* Recurrent net down 10 percent
* Bad loans at 3.2 percent of total (Adds detail)
MADRID, July 28 (Reuters) - Spain's second-largest bank said on Tuesday its recurring net profit fell 10 percent in the first-half as it raised its bad loans provisions, but net interest income increased sharply.
Bad loans as a percentage of the total rose to 3.2 percent end-June from 2.8 percent end-March, but it said the number of new bad loans fell by 19 percent in the second quarter, the lowest level in the last four quarters, a trend seen at other Spanish retail banks in the second quarter.
Total lending was flat in the first half at 336 billion euros, while deposits were up 2.2 percent at 499 billion.
Recurring net profit fell to 2.799 billion euros ($3.99 billion), down from 3.108 billion a year earlier, and compared with a forecast of 2.5 billion euros in a Reuters poll of analysts.
Net interest income -- the difference between interest earned on loans and that paid on deposits -- rose 23.5 percent to 6.858 billion euros, beating the poll forecast of 6.586 billion.
The bank kept a tighter rein on operating costs, which fell 1.6 percent year-on-year, with the cost-to-income ratio improving to 39.4 percent end-June from 43.2 percent a year ago.
Core capital stood at 7.1 percent at end-June, with the bank generating 0.70 points of capital since the beginning of the year.
It said it had maintained a "conservative" policy with regard to the purchase of real estate assets, but provided no further details. (Reporting by Judy MacInnes, editing by Will Waterman)