* ADCB Q2 profit 1.13 bln dhs vs 1.28 bln dhs yr-ago

* Weighed by big jump in Q2 impairments to 350.9 mln dhs

* Third Abu Dhabi bank to report lower earnings

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By Stanley Carvalho and David French

ABU DHABI/DUBAI, July 18 (Reuters) - Abu Dhabi Commercial Bank beat analysts' forecasts despite posting a 12.3 percent drop in second-quarter net profit on Monday, weighed down by the need to set aside more cash for bad debts.

It is the third Abu Dhabi bank to report weak earnings, reflecting the struggles of the emirate's banking sector as the impact of lower oil prices and reduced government spending feeds through into the wider economy.

Abu Dhabi's third-largest bank by assets made a net profit attributable to shareholders of 1.13 billion dirhams ($307.7 million) in the three months to June 30, compared to 1.28 billion dirhams in the same period a year ago.

Four analysts polled by Reuters had forecast a net profit for the quarter of 1.07 billion dirhams.

The bank's earnings were dragged down by a steep rise in impairment charges, with 350.9 million dirhams set aside to cover bad debts in the second quarter compared to 83.9 million dirhams in the same three months last year.

Net interest income from traditional banking operations also fell 1 percent on the same three months of last year to 1.53 billion dirhams.

These factors offset a 24 percent increase in non-interest income, such as earnings from fees, to 616.7 million dirhams. The bank noted, in relation to the first half of the year, that fees in its retail banking business had grown strongly on the back of higher loan volumes and credit card spends.

"We remain prudent in our growth strategy and continue to focus on maintaining a diversified funding base while liquidity remains a top priority," Chief Executive Ala'a Eraiqat said in the statement.

Lower oil prices are forcing UAE lenders to adjust to tighter liquidity as the government uses revenues previously placed as deposits with banks to help plug the budget deficit.

The bank's average net interest margin in the first half of the year fell to 3.11 percent from 3.47 percent in the corresponding period of 2015, reflecting the lower amount the bank earned on its lending versus how much it paid out to initially secure the funds.

Both the total amount of loans and deposits the bank held on June 30 were up 13 percent year-on-year to 154.9 billion dirhams and 149.1 billion dirhams, although loans had been growing at a faster rate than deposits in the first half of 2016 at 6 percent and 4 percent respectively.

($1 = 3.6730 UAE dirham)

(Editing by Adrian Croft) ((davidj.french@thomsonreuters.com; +971 4 362 5864; Reuters Messaging: davidj.french.thomsonreuters.com@reuters.net))