* Caixabank Q1 profit falls 55 pct, revenues up 4 pct
* Sabadell Q1 profit up 59 pct, beefs up provisions
* Both post drop in bad debt ratios, predict trend change (Writes through, adds bank, analyst quotes, updates shares, adds graphic)
By Sarah White and Jesús Aguado
MADRID, April 24 Spain's Caixabank and Sabadell posted fewer bad debts in the first quarter of 2014 and heralded the start of a turnaround for the country's banks after a costly crisis.
Spain's financial industry has struggled to recover from a 2008 housing crash that lumbered its banks with huge unpaid property loans and sparked a national economic downturn, leaving some lenders so short of capital the state had to bail them out with billions of euros to help them survive.
The country exited recession in the second half of last year - the Bank of Spain expects 1.2 percent GDP growth in this year - but Thursday's loan data were among the clearest signs yet the turnaround is feeding through to banks and borrowers.
"We do believe this marks a shift in the trend," Sabadell Chief Financial Officer Tomas Varela told a news conference.
Juan Maria Nin, Caixabank's chief executive, added: "This change in the trend is coupled with a Spanish recovery and it's good news."
Analysts were quick to suggest that Caixabank and Sabadell's story was likely to be echoed elsewhere. The country's biggest banks Santander and, which have big operations overseas but were also hit by losses at home, report first quarter results next week, as do Banco Popular and part-nationalised Bankia.
"At peers, we are likely to see stabilising asset quality," Stefan Nedialkov, banking analyst at Citi said in a note.
Caixabank and Sabadell, both from the northern region of Catalonia, said bad loans as a percentage of total credit dropped at the end of March compared end-December.
Sabadell's bad debt ratio fell slightly from 13.63 percent to 13.57 percent in the period, while Caixabank's ratio fell from 11.66 percent to 11.36 percent - the first drop since the end of 2006. Caixabank CEO Nin said bad debts were falling as borrower defaults tailed off but also as the bank writes off soured loans.
The two banks did not need state aid during Spain's crisis, although their earnings were gutted by hefty provisions against soured debts two years ago. Spain had to ask European for 41.3 billion euros in aid to prop up its banks in 2012.
After several years of deep government spending cuts, the Bank of Spain said on Thursday it expects GDP to have grown 0.4 percent in the first three months of 2013, which would be the fastest quarterly rate of growth in six years.
But many Spaniards still complain the improvement is slow to feed through to the real economy, as unemployment remains stubbornly high and wage inequality is rising fast. More than one in four of the workforce is out of a job.
That is still a threat to banks, and many predict their overall stock of loans will fall again this year as some consumers and businesses try to whittle down debts.
Lenders say however that appetite for credit is picking up again among some companies - those geared towards exports for instance. They are also hoping to lend more to small companies this year to help turn around their core revenues - banks typically make more from lending to companies than on mortgages - that is leading to tough competition.
"There's a price war over credit at the moment," Caixabank's Nin said.
The Barcelona-based bank's net interest income (NII), or earnings on loans minus deposit costs, was broadly flat at 993 million euros, undershooting forecasts, which some analysts attributed to a fall in overall credit.
Sabadell's first-quarter net profit jumped 59 percent from a year ago to 81.2 million euros. Caixabank's quarterly net income fell by more than half to 152 million euros, compared to a year ago when it was helped by one-off gains from acquisition.
Fewer bad loans will eventually allow banks to significantly cut the funds they have to put aside in capital to cover any future losses, which has also been eating into profits.
For now, however, some continue to bolster these reserves before the European Central Bank takes over as the euro zone banking supervisor in November and ahead of Europe-wide health checks in the coming months.
Sabadell said it had used most of its first quarter bond trading gains towards provisions, which more than tripled to 1.1 billion euros ($1.52 billion)compared to a year ago.
Caixabank shares were slightly down 0.2 percent at 4.58 euros per share by 1020GMT, while Sabadell's stock was up 3.24 percent, at 2.45 euros per share.
($1 = 0.7231 euros) (Editing by Sophie Walker)