By Jesús Aguado

Spanish lenders Sabadell and Caixabank posted lower than expected net profits in the second quarter after booking a combined 1.39 billion euros (1.26 billion pounds) in pandemic-related provisions.

In an attempt to offset pressure from low interest rates, Spanish banks have focused on cost-cutting measures and shifting away from mortgage lending to more profitable consumer lending. But both segments have been affected by the coronavirus crisis.

In anticipation of a worsening economic scenario, both lenders saw an increase in the price of insuring their loan books, though Sabadell hinted at some signs of economic recovery for the second half.

Nevertheless, Sabadell's cost risk rose to 107 basis points from 93 bps, while at Caixabank the cost of risk finished June at 106 basis points on annualised level. Sabadell guided for a cost of risk of between 90 to 95 bps by end-2020, while Caixabank forecast a cost premium range of between 60 to 90 basis points.

In the first quarter, Spain's economy contracted an eye-watering 22% year-on-year.

Shares in Sabadell were down 1.4% at the market opening, while Caixabank's were down 1.7%. The blue-chip IBEX 35 index opened up 0.7%.

As a consequence of charges of 635 million euros at Sabadell, its bottom line slumped 81% from last year.

Sabadell, the country's fifth-largest bank by total assets, reported a net profit of 52 million euros, while analysts polled by Reuters had forecast 74 million.

Sabadell's quarterly numbers were also dented by a 64 million euro loss at its British unit TSB due to provisions and impairments of 83 million euros.

Spanish banks have gone abroad in search of higher revenues, though Sabadell's 2015 purchase of TSB has been marred by major technology glitches and uncertainties around Brexit, and the impact of the coronavirus has put the bank under more pressure.

Caixabank, the country's third-largest bank by total assets, however, managed to increase net profit by 30% to 115 million euros year-on-year as lower restructuring costs offset the cost of setting aside 755 million euros to protect itself from the COVID-19 crisis.

Analysts polled by Reuters had expected a net profit of 195 million euros.

At an operating level, Sabadell's net interest income (NII), a measure of earnings on loans minus deposit costs, fell 9% in the second quarter to 820 million euros, while Caixabank's lending income fell 1.3%. Analysts expected NII of 846 million euros and 1.21 billion respectively.

At the end of June, Sabadell increased its core tier-1 capital ratio to 11.9% compared to 11.6% at end-March, while Caixabank increased its capital by 28 basis points to 12.29%.

(Reporting by Jesús Aguado; Additional reporting by Inti Landauro and Emma Pinedo; Editing by Sherry Jacob-Phillips and David Holmes)