(Adds details, analyst comment, NBG CEO comment)
* Recession hits loan books
* Provisions for bad debt increase
* NBG, Piraeus expect to resume ECB funding
By George Georgiopoulos and Lefteris Papadimas
ATHENS, May 30 (Reuters) - Greece's biggest lender National Bank made a heavy loss in the first quarter and rival Piraeus also lost money as the country's recession sapped clients' ability to pay back loans and hit new business, the banks said on Wednesday.
With more than one in five Greeks unemployed and the economy in a fifth straight year of recession, people are struggling to meet their debt repayments, forcing banks to set aside more money to cover potential losses.
At the same time, banks are having to eat into their own profit margins by paying depositors higher interest rates to discourage them from withdrawing their funds, a tactic that squeezes the net interest income they earn.
National Bank said it lost 537 million euros ($665.48 million) as provisions for non-performing loans surged by 47 percent year-on-year to 539 million.
Piraeus, the country's fourth largest lender, said it lost 80 million euros before tax. But using an outstanding deferred tax asset related to a bond swap allowed it to post a profit of 298 million euros.
Provisions for non-performing loans at Piraeus were also steeply higher - up by 78 percent compared to the same period a year earlier.
"The market remains focused on the sector's recapitalisation which will help renew direct access to ECB funding. First-quarter results take the back seat," said akis Zamanis, head of research at Athens-based Beta Securities.
Both banks were recapitalised earlier this week by a state bank support fund - the Hellenic Financial Stability Fund (HFSF) - as huge losses from a mammoth sovereign bond swap to cut Greece's debt depleted their capital base.
"The capital injection secures us uninterrupted access to Eurosystem liquidity, it allows us to disengage from liquidity drawn on the Bank of Greece's ELA facility," National Bank's CEO Apostolos Tamvakakis said in a statement.
On Tuesday, the HFSF fund injected 18 billion euros into the country's four largest banks to restore their capital adequacy and enable them to borrow from the European Central Bank at a lower cost than from the country's central bank.
The HFSF fund advanced 7.4 billion euros to NBG and 4.7 billion euros to Piraeus in the form of European rescue mechanism bonds the banks can repo at the ECB.
"We strengthened the banks' capital adequacy to 8 percent which gives them access to ECB funding," the fund's president Panagiotis Thomopoulos told reporters on Wednesday. "Depositors should not worry."
On a more positive note, NBG said its operations in Turkey and other Balkan countries contributed 450 million euros to core earnings, a rise of 7 percent year-on-year.
Greece's banking sector has been haemorrhaging deposits since the debt crisis erupted in late 2009 when worried depositors began sending money abroad or tapped savings in order to get by, burning up their cash reserves without any near-term hope of replenishing them.
Between December 2009 and March 2012, the banking sector's deposit base collapsed by 72 billion euros to 165 billion, based on central bank statistics, forcing banks to turn to the lenders of last resort to plug their funding gaps.
Both banks lost deposits in the first quarter. Piraeus said its deposit base shrank by 24 percent year-on-year to 20.9 billion euros. At NBG, deposits fell by 2.3 billion euros, with its loans-to-deposits ratio at 111 percent.
Greek banks pledged various collateral to borrow a total of 127 billion euros from the ECB as well as from the Bank of Greece's ELA facility up to January this year, a sum that translates to about 77 percent of their total deposits.
With Greece's 215-billion-euro economy contracting at a 6.2 per cent annual pace in the first quarter as austerity measures to cut debt squeeze disposable incomes, asset quality is deteriorating.
Piraeus Bank said loans in arrears of more than 90 days reached 16 percent of its loan book at the end of the first quarter, up from 13.5 percent in December 2011. It blamed the deep recession and political uncertainty for the rise.
At NBG, the ratio of non-performing loans in Greece rose to 15.5 percent from 13 percent in December.
Political stalemate after an inconclusive May 6 election have forced Greece to hold a repeat vote on June 17. The choice facing Greeks is stark: to back pro-bailout parties and swallow more austerity, or to support anti-bailout parties and risk losing the international funding which is staving off bankruptcy. ($1 = 0.8069 euros) (Editing by Andrew Osborn and Jon Loades-Carter)