* BBVA's Q3 net profit up 18.5 pct
* Sabadell's Q3 net profit down 8.3 pct
* Both lenders reduce bad loans by 2 bln euros (Wraps BBVA, Sabadell, adds details)
MADRID, Oct 27 (Reuters) - BBVA and Sabadell , which are among the Spanish banks with the highest exposure to Catalonia, both showed progress in shrinking their bad loan portfolios in the third quarter.
But while a economic recovery and a property rebound has allowed most of Spain's banks to tackle toxic balance sheets faster than peers in Italy, results from BBVA and Sabadell underlined that pressure on revenue from lending remains.
Around a third of total deposits at Sabadell and BBVA come from Catalonia, whose attempt at independence from the rest of Spain has spooked financial markets and bank depositors, driving some companies to relocate from the region.
Friday's results showed BBVA, the country's second biggest bank by assets, reduced its non-performing loans by 1.5 billion euros ($1.7 billion) in the quarter, while Sabadell reduced its problematic assets by 500 million euros.
The European Central Bank announced this month new guidelines for lenders to reduce bad loans, although the plans are meeting with a fierce backlash in Italy.
Italian banks have more than 210 billion in non-performing exposure, while Spanish banks have combined non-performing loans of 106 billion euros..
However, Spanish banks are struggling to lift earnings from loans, as interest rates hover at historic lows and increasing competition erodes margins.
BBVA's net interest income (NII), or profit from loans minus funding cost, was down around 2 percent against the previous quarter, while Sabadell's NII fell 4 percent.
Spanish banks have been expanding abroad in search of higher revenues and more stable returns to offset pressure at home.
BBVA's net profit was up 19 percent up for the period July to September to 1.14 billion euros, compared with a 1.04 billion euros forecast in a Reuters poll of analysts, boosted by Mexico, which accounts for more than 40 percent of its earnings.
Net profit at Banco Sabadell however fell 8.3 percent in the third quarter from a year earlier. ($1 = 0.8603 euros) (Reporting by Jesús Aguado; Editing by Paul Day and Alexander Smith)