Hungary's K&H Bank, the local unit of Belgium's KBC Group, said risk provisions rose and lending dropped sharply in the first three quarters, eroding net profit.

We have formed more substantial risk provisions because of the worsening economic environment, Chief Executive Marko Voljc told reporters.

Risk provisions rose to 31 billion forints ($174.8 million) at the end of September from 1.3 billion forints released from provisions the same time last year. Net profit fell 70 percent year on year to 8.5 billion forints as a result, Voljc said.

Lending dropped sharply as banks, including K&H, tightened conditions and consumer demand for credit plummeted amid the worst crisis Hungary has faced in nearly two decades.

The rate of non-performing loans has risen to 5 percent from 4.4 percent at the end of the second quarter and 1.3 percent a year ago, and could grow further as unemployment peaks in the first half of 2010, Chief Financial Officer Attila Gombas added.

We do not anticipate dramatic further weakening, Gombas said. The growth of the NPL rate will slow in the consumer sector. In the corporate portfolio, we might see some further deterioration before we slowly exit recession.

Voljc said that a public offering of K&H shares, something KBC has considered after the European Commission approved its restructuring plan, could happen in 2011 or later, affecting a stake of 30 to 40 percent.

I do not see it happening in 2010, he said. But beyond that it might happen.

Voljc said a potential public offering would follow a similar move planned for Czech subsidiary CSOB next year.

The main objective is to reduce reliance on state support at KBC Group ... between now and 2013. If revenue from normal operations, as well as the (Czech IPO) does not enable us to do that, then we may also consider a partial IPO in Hungary.

($1=177.35 forint)

(Reporting by Marton Dunai; Editing by Jon Loades-Carter)