UPDATE 2-Latin American asset sales boost Spain's BBVA
(Adds analyst quote, details on South America, Spain)
MADRID, July 31 (Reuters) - First-half profits at Spain's BBVA jumped on asset sales in Latin America, where muted earnings helped offset some of the pain in its recession-hit home market but also signalled a possible downturn ahead.
A strong performance in Mexico, where Spain's second bank makes more than a quarter of revenues, helped keep lending income steady despite a slump in Spain, where the economy continues to shrink, weighed down by high unemployment.
While Mexico showed growth, other South America markets such as Chile and Venezuela, which BBVA relies heavily on, suffered in the three months to June as currency devaluations and slowing economic growth weighed on income.
Net profit from South America fell 11 percent in the first half of the year compared to 2012 and analysts said this was an area to watch.
"Asset quality deterioration, margin pressure and low growth will be challenging in the region," Jaime Becerril, an analyst at JPMorgan, said in a note.
Like bigger peer Santander, BBVA has leaned on overseas markets to counter problems at home, where the deep recession is dragging on earnings.
Spanish banks also took billions of euros of provisions last year to cover losses on bad real estate deals to clean-up their books after a property crash.
Lower provisions in the first half of 2013 led to dramatic profit turnaround at many Spanish lenders, although underlying earnings are still hampered by rising bad debts and low interest rates squeezing lending margins.
"Banking activity in Spain does not yet reflect the beginning of the economic recovery," the bank said in its earnings statement.
BBVA, which makes nearly 60 percent of revenues in emerging economies, including Turkey, also made around 1.7 billion euros worth of gains from selling assets in Latin America in the first six months of 2013, including several pension businesses.
That helped it post a 91 percent leap in first half net profit to 2.9 billion euros ($3.84 billion), more than Santander, Spain's biggest bank.
BBVA shares were down 1 percent at 7 euros per share at 0800 GMT, underperforming the European sector which was down 0.6 percent.
PAIN IN SPAIN
Thanks to its big presence in Mexico, several analysts have favoured BBVA versus Santander, which is more exposed to Brazil where an economic recovery has so far been uneven.
Economic growth in Mexico also slumped to its lowest in three years in the first quarter of 2013, though it recovered in May.
BBVA grew net profits in Mexico by 10 percent in the first half, while net interest income, a measure of earnings on loans, also rose just over 10 percent from a year ago.
That helped keep net interest income afloat across the BBVA group. At 7.3 billion euros, it was down only 0.5 percent on the previous year in the first half.
Mexico also offset net interest income slumps in other markets, including the United States.
In Spain, profits fell over 5 percent from a year ago to 742 million euros - a figure excluding losses on rotten real estate assets, which added up to 629 million euros in the first half.
Net interest income in Spain slumped over 13 percent to 2 billion euros, and loans in arrears grew, pushing up bad debts at the group level from 5.3 percent of outstanding loans at the end of March to 5.5 percent at the end of June.
BBVA was also hit by changes to its mortgage contracts after it was told by a court it had to remove clauses which set maximum interest rates to be paid by clients.
Removing the so-called mortgage 'floors' would cost it 35 million euros in net profit in June, the bank has said.
BBVA said its capital ratio, a key measure of its strength, would be 9 percent by the end of the year under a 'fully-loaded' Basel III model. That takes into account changes that have to be made by 2019 under stricter international rules on capital. ($1 = 0.7547 euros)
(Additional reporting by Jesus Aguado; Editing by Julien Toyer and Elizabeth Piper)