* Shares down 5 pct on NII weakness
* Q3 NII up 4.9 y/y pct, but down 5 pct q/q
* Net profit up 1.7 pct in Q3 to 229 mln euros (Recasts to focus on NII, adds analyst comment, shares)
By Jesús Aguado
MADRID, Oct 29 (Reuters) - State-controlled Spanish lender Bankia reported weaker-than-expected income from loans on Monday, raising doubts over its recovery as it continues to grapple with the impact of ultra-low interest rates.
Spanish banks are struggling to improve their lending income amid little sign of a sustained increase in euro zone interest rates. Bankia, whose loan book is dominated by mortgages, has responded by trying to shift to more profitable consumer loans.
Its third-quarter net interest income (NII), a measure of earnings on loans minus deposit costs, was 495 million euros ($564 million), up 4.9 percent from the previous year, helped by the integration of smaller lender BMN, which Bankia fully consolidated for the first time in the first quarter.
However, NII was down 5 percent compared with the second quarter due to fierce competition for lending.
Analysts expected NII to come in at 508 million euros.
“Overall, we believe that this set of results is once again disappointing, with evidence of still significant pressure on NII and a low visibility on its recovery, despite the good signs in costs and provisions,” analysts at BBVA said in a note.
Bankia shares were down 5.3 percent in early trading. The stock has dropped around 15 percent since Oct. 17, the day before a court ruled that banks, not customers, were responsible for paying stamp duty in Spain.
Net profit at Bankia rose 1.7 percent to 229 million euros in the third quarter from a year earlier thanks to higher commissions. Analysts had expected a net profit of 223 million euros.
Bankia received a 22.4 billion euros rescue package in 2012 to recover from property-loan losses at the height of Spain's financial crisis. [reut.rs/2zaof6a ]
Under a deal with the European Union to approve the state aid, the government has until the end of 2019 to sell its 61 percent stake
Bankia is reducing its non-performing assets faster than Italian peers, at a time when the European Central Bank is urging banks to remove doubtful loans from their balance sheets.
Bankia reduced its toxic assets in the quarter by 700 million euros and brought its overall non-performing loan ratio down to 7.8 percent from 8.1 percent in the previous quarter.
The lender ended September with a core tier-1 fully-loaded ratio - the strictest measure of solvency - of 12.46 percent compared with 12.70 percent at the end of June, above the 12 percent threshold it set itself as a target in its 2018-2020 strategic plan.
$1 = 0.8777 euros Reporting by Jesús Aguado; Editing by Sherry Jacob-Phillips and Mark Potter