at chances to expand in Spain, however, and are both considering a purchase of bailed-out Catalunya Banc.
"If we think we can create value, we will make an adequate offer," BBVA's Gonzalez said.
BBVA has relied on overseas disposals to help build up capital, and it announced another transaction on Friday, with the sale of its stake in its Chilean pension business to Metlife. The deal will net it a 500 million euros capital gain.
In a sign that funding pressures are easing, Spain's lenders have begun to return crisis loans taken from the European Central Bank.
BBVA said on Friday it had repaid 8 billion euros of the so-called longer-term refinancing operations, or LTROs, set up by the ECB in December 2011 and February 2012.
It also revealed its total LTRO borrowings had reached around 30 billion euros after it bought rescued savings bank Unnim, and BBVA it would be left with about half that amount after repaying another 7 or 8 billion euros in February.
Caixabank also repaid 4.5 billion euros in LTRO funds.