By Huw Jones

LONDON (Reuters) - Banks should shut branches to help lift flagging profits and get on a healthier long-term footing, an influential global central banking forum said in a report on Sunday.

Closing bank branches is politically sensitive, particularly in Europe, with a backlash in countries including France, Spain and Britain where opponents say remote areas or regions where people are less well off have been targeted.

A Reuters analysis showed British banks are disproportionately closing branches in the lowest-income areas, while expanding in wealthier ones.

The Bank for International Settlements, which represents the world's major central banks, said that now banks have reinforced their capital reserves, it is time for them to focus on profits.

Persistently low interest rates, anemic economic growth and too many souring loans on balance sheets were holding back a recovery in profits, meaning banks need to pursue other ways to lift revenues, the BIS said in its annual report.

"It will be critical to cut excess capacity. One gauge of potential overcapacity is the density of bank branches."

Lenders in Europe are already taking action. Deutsche Bank <DBKGn.DE> and Spain's Santander <SAN.MC> are among the latest major European banks most recently looking to make significant branch closures.

BIS figures in the report showed the number of bank branches per 100,000 adults in Spain and Italy was 60 to 70, compared with fewer than 40 in Japan and the United States.

Its comments chime with European regulators who say Europe is "overbanked", suggesting that lenders should consolidate sooner rather than later to tackle poor profitability.

The BIS said the scale of cuts so far have been "rather limited" compared with past crises.

After the onset of the Nordic banking crisis in 1991, banks in Finland cut the number of branches by more than 40 percent within four years and slashed operating expenses by half.

The Basel Committee of global banking regulators, based at the BIS in Basel, Switzerland, is completing its post-crisis bank capital rules, which lenders say will lead to "Basel IV" or another step-up in costly requirements.

Banks say pressure from regulators to hold higher levels of capital is making a return to sustainable profitability harder, but the BIS report rejects this argument.

The BIS says higher capital levels translate into better credit ratings for banks, helping to push down funding costs and increase availability of credit for the economy.

There was "ample room" for Basel when it comes to finalizing these requirements, as research showed that additional bank capital yields sizeable economic benefits if phased in gradually, the report added.

(Editing by Alexander Smith)