* Regional lenders swing back into profit in H1
* German economy in surprise turnaround
* Landesbanks warn bad loans may yet wreck FY earnings
By Jonathan Gould
FRANKFURT, Aug 27 (Reuters) - Germany's regional public sector lenders swung back into profit in the first half of the year, mirroring a surprise turnaround of the German economy, but warned looming bad loans may yet wreck full-year earnings.
Highlighting the doubts that also belie the bottom-line improvement among its peers, Germany's biggest landesbank LBBW on Thursday said it was "not legitimate" to extrapolate full-year results from the six month figures.
"The bank expects that the difficult situation in the financial markets as well as in the real economy will persist," LBBW said in a statement.
The Stuttgart-based lender swung to a 215 million euro ($306 million) profit in the first six months of the year from a 181 million euro loss in the same period a year earlier, as buoyant markets reversed earlier writedowns, boosting trading results.
But an LBBW spokesman said higher risk provisioning for bad loans meant it had actually made a loss in the second quarter.
LBBW boosted first-half loan loss provisions by 740 million euros from a 23 million euro reserve release a year before.
The move paralleled those of other landesbanks this week, with No. 2 player BayernLB nearly quadrupling its bad loan reserves and saying it was likely to boost them again over in coming months to account for problem business in eastern and southeastern Europe.
NordLB on Thursday said it had raised its bad loan provisions five-fold in the first six months of the year.
Landesbanks, which act as wholesale banks for the local savings banks that control over 40 percent of Germany's retail banking market, are big lenders to companies in their regions and thus tightly tied to the country's economic fortunes.
Europe's biggest economy pulled out of recession in the second quarter, posting surprise 0.3 percent quarterly growth, but economists fear a wave of insolvencies is unavoidable in the wake of the deepest economic crisis since World War Two.
Accordingly, public sector lenders this week sounded a cautious note even as analysts cheered the GDP revival and further brightening in the Ifo business sentiment survey.
"It is not possible to make serious forecasts up to the end of the year due to the continuing uncertainty about the economic and market situation," BayernLB Chief Executive Michael Kemmer said.
"A loss for the year still cannot be ruled out," he added.
CAT HERDING
Banking observers worry that the return to profit in the first half of the year might also take the pressure off Germany's seven separate landesbank groups to merge, something Berlin has pushed strongly for in the wake of the crisis.
"Everyone is cleaning up his own mess at the moment and trying to sort themselves out," said banking expert and academic Wolfgang Gerke.
Industry observers have for years urged cutting the number of landesbanks to two or three and consolidation is supported by the lenders' savings bank owners.
However, state politicians, reluctant to lose power and prestige if their regional banks are merged, appear no closer to pushing consolidation forward, even after the landesbanks required billions of euros in state guarantees to offset losses on toxic assets.
German states typically own big minority stakes in their landesbanks, giving state politicians a significant voice.
"Now that they are ostensibly making profits again, they consider themselves on the mend and think that they no longer have to do anything," said Professor Hans-Peter Burghof, banking expert at the University of Hohenheim.
"Most of the banks lack sustainable business models that will allow them to get back on to a sound footing in the medium term," Burghof added. ($1=.7024 Euro) (Additional reporting by Patricia Uhlig; Editing by Jon Loades-Carter)