UPDATE 2-Bankinter sees signs that worst of COVID-19 crisis might be over

* Net profit rises 14% to 148 mlns, above market forecasts

* First increase y/y in quarter since COVID-19 outbreak

* Net interest income remains under pressure

* Shares fall 1.5% (Adds details, shares)

MADRID, April 22 (Reuters) - Bankinter reported its first year-on-year net profit increase since before the coronavirus outbreak started and predicted the worst of the crisis might be over as the bank does not plan to set aside more provisions against potential bad loans.

Spain’s fourth-largest bank by market value said its business activity reflected a sustained momentum across all its banking units even though the economic landscape at the start of this year had yet to show signs of a recovery.

Bankinter reported a net profit of 148.3 million euros ($178.40 million) in the January to March period. Analysts polled by Reuters expected a 120 million euro net profit.

The profit increase, the first year-on-year rise since the second quarter of 2019, came after the bank managed to increase its loan book, especially to companies, boosted by state-backed credit lines.

In the absence of any COVID-19 related provisions in the quarter, the bank managed to increase its return on equity (ROE), a measure of profitability, to 11.3% from 7% in the fourth quarter.

Shares in Bankinter however fell 2% compared with a 0.8% increase in Spain’s leading blue-chip index Ibex-35 as financial margins remained squeezed.

Banks across Europe are under growing pressure from rising bad debts and record-low interest rates.

Bankinter’s Chief Financial Officer, Jacobo Díaz, told analysts in call we “do expect bad news to come but we don’t know exactly when.”

The bank finished the quarter with a bad loan ratio of 2.37% compared with a 4.55% ratio for the sector as of February.

Though net interest income, earnings on loans minus deposit costs, or NII, rose 1.3% to 311.8 million euros, it was below the 314 million euros forecast by analysts. Compared with the the previous quarter NII fell 2.6%.

Bankinter plans to list its insurance business Linea Directa Aseguradora (LDA) on the stock market next week. LDA accounts for a fifth of the bank’s profits, but Bankinter said it was optimistic about offsetting this in a three-year horizon, targeting net profit of more than 550 million euros in 2023.

$1 = 0.8313 euros Reporting by Jesús Aguado; additional reporting by Emma Pinedo; editing by Inti Landauro and Jane Merriman