BANKIA SA 
By MADRID (Reuters) - A trio of Spanish banks, including bailed out lender Bankia (>> Bankia SA), reported rising bad debts on Thursday as a protracted recession hampers their recovery from a property market crash.
Spanish banks' profits were gutted last year as they got to grips with the bursting of a decade-long property bubble. Helped by a 42 billion-euro bailout from the European Union, the industry took massive losses on soured real estate assets and transferred 51 billion of them to a state-backed "bad bank".
Bankia, which posted the biggest loss by any bank worldwide last year, said on Thursday it swung back to a profit in the first half of this year, while rivals Bankinter (>> Bankinter SA) and Sabadell (>> Banco de Sabadell SA) increased earnings - all helped by a big fall in writedowns on property assets.
But they face a rocky recovery. Spain has been in, or close to, recession for five years and many businesses and borrowers are struggling to keep up with loan payments.
The three banks all reported a rise in bad loans, though the rate of increase at the two to provide detailed information showed a slowdown in the second quarter from the first.
"The macro economic environment is still very weak in Spain," Bankia's second most senior official, Jose Sevilla, told a news conference in Madrid. "We will have to prioritise efficiency against a backdrop of more modest margins."
Providing a glimmer of hope, however, data on Thursday showed Spain's unemployment rate falling for the first time in two years, dipping to 26.3 percent in the second quarter from 27.2 percent in the first.
STILL UNDER PRESSURE
Bankia, 68 percent state-owned and Spain's fourth-largest bank with 7.5 million customers, posted the biggest turnaround, making a first-half net profit of 200 million euros.
That was below the 246 million expected by four analysts polled by Reuters, but vastly better than a 4.5 billion euro loss in the first half of 2012.
Bankia, which has closed 666 branches out of a plan to axe 1,143 by 2015, or more than a third of its network, took 856 million euros of impairments in the six months to June, against a 7.5 billion euro hit in the same period last year.
But its net interest income, the difference between the amount it pays for deposits and charges for loans, fell 36 percent on the first half of 2012, while its bad loans rose to 13.4 percent of the total from 13.1 percent at the end of March.
"We still have not arrived at a favourable moment for credit to grow again," said Sevilla, adding families were still tightening their belts and companies were seeking to cut debt.
Bankinter's first-half net profit was 102 million euros, up sharply up from the year before. Its bad debt ratio rose to 4.6 percent from 4.5 percent at the end of March, although it said the rate of increase had slowed quarter on quarter.
Recovery was slower at Sabadell, which made a 123 million euro net profit for the first six months of the year, beating analysts' expectations after big gains from financial transactions, such as trading operations.
It reported a higher bad debt ratio as well - to 10.6 percent from 9.7 percent in March - though like Bankinter the rate of increase was slower than the previous quarter.
Sabadell also said it was setting aside an extra 321 million euros related to refinanced loans, some of which it will have to reclassify as non-performing ones.
The Bank of Spain recently asked lenders to reclassify more of their refinanced loans as non-performing ones. Sabadell benefits from a government-funded protection scheme against losses on some of its assets, after it bought bailed out banks.
"Asset quality continues to press the profit and loss (account) down" for all three banks, said Juan Pablo Lopez, who covers Spanish banks for Espirito Santo.
He added that mortgage lenders, which have already taken a lot of pain, would do better than banks with big exposure to small and medium-sized enterprises, like Sabadell.
At 1145 GMT, Bankinter and Bankia shares were broadly flat, while Sabadell's were down 1.5 percent, in a European banking index down 1 percent <.SX7P>.
($1 = 0.7555 euros)
(Additional reporting by Laura Noonan in London and Jesus Aguado and Tomas Cobos in Madrid; Writing by Steve Slater; Editing by Paul Day and Mark Potter)
By Sarah White
