Spain's downtrodden banks show glimmers of light in mixed quarter

* Caixabank (Amsterdam: CB6.AS - news) 's Q3 net profit up 15 pct, beats forecasts

* Sabadell's Q3 net profit down 3 pct, beats forecasts

* Popular (NasdaqGS: BPOP - news) posts tiny Q3 profit, shares down 7 pct

* Lenders improve capital ratios, NII stabilizes (Adds analyst comment, share prices, details)

By Jesús Aguado and Angus Berwick

MADRID, Oct (HKSE: 3366-OL.HK - news) 28 (Reuters) - Spanish banks showed some signs of recovery on Friday with Caixabank, the country's third largest lender, bucking a trend of shrinking European lending margins and beating profit forecasts.

However, the market punished Spanish problem child, Banco Popular, for posting worse-than-expected lending income and withholding bad loan figures mid-way through cleaning up its toxic property portfolio.

By contrast, Caixabank, along with mid-sized Banco Sabadell , both posted improvements to their bad loan and capital positions as they continue to repair balance sheets battered by years of economic and financial strife.

All three banks have seen their lending income, which makes up the bulk of their revenues, steadily slip over the past year due to the ultra low interest rate environment and a price war in Spain that has spurred a wave of cost cutting.

The shrinking pool of profits that European banks can make on loans has caused worries at a time when regulators have been demanding ever higher levels of capital.

But on Friday there were signs that net interest income, a measure of earnings on loans minus deposit costs, had begun to stabilize as Caixabank reported a rise against both the second quarter and the year before, and Sabadell's beat forecasts.

Caixabank posted a 15 percent rise in third-quarter net profit from a year earlier to 332 million euros driven by gains in its trading division, outstripping a forecast of a 7 percent fall in a Reuters poll of analysts. Its shares rose 0.5 percent by 1100GMT against a 0.7 percent fall on Europe's banking index .

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Shares (Berlin: DI6.BE - news) in Popular, the listed bank with the biggest exposure to Spain's troubled real estate sector, had fallen 7.4 percent by 1100 GMT. In June it secured a 2.5-billion-euro ($2.7 billion) capital hike to clean its books and has said it expects losses of 2 billion euros over the full year.

For the second quarter in a row Popular, Spain's sixth-largest lender, notched a tiny profit in the thousands of euros. Its net profit of 416,000 euros slightly missed forecasts.

Analysts at Jefferies said its share slump after its "messy" results mainly owed to a five percent fall in net interest income from the second quarter and a lack of disclosure over its bad loan book.

Popular CEO Pedro Larena and other executives declined to reveal the bank's non-performing loan ratio for the third quarter at a group level when pressed by reporters at a results presentation and by analysts later on a conference call.

Popular, whose shares have fallen more than 60 percent in the past year, had the highest rate of non-performing loans among Spain's large banks with a ratio of 12.3 percent in the second quarter.

Sabadell, Spain's fifth largest bank, had a near 3 percent fall in profit in the months from July to September against the year before, which was better than forecasts and was up by 27 percent on the second quarter, thanks to lower provisions.

Shares in Sabadell, however, fell close to 5 percent as analysts highlighted weaker lending income and net profit in Britain where it owns British bank TSB.

All three banks managed to boost their fully-loaded common capital tier one ratio, a closely-watched measure of a bank's strength. ($1 = 0.9164 euros) (Editing by Alexander Smith)