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UPDATE 2-Hungary's OTP posts record loss on loan refunds, Ukraine crisis

* Loan refunds call for 176.1 bln forints in provisions

Writes down entire Ukraine goodwill, sees big 2014 loss

* Non-performing loans climb to 21.6 pct of loan book

* Capital position stable, normal operations profitable

(Adds interview comments from Deputy CEO)

By Marton Dunai

BUDAPEST, Aug 15 (Reuters) - Hungary's OTP Bank posted its deepest quarterly loss on record on Friday, weighed down by regulations at home and higher loan provisions in Ukraine.

OTP's second-quarter net loss was 153 billion forints ($655 million) as it set aside 176 billion forints to prepare for a Hungarian law forcing banks to refund loan clients. Its 109 billion forint operating profit was in line with recent quarters.

Hungary's parliament required banks in July to pay refunds to customers on contract modifications that had been deemed unfair and on disadvantageous exchange rates that were used to calculate foreign currency loan payments.

"Those acts will put a substantial burden on the banking sector," OTP said in its earnings statement on the Budapest Stock Exchange website.

The bank, which had been profitable in nearly every quarter, even during the economic crisis in 2008 and 2009, had warned on Monday that it might suffer deeper than expected losses because of Hungary's regulatory environment.

Deputy Chief Executive Laszlo Bencsik told Reuters the bank was upbeat on its ability to generate profits as it saw problems easing in Russian and Ukraine as well as in Hungary.

OTP's group-level loan book shrank by 1 percent on an annual basis as mortgage loans and corporate loans dropped and consumer loans grew. Deposits grew by 5 percent from the same period last year.

Net interest income was 158.3 billion forints in the quarter, down 3 percent from a year earlier, while the bank made 41.5 billion forints from fees, a 3 percent annual fall.

OTP said its capital position was still stable even as its solvency margin narrowed to 17.8 percent from 20.2 percent in the first quarter, compared with an 8 percent regulatory minimum. Its non-performing loan rate climbed to 21.6 percent of the loan book from 21.2 percent previously.

UKRAINE PAIN

As ex-communist central Europe's biggest independent lender, OTP has two of its largest operations in Ukraine and Russia. Both have been profitable in the past but the conflict in Ukraine and delinquency among borrowers has sapped those markets.

"Apart from the Ukraine and Russia, the rest of the group enjoys an improving or stabilising macroeconomic environment," the bank said, adding that loan demand was returning to certain market segments and the outlook for portfolio quality and risk costs improving.

"As for the Ukraine and Russia, the short-term outlook is anything but positive," OTP said.

The bank wrote down its entire goodwill in Ukraine and raised its non-performing loan coverage to 90 percent in Crimea, which hit its bottom line by a combined 20 billion forints.

Management expects losses in Ukraine to reach 30 billion forints in 2014, compared with a loss of 10 billion to 20 billion seen earlier, as risk costs in Crimea rise and an overall tough operating environment will continue this year. ($1 = 233.6500 Hungarian forint)

(Reporting by Marton Dunai; editing by Pravin Char and Tom Pfeiffer)