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UPDATE 2-Bankia net profit falls 79%, sees difficult fourth quarter

* Q3 net profit falls to 37 mln euros vs expectations of 46 mln

* Net interest down 2.6% y/y, up 5.3% vs Q2 on activity recovery

* Sets aside 155 mln euros in COVID-19 provisions in the quarter

* Generates more than 2.5 bln in excess capital ahead of plan (Adds details, comment, shares)

MADRID, Oct 28 (Reuters) - Bankia said on Wednesday its third-quarter net profit fell 79% from the same period a year ago as the Spanish bank warned of a “complicated fourth quarter” due to the uncertain effects of the coronavirus outbreak.

Bankia set aside 155 million euros ($183.2 million) for the quarter to protect its books and support its customers against the fallout of the COVID-19 pandemic, after providing 310 million euros for the same reason in the first half of the year.

The new provisions also pushed the bank’s return on equity (ROE), a measure of profitability, down to 1.9% in the quarter against 2.2% in the previous quarter.

The state-owned lender, which has agreed to a defensive merger with its biggest rival Caixabank, reported a net profit of 37 million euros in the quarter. Analysts polled by Reuters had expected a net profit of 46 million euros.

European banks are under pressure to join forces to deal with rising bad debt and low interest rates as they battle the fallout from the pandemic.

Shares in Bankia were down 0.7%, while Spain’s leading index Ibex-35 was 1.8% lower.

Bankia’s chairman Jose Ignacio Goirigolzarri warned of a “still complicated quarter before year end, because the pandemic’s effects are uncertain.”

Bankia’s cost of risk - which measures the cost of managing credit risks and potential losses and serves as an indication of future provisions - rose to 81 basis points in the third quarter from 73 bps in June, slightly above its 70 to 80 bps guidance for the year.

Bankia’s CEO Jose Sevilla said he expected to receive the authorisations for the Caixabank deal after getting shareholder approval in early December.

Bankia said it had met one of the milestones in its three-year strategic plan one quarter ahead of time after generating 2.5 billion euros of excess capital - above 12% of its core Tier 1 ratio - by 2020.

By the end of September, Bankia had a core Tier-1 capital ratio of 14.79%, compared to 13.27% in June.

Bankia’s net interest income, a measure of earnings on loans minus deposit costs, fell 2.6% from the same quarter a year ago to 489 million euros, pressured by the low interest rate environment. Analysts had expected a NII of 483 million euros.

But compared to the previous quarter, net interest income rose 5.3% as the bank benefited from cheap European Central Bank funding lines and a recovery in banking activity, both in consumer and mortgage lending.

$1 = 0.8461 euros Reporting by Jesús Aguado; Additional reporting by Emma Pinedo; Editing by Clara-Laeila Laudette and Jane Merriman

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