| MADRID/BARCELONA, Spain
MADRID/BARCELONA, Spain 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 soured property assets that gutted profits last year.
BBVA (BBVA.MC), Spain's second-largest bank, and Barcelona-based Caixabank (CABK.MC) both reported sharp falls in 2012 profit on Friday, while Popular made its biggest ever annual loss.
All reported increases in loans in arrears as businesses and homeowners struggled to repay debt in a country where one in four workers is out of a job.
The government enforced a cleanup of Spain's banks after a property bubble burst in 2008, prompting them to wipe billions of euros off the value of loans to property developers and foreclosed real estate on their books.
That process is coming to an end and bank's earnings should improve as property provisions tail off this year.
But bad loans, which reached a new high in November of 11.4 percent of banks' outstanding portfolios, will weigh.
"Bad loans will continue to grow this year, it wouldn't be realistic to think otherwise," said Angel Ron, Chairman of Banco Popular (POP.MC), which reported a loss of 2.46 billion euros for 2012, slightly wider than analysts had expected.
BBVA, Spain's second-largest bank, said domestic loans in arrears rose to 6.9 percent of its outstanding portfolio at the end of December, from 4.8 percent a year earlier.
The bank, 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 because of 9.5 billion euros in provisions including writedowns on property assets.
Loans in arrears also rose to 8.62 percent of the total loan book at Barcelona-based Caixabank (CABK.MC), which bought state-rescued Banco de Valencia last year.
Lenders are hoping they are past the worst, as the Spanish government's funding problems ease and the euro-zone debt crisis abates.
The drive to mark down toxic property assets pushed Spain to take around 40 billion euros ($53 billion) in aid from Europe in 2012 for banks in need of capital and unable to cope.
"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 profits down 78 percent to 230 million euros.
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. He added that Mexican profits were "surprisingly strong" in the fourth quarter as asset quality improved.
BBVA's yearly profit fell 44 percent to 1.67 billion euros, in line with analyst forecasts.
Larger rival Santander is also shielded to some degree from problems in Spain by large overseas businesses, although its greater exposure to Brazil where the economy is slowing and non-performing loans are rising, have weighed on earnings. <ID:LnL1N0B010D>
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 added that it aimed to repay half of the 22 billion euros it had borrowed by February. Caixabank also repaid 4.5 billion euros in LTRO funds. ($1 = 0.7367 euros)
(Additional reporting by Clare Kane, Sonya Dowsett and Tomas Cobos; Editing by Erica Billingham)