Spanish banks' profits were gutted last year as they struggled with the bursting of a decade-long property bubble. Helped by a 42 billion-euro bailout from the European Union, the industry took massive losses on troubled real estate assets and transferred 51 billion of them to a state-backed "bad bank".
On Thursday, a trio of Spanish banks, including bailed out lender Bankia, again reported rising bad debts, although the rate of increase showed a slowdown in the second quarter compared with the first.
What's more, Bankia, which posted the biggest loss by any bank worldwide last year, reported it actually swung back to a profit in the first half of the year. Bankinter and Sabadell increased earnings, too - helped by a big fall in writedowns on property assets.
Still, they face a rocky recovery. Spain has been in, or close to, recession for five years and many businesses and borrowers are struggling to keep up with loan payments. Providing some hope, however, data on Thursday showed Spain's unemployment rate falling for the first time in two years, dipping to 26.3% in the second quarter from 27.2% in the first.
Bankia, 68% state-owned and Spain's fourth-largest bank with 7.5 million customers, posted the biggest turnaround, making a first-half net profit of 200 million euros.
Bankia, which has closed 666 branches out of a plan to axe 1,143 by 2015, or more than a third of its network, took 856 million euros of impairments in the six months to June, against a 7.5 billion euro hit in the same period last year.
But its net interest income, the difference between the amount it pays for deposits and charges for loans, fell 36% on the first half of 2012, while its bad loans rose to 13.4% of the total from 13.1% at the end of March.
"The macro economic environment is still very weak in Spain," Bankia's second most senior official, Jose Sevilla, said at a news conference in Madrid. He said families continue to curb spending and companies are still seeking to cut debt. "We will have to prioritize efficiency against a backdrop of more modest margins. We still have not arrived at a favorable moment for credit to grow again."