MADRID—Bankia SA reported a slight improvement in third-quarter net profit from a year earlier, but a key driver of profitability fell in the latest sign of Spanish banks' struggle to translate a recovering economy into stronger loan growth.

Bankia, Spain's largest bailed-out lender that is still majority owned by the government, said on Monday that net profit in the third quarter rose to €300 million ($330 million) from €299 million in the year-earlier period on slightly fewer loan-loss provisions. That was roughly what analysts had expected Bankia to report, according to a poll by data provider FactSet.

But net interest income fell 6.4% to €688 million in the third quarter compared with the year earlier period, while quarter-on-quarter Bankia's net interest income fell 1%.

While those declines were in line with what analysts were expecting, the slump confirms the challenges faced by Spain's banking sector, as laid bare over the past two weeks by the earnings results of other Spanish lenders. Despite Spain's expanding economy, many individuals and businesses remain focused on paying off existing debt taken on during the country's property boom, rather than taking out new loans. That "deleveraging" process—as debt repayments outpace new loan issuance—is hurting banks' net interest income, a key driver of profit for retail banks.

Net interest income is the difference between what lenders pay clients for deposits and what they charge for loans.

Bankia is the last major Spanish lender to report third-quarter earnings this year, and the bank's decline in net interest income mirrors the hit taken by other Spanish banks that have reported third-quarter results.

Banco Santander SA's Spain unit and Caixabank SA also reported a quarter-on-quarter drop in net interest income. Part of the decline in net interest income in the third quarter, compared with the second, is explained by the limited financial activity in August, when Spaniards and many other Europeans take their summer vacations.

Another factor: Some of the new loans that banks are selling are less profitable than in previous quarters because of stiff competition in lending to small and medium-size businesses, and a continued decline in the Euribor rate.

Spanish banks had been offsetting some of the declines in loan yields and sluggish loan volumes with income generated from selling off their bondholdings. But many of those gains have already been realized.

On the upside, Bankia and other Spanish banks have made progress in lowering the amount of nonperforming loans on their books as Spain's economy settles into recovery mode and fewer borrowers become delinquent and more investors snap up loan portfolios.

Bankia said the ratio of bad loans to total loans was 11.4% as of September, down from 12.2% as of June. The lender said its capital ratio under international regulations, known as "fully loaded" Basel III criteria, was 11.73% as of September.

Write to Jeannette Neumann at jeannette.neumann@wsj.com

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(END) Dow Jones Newswires

November 02, 2015 04:55 ET (09:55 GMT)

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