recovery hopes@ (Combines earnings of various state-owned banks, adds industry context)
* Bank of Baroda posts better-than-expected Q2 results
* Bank of India Q2 non-performing asset ratio falls
* Shares in big government banks rally in Mumbai trading
MUMBAI, Oct 31 (Reuters) - India's second-biggest state lender Bank of Baroda Ltd posted a quarterly profit that topped analysts' expectations, sending its shares higher and stoking speculation that the bad loans weighing on big government banks may be easing.
Fourth-ranked Bank of India Ltd, while reporting earnings that missed estimates slightly, said its non-performing assets fell at the end of the September quarter from a year earlier. Its shares rose the most in six years.
Indian state banks, with their high exposure to the power and infrastructure sectors, have been particularly hit by the country's economic slowdown. They are also typically more willing to ease repayment terms for struggling debtors.
Analysts say the better-than-expected earnings suggest that debt restructuring is bearing fruit and the banks' recovery efforts are gaining traction.
"The worst is behind us," Bank of Baroda Chairman S.S. Mundra told reporters after the results on Thursday. "The September quarter was the last of this bad cycle."
Bank of Baroda posted a 10.2 percent fall in July-September net profit to 11.68 billion rupees ($191 million). Analysts, on average, had expected profit of 9.5 billion rupees, according to Starmine data.
The bank's non-performing assets rose to 1.86 percent of its total assets at the end of September from 0.82 percent a year earlier.
But Mundra said growth in non-performing loans will slow in the second half, helping to send the bank's shares up by more than 10 percent, their biggest gain in more than three years.
Over $20 billion of bad loans were weighing on the country's top 10 state banks as of March 31, according to Reuters calculations based on data from individual banks.
"Asset quality pressures will not increase. We will be able to maintain these levels or reduce," said Vijaylakshmi Iyer, chairwoman of Bank of India.
Bank of India said its September-quarter net profit more than doubled to 6.22 billion rupees. That compares with analyst expectations of 6.76 billion rupees.
Its non-performing assets fell to 1.85 percent of its total assets at the end of September from 2.04 percent a year earlier.
Shares in Bank of India rose more than 20 percent, their largest one-day gain since October 2007. At 0908 GMT, the benchmark index was down 0.1 percent.
The largest state lender, State Bank of India (SBI) , which accounts for about a quarter of all loans and deposits, will report earnings on Nov. 13. Punjab National Bank , the third-biggest, reports on Nov. 8.
Punjab shares rose 8.9 percent and SBI was up 4.4 percent.
The fortunes of state banks have contrasted with those of private-sector peers ICICI Bank Ltd, HDFC Bank Ltd and Axis Bank Ltd. The banks each reported more than 20 percent profit growth after keeping their focus on consumer loans.
ICICI, India's biggest private-sector bank by assets, said a wider branch network and strong dealership connections will help the bank grow in the consumer segment.
Mid-sized state lenders are not faring as well as their bigger cousins.
Union Bank of India reported a 62 percent fall in quarterly profit as provisions nearly doubled and non-performing assets rose to 2.16 percent.
Indian Overseas Bank and Oriental Bank of Commerce Ltd each posted about a 16 percent decline in profit on a steep rise in non-performing loans.
Bank of Maharashtra Ltd reported a 72 percent decline in net profit while non-performing loans nearly doubled.
Non-performing loans as a percentage of total loans reached the highest in more than five years in June, at 4.3 percent. This has forced banks to set aside more money to cover them, reducing profits.
"The bigger banks are showing lower deterioration compared to mid-sized PSU banks," said Manish Ostwal, sector analyst at KR Choksey Shares & Securities. "They operate on stronger margins and can absorb the pressure in the short term. They also have a better ability to raise money in overseas markets." ($1 = 61.30 rupees)
(Additional reporting and writing by Prashant Mehra; Editing by Ryan Woo)