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KUALA LUMPUR, May 15 (Reuters) Malaysia's biggest publicly traded firm, Malayan Banking Bhd , said third-quarter earnings dropped 6.6 percent from a year earlier due to higher taxes and bad-loan provisioning.

Analysts had expected Maybank, with a market value of almost $12 billion, to report higher quarterly earnings, helped by a less aggressive stance on loan-loss provisions.

But the bank said the slight drop in earnings from a year ago was due to the lower ''zakat'', or a Muslim alms tax, that it paid in the corresponding quarter a year earlier.

Malaysia aims to free up its financial sector to foreign banks next year, which is likely to increase competition, while thinning interest margins are prompting expansion into growth sectors such as Islamic finance and investment banking.

Malaysian banks have begun seeking acquisition targets at home and abroad as Maybank and its rivals prepare for growing competition from global giants, such as Citigroup .

Last year, Maybank bought control of insurer MNI Holdings, seeking to diversify its revenues into non-interest income such as insurance products. Maybank has also said it is interested in expanding into Southeast Asia, hoping to generate a third of its profits from abroad within 3 years.

A more aggressive policy on writing off bad loans also led its nine-month results to dip to 1.95 billion ringgit compared with 1.94 billion ringgit a year earlier, Maybank said.

Maybank posted third-quarter earnings of 641.2 million ringgit ($177.5 million) for the three months ended March 31, unexpectedly lower than the 687 million ringgit it earned in the year-ago period.

Non-interest income in the nine-month period grew more than a fifth, while net interest income grew about 7 percent, the bank said. Annualised loans growth amounted to 9 percent, Maybank added.

Maybank also said it grew its asset base by 11 percent to 212.3 billion ringgit, cementing its position as the biggest bank.

Maybank shares were flat in the January-March quarter, while rival Bumiputra-Commerce Holdings Bhd gained over 10 percent, compared with a 3 percent gain in the benchmark Kuala Lumpur Composite Index <.klse>.

($1=3.613 Malaysian Ringgit) REUTERS PV DS1701