* NPLs 2.6 percent of loans vs 2.3 percent at end-June
* Reiterates 3 percent bad loans ratio target for 2009
* Raises provisions to 100 million euros in Q3 vs 57 million in Q2
* Year-on-year 9-mth net profit down 15.3 percent
* Shares 1.5 percent lower
(Adds conference call comments, analyst comments, share price)
By Tracy Rucinski
MADRID, Oct 7 (Reuters) - Banesto missed nine-month net profit forecasts and ramped up provisions against bad loans in its battle against Spain's prolonged recession.
The bank, 88 percent owned by the euro zone's largest bank Santander, almost doubled generic provisions in the third quarter to 100 million euros ($242.6 million), compared with the previous three months.
It expected to continue ramping up cushioning against deteriorating credit quality for at least another year, chief executive Jose Garcia Cantera said in a conference call on Wednesday's results.
"Quarterly provisions of about 80-90 million euros should be enough to hold the bank through 2009, 2010 and part of 2011," Cantera said.
Banesto's non-performing loans ratio rose to 2.59 percent at the end of September from 2.3 percent at end-June, and Cantera reiterated the bank's target for a ratio of 3 percent in 2009.
The figure is well below the Spanish banking sector's bad loans ratio, which has already topped 4 percent and which Banesto expects will continue to rise.
"Given the economic outlook for Spain, further deterioration in bad loans (for the banking sector) should be expected in 2010. It would be prudent to say bad loans haven't bottomed," Cantera said.
At 1126 GMT, Banesto's shares fell 1.49 percent to 9.26 euros.
"We continue to believe that credit quality will get worse before it gets better," Espirito Santo analysts said in a note to clients.
Banesto made net profit of 553.6 million euros ($813.8 million), missing expectations for 571.9 million, while net interest revenue -- the difference between what a bank earns on loans and what it pays on deposits -- rose 10.7 percent to 1.3 billion euros.
"This is still a strong top line performance ... as margins remain fairly flat and the bank continues to benefit from slower lending repricing, lower spreads on liabilities and a better funding mix," JP Morgan analysts said in a note.
Banesto's Tier I capital ratio stood at 8.6 percent at the end of September. ($1=.6802 Euro) (Additional reporting by Paul Day, Jesus Aguado; Editing by Rupert Winchester and David Cowell)