* Banesto 2010 net profit 460 mln euros, vs 471 mln f/cast
* Bad loans ratio up to 4.08 percent end-Dec
* Shares underperform Spanish bank stock rally
* Banesto says to continue as independent bank
(Updates with total provisions buffer, analyst quote)
By Sonya Dowsett
MADRID, Jan 13 (Reuters) - Spanish retail bank Banesto's net profit tumbled nearly 20 percent last year, missing forecasts, as the country's economic woes drove bad loans higher and a price war for deposits bit into its income.
While relatively small, Banesto is closely watched as the first European bank to report earnings. Its results on Thursday showed a worsening climate for banks in Spain that analysts expected to be a factor across the sector.
"The earnings today point towards a marked deterioration of Banesto's financial performance set against a weakening Spanish banking operating environment," said RBS analyst Raoul Leonard.
Rising levels of unpaid loans, increased provisioning against exposure to the country's ailing property market and a deposit price war have eaten into margins at Spanish banks.
Banesto, which is 88 percent owned by Santander, said it had put aside 1 billion euros ($1.31 billion) in provisions during the year. The bank said total provisions would be significantly higher in 2011.
Banesto's total provisions stood at 1.91 billion euros in 2010. Bad loans as a proportion of total lending rose to just over 4 percent at the end of 2010, from 3.8 percent at the end of September.
Banesto enters 2011 without long-standing chairman Ana-Patricia Botin, who has moved on to run Santander's British business. Her departure led to speculation that Banesto could become the Spanish retail unit of Santander.
However, her successor, Antonio Basagiotti, said during a conference call that Banesto would remain independent and its strategy was unchanged.
"There is absolutely no change in management ... everything continues exactly as before, an independent bank," he said.
The eldest of Santander Chairman Emilio Botin's six children, Ana-Patricia is credited with having done a good job of running Banesto since 2002.
Banesto's total loans to the real estate and construction sector stood at 10.35 billion euros in 2010, around 13 percent of its loan book. Of this, 1.67 billion was non-performing and 1.08 billion was potentially non-performing, the bank said.
"Spanish banks continue to remain under margin pressure and asset quality is still deteriorating. Provisions are going to remain high in 2011," Daragh Quinn, banking analyst at Nomura said.
Banesto shares recouped early losses to trade 0.1 percent higher at 6.15 euros by 1433 GMT, underperforming a rally in other Spanish banks. These gained on a successful Spanish bond auction, driving Spain's blue chip index 2.9 percent higher. Santander, Spain's largest bank, was up 5.8 percent.
Spain's economy crawled out of a year-and-a-half long recession at the beginning of 2010, but economists expect it to contract for the year as a whole as austerity measures bite.
Spanish banks have found it harder and more expensive to access the wholesale markets as confidence in the country's economy has ebbed. This has led to a pricing war on interest paying savings accounts as banks chase retail deposits.
This was reflected in Banesto's net interest income, broadly what a bank earns on loans minus what it pays for deposits, which fell by 4 percent from 2009. It dropped more sharply in the last quarter of 2010, with an 11 percent fall to 375 million euros from 422 million euros in the third quarter. (Additional reporting by Jesus Aguado; Writing by Alexander Smith; Editing by Sophie Walker and Jon Loades-Carter) ($1=.7665 Euro)