UPDATE 1-Spain's BBVA Q4 net profit up 36 pct, capital improves

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MADRID, Feb 3 (Reuters) - Spain’s second-biggest bank BBVA on Wednesday posted a 36.4 percent rise in net profit in the fourth quarter, helped by lower provisions against bad loans and a slowly recovering business which also lifted the lender’s capital levels.

Spanish banks, struggling with tepid growth amid historically low interest rates and increasingly fierce competition as Spain emerges from recession, have yet to fully emerge from their worst crisis in decades.

Like most Spanish peers, BBVA managed to increase its net interest income, a measure of earnings on loans minus deposit costs, year-on-year in the fourth quarter to reach 4.415 billion euros ($4.8 billion).

That was slightly below analysts’ expectations and down from the three months to end-September.

Net profit was much better as the bank booked trading gains in the period and took lower charges compared with both last year and the third quarter, when it was hit by a 1.8 billion euros writedown in Turkey.

As a result, while net interest income was up 8.7 percent at 16.426 billion euros in the full year, net profit increased only by a modest 0.9 percent to 2.642 billion euros.

BBVA’s core tier 1 capital level under the strictest Basel III “fully loaded” criteria rose to 10.3 percent at end-December, compared with 9.8 percent three months earlier and beating the bank’s year-end target of above 10 percent.

The lender also brought down its bad loans ratio to 5.4 percent at the end of the year from 5.8 percent at the end of the third quarter. ($1 = 0.9157 euros) (Reporting by Julien Toyer and Jesus Aguado; editing by Susan Thomas)