By Sarah White and Jesús Aguado
MADRID (Reuters) - A quarterly rise in lending income showed on Monday that Spain's Bankia
The news will strengthen the Spanish government's case that it doesn't need to extend a 41 billion-euro (35 billion pounds) bank bailout deal with European partners which expires at the end of the year, and comes ahead of data on Wednesday set to show the country pulled out of a two-year recession in the third quarter.
But with unemployment running at around a quarter of the workforce and Spanish banks focused on building up capital ahead of a Europe-wide review of their assets - rather than on lending - no one is expecting a quick recovery.
"Bankia's results were pretty good in terms of its core business and show a certain stabilisation of its recurring income," said Madrid-based Renta 4 analyst Nuria Alvarez.
"But it still faces a challenge to improve profitability and so it is still too early to say Bankia has completely turned around its business."
Bankia became the symbol of Spain's financial crisis when it had to be rescued following a property market crash.
The bank, whose problems wiped out the investments of hundreds of thousands of ordinary Spaniards, posted a record 19.2 billion euro loss last year. The government shifted its toxic property assets into a so-called "bad bank" and Bankia has been back in profit since the first quarter of 2013.
The bank is still going through a painful restructuring and cutting branches and jobs, while like most Spanish banking peers, its bread and butter lending business has suffered compared with a year ago, as low interest rates ate into margins and demand for credit declined.
But net interest income, a measure of earnings on loans minus deposit and financing costs, rose 1.6 percent in July-September from the previous three months, marking the second quarter-on-quarter increase in a row.
Rivals such as Sabadell
The Spanish economy grew 0.1 percent in the third-quarter from the second, making the first expansion in nine quarters, the Bank of Spain estimated last week, an outturn expected to be confirmed in official figures on Wednesday.
Bankia also said it was comfortable that it would pass the upcoming tests of European banks' assets.
A LONG ROAD
Bankia and its parent BFA - which houses stakes in Spanish companies that are gradually being sold off - posted a nine-month profit after tax of 648 million euros.
That puts the group on track to meet an 800 million euro profit target for 2013, a key step in its restructuring after it took 18 billion euros of European aid.
Bankia alone beat forecasts with a 362 million euro net profit for the nine-month period, joining the country's top banks Santander
But banks could still drag on Spain's economic recovery for months to come.
Most have shrunk lending to store up capital or because of what many have described as a lack of demand from solvent borrowers. Net lending at Bankia, which has been told by Europe to shrink, fell by over 9 percent in the first nine-months of 2013 from the year before.
"The accumulating and profound job losses throughout 2012 and ... 2013 alongside the steady stream of falls in industrial production, bank lending, real income, and retail trade data suggest that Spain continues to exhibit the characteristics of a major downturn," Raj Badiani, analyst at consultancy IHS Global Insight, said in a recent note.
Bad debts are also still weighing on many Spanish banks as households and small companies struggle, though Bankia's stock of loans in arrears actually dropped by 800 million euros from the end of 2012 to 19 billion euros by September.
Its bad debts as a percentage of total credit rose 13.6 percent at end-September versus 13.4 percent at the end of June - above a sector average in Spain of 12.1 percent in August - though this was mainly down to the lending drop-off.
Bankia's net interest income dropped 29 percent year-on-year to 1.73 billion euros in the nine months to September.
Created through the merger of seven savings banks, Bankia ran into troubled less than a year after listing on the stock market. Bankia's shares were down 2.9 percent in midday trade to 1.105 euro per share, after rising at the open.
(Additional reporting by Paul Day; Editing by Tracy Rucinski and Mark Potter)