* 2012 net profit 2.21 bln euros vs forecast 2.48 bln
* Completes government provisions on Spanish property
* Spanish bad loan ratio rises to 6.74 pct vs 6.38 pct
* Pays back 24 billion euros of ECB loans (Adds chairman quotes, details on UK IPO, acquisitions)
By Sarah White
MADRID, Jan 31 Spain's Santander increased provisions for bad loans in its home patch and Latin American main market last year and wrote down rotten Spanish real estate assets, cutting profit by more than half.
Santander, the largest lender in the euro zone, on Thursday said it has now taken the worst of the pain from Spain's property crash five years ago. But recovery in Europe's ailing economy would take some time.
"I believe we are now entering a new phase and the recovery will be more visible in 2014," Chairman Emilio Botin told a news conference.
He said Spain, which is in its second recession in five years, was close to a "cycle of change" after government austerity and banking reforms have put the country on a better footing.
Botin expects Santander to post stronger results this year, helped by lower writedowns. It has booked all of its government-enforced provisions on property assets, which totalled 6.1 billion euros ($8.28 billion) last year.
The bank added that it had halved its net Spanish real estate exposure to 12.5 billion euros, after a push to sell a record 33,500 properties in the country.
Its Spanish bad loan ratio - based on loans in arrears for 90 days or more - rose to 6.74 percent of its portfolio from 6.38 percent at the end of September.
Although lower than the bad loan ratio of 11.4 percent of outstanding debt overall for Spanish banks, it still points to pain ahead in Santander's domestic market where one in four workers are unemployed. Spain accounts for 15 percent of Santander's profits.
Santander said it wanted to gain market share in Spain, after increasing deposits last year. Botin said the bank was very interested in nationalised lender Catalunya Banc, which is up for auction.
TRUST IN BRAZIL
Bad loans also rose in Brazil, Santander's biggest market where the economy is slowing, and in Mexico and Chile. The three countries contribute nearly 50 percent of group profits.
Botin disagreed with doubts about Brazil's potential and competitiveness, saying he was confident the government there would carry out necessary reforms.
"I completely trust in Brazil," Botin said.
Some analysts prefer Spanish peer BBVA to Santander because it makes more profit from Mexico, where bad loans are lower and the economy grew 4 percent in 2012, according to government forecasts. Brazil grew at an estimated 1 percent last year.
Fourth-quarter results from Brazil improved, partly due to reduced provisions, leading some analysts to question whether the bank is well-enough equipped to cope with future defaults there.
Underlying revenue from the country and others in Latin America disappointed some analysts, as net interest income - the difference between what a bank earns on loans and what it pays out on deposits - also shrank in Brazil at the end of the year.
"Negative revenue trends in Santander's key markets could be an area of concern for investors," Daragh Quinn, an analyst at Nomura said a note.
Santander shares closed 3.5 percent lower at 6.18 euros.
Net profit dropped 59 percent to 2.21 billion euros in 2012, missing analysts' forecasts in a Reuters poll.
Total provisions, which include the writedowns on real-estate, rose to 18.8 billion euros, with a 28 percent increase in money set aside to cover credit losses.
LISTINGS ON THE HORIZON
Provisions in Latin America rose 35 percent, while profit from the region dropped 8 percent in 2012, which Santander attributed to the sale of its Colombian operation - one of several steps it took last year to bulk up its capital.
Santander said its core capital ratio stood at 10.33 percent at the end of 2012 compared with 9 percent required by Spanish banking authorities, and it ruled out tapping shareholders for a capital increase.
The bank said it could list its U.S. consumer finance business on the stock market in the second or third quarter of this year. A delayed listing of its British unit looks further off, however.
The bank also said it had repaid more than two-thirds of the 35 billion euros in emergency loans it took from the European Central Bank, adding that liquidity conditions had eased.
The 24 billion euros it paid back corresponded to everything it took from a first ECB auction in December 2011, and the bank said the remaining 11 billion euros was "liquidity insurance" which it would leave on deposit at the ECB.
($1 = 0.7370 euros) (Additional reporting by Jesus Aguado and Tracy Rucinski; Editing by Erica Billingham)