* Q1 net profit 2.11 billion euros, vs forecast 2.19 bln
* Net interest income 7.51 bln euros, vs forecast 7.42 bln * Chairman Botin says main trouble spot Spain is recovering
* CEO plays down concerns of credit bubble in Brazil
* Shares up 1.5 percent
(Updates with CEO comments on Brazil, Spain property, shares)
By Elisabeth O'Leary and Judy MacInnes
MADRID, April 28 (Reuters) - Spanish bank Santander flagged a turning point for its struggling domestic business, shrugging off a 5 percent fall in first-quarter earnings.
"Revenues are growing at a good pace throughout the group and in Spain reversed the downward trend of recent quarters. I am convinced that this change will continue in coming months," said Emilio Botin, chairman of the euro zone's largest bank.
While analysts agreed things looked better in Santander's home market, they said it would be a while before Spain was out of the woods. The country has been a focus of market attention since a property crash unleashed high personal debt levels and unemployment affecting one in five people.
Santander said on Thursday that profit in Spain, which accounts for less than Brazil or Britain, fell 31 percent year-on-year but was up 54 percent quarter-on-quarter.
"Spain will start to look better in terms of profitability, but it will still be weak for a while," Evolution Securities analyst Arturo de Frias said.
Chief financial officer Jose Antonio Alvarez said he did not expect higher euro zone rates to prompt a big rise in the bank's bad debt rate, which was expected to peak this year.
Spanish bad loans as a percentage of total loans were 4.57 percent at end-March versus 4.24 percent at December, and compare with 5.83 percent for the Spanish banking sector as a whole at the end of 2010.
Meanwhile, Banco Sabadell said its first-quarter net profit fell 22 percent to 84 million euros, hit by provisions for exposure to a sickly property market, with its bad loan rate standing at 5.46 percent. Santander shares were up 1.5 percent at 8.6 euros by 1332 GMT, outperforming a 0.4 percent rise in the wider European banking sector.
BOOMING BRAZIL
Retail Spanish banking makes up 13 percent of Santander's profit, less than its business in Britain, which makes up about 17 percent, or Brazil, which contributes a quarter.
Group net profit dropped to 2.11 billion euros ($3.1 billion), compared with a forecast for 2.19 billion.
Brazilian profit rose 22.5 percent to 732 million euros, the main contribution to a 1.3 billion profit in Latin America.
The eurozone's biggest bank by market capitalisation still has some catching up to do with its main competitors in Brazil, particularly local players such as Banco Bradesco, chief executive officer Alfredo Saenz said.
But he played down concerns that Brazil might be facing a credit bubble, attributing Santander's slower growth to the fact it is still integrating all its businesses there.
"We don't believe there is a credit bubble in Brazil and don't see this happening in the next few quarters," Saenz said.
Loans at Santander Brazil grew 18 percent in the first quarter, up from 16 percent in the fourth and just slightly below competitors' levels, Saenz added.
Analysts highlighted strength in Santander's core capital, which rose to 9.66 percent from 8.8 percent in December, comfortably above the Bank of Spain's 8 percent minimum.
And fund managers such as Yohan Salleron at Mandarine Gestion in France, with about 1 billion euros under management, like the bank because of its geographical diversification.
"It used the crisis to its advantage by increasing its presence in countries like UK and Germany. It is going to turn out to be a winner from the financial turmoil as it has amassed quite a few assets at attractive prices," he said.
Spanish banks have been struggling with a property crisis at home which many analysts believe is far from over and could keep economic growth muted for years to come.
Unemployment of 20 percent, more than double the European average and the highest rate in the region, has weighed on Spaniards' ability to repay mortgage debt. Banks have had to set aside more and more to offset falling property values.
Saenz said Santander is seeing a slight uptick in home sales at its real estate division, but these are still at a discount of between 26 and 28 percent.
"I am not sure if we will see deeper discounts...We will probably see a stable property market this year," he said.
In broad terms, Santander's business has been performing well, with net interest income -- broadly what a bank earns on loans, less what it pays for deposits -- up 5.5 percent to 7.51 billion euros, just pipping expectations for 7.42 billion.
European rival Deutsche Bank posted an 18 percent rise in quarterly net profit as good results for its investment bank and deals to expand retail and wealth management operations bolstered the bottom line. (Additional reporting by Lionel Laurent in Paris; Editing by David Holmes and Alexander Smith) ($1 = 0.6817 euro)