Santander Second-Quarter Net Falls 8%, Hurt by Spain
July 29, 2010, 12:30 PM EDTBy Charles Penty
(Updates with closing share price in seventh paragraph.)
July 29 (Bloomberg) -- Banco Santander SA, the biggest Spanish bank, said second-quarter profit fell 8 percent after a drop in earnings in its home market offset growth in Brazil.
Net income declined to 2.23 billion euros ($2.9 billion) from 2.42 billion euros a year earlier, the Santander-based lender said in a filing to regulators today. That’s less than the 2.28 billion-euro average estimate of eight analysts surveyed by Bloomberg.
The bank has bought businesses in Mexico, the U.S. and Germany as Chairman Emilio Botin takes advantage of opportunities to extend the lender’s reach across its nine main markets. As credit demand falters and funding costs rise in the aftermath of Spain’s worst recession in 60 years, Botin told shareholders last month that Santander’s Brazilian earnings would outstrip those at home for this first time this year.
Santander “gathered a lot of deposits and that has hit margins a bit,” said Daragh Quinn, an analyst at Nomura International in Madrid who has a “buy” rating on the shares. Still, “expectations for Santander earnings are always very high and they’ve come in slightly below consensus, but they’re delivering on everything they said they would.”
Botin today repeated guidance given at the June 11 shareholders meeting that Santander’s earnings this year would be “in the region” of last year’s profit of 8.94 billion euros. The dividend will remain at about 60 cents per share, he said in the statement.
U.K. Network
The bank is in the final stages of talks to buy about 300 branches in the U.K. from Royal Bank of Scotland Group Plc and expects a “solution” in August, Chief Executive Officer Alfredo Saenz told analysts on a webcast. Santander is also studying the possible sale of a stake in its U.K. operations while it hasn’t made any decision yet, he said.
Santander fell 1.6 percent to close at 10.26 euros in Madrid trading, extending this year’s decline to 11 percent and valuing the company at 84 billion euros. The 54-member Bloomberg Europe Banks and Financial Services Index fell 0.6 percent today.
The bank’s core capital, a measure of its ability to absorb losses, dropped to 8.6 percent from 8.8 percent in the first quarter, Santander said. Lenders in Spain are facing a squeeze on margins as defaults mount, credit demand flags and loan books re-price to reflect lower interest rates.
Stress Results
Santander passed European stress tests that showed the bank would have maintained its Tier 1 capital ratio at 10 percent in the worst-case scenario.
Net interest income at the group level climbed 12 percent to 7.38 billion euros, while net loan-loss provisions rose 2.7 percent to 2.48 billion euros. Lending increased an annual 4.9 percent, compared with a 0.3 percent decline in the first quarter, as the bank also added 88.3 billion euros of deposits in the first half of the year, the company said.
Bad loans as a proportion of total lending rose to 3.37 percent from 3.34 percent in March and 2.82 percent a year ago. Net entries into default fell to 3.39 billion euros from 3.42 billion euros in the first quarter.
Saenz said that while defaults at the group level have probably peaked, his prediction in February that Spanish defaults would peak in the second or third quarter of this year was off the mark. He said he now sees defaults peaking next year at about 4.1 percent from 3.71 percent now.
‘Deposit War’
Profit from Santander’s Spanish retail branch network fell 21 percent to 412 million euros as net interest income dropped 9 percent. The company offered a 4 percent yield on deposits as it captured 30 billion euros from Spanish customers earlier this year in a campaign that Saenz said today was “life insurance” against stresses in the wholesale funding markets.
“Net interest income has taken a hit from the deposit war,” said Andrea Williams, who helps manage about 1 billion pounds ($1.56 billion) including Santander shares at Royal London Asset Management in London.
Earnings from the U.K. rose 11 percent to 527 million euros. The bank said in a statement to U.K. regulators it would hire over 600 workers in the second half of the year to “support business growth.” Earnings from Brazil, where Santander owns the third-biggest non-state-owned bank, climbed 32 percent to 691 million euros, Santander said.
Banco Espanol de Credito SA, a Santander-owned Spanish retail bank run by Ana Patricia Botin, the chairman’s eldest daughter, said on July 14 that second-quarter profit fell 14 percent.
Santander’s Sovereign unit in the U.S. earned 103 million euros in the quarter, compared with a 7 million-euro loss a year earlier.
--Editors: Stephen Taylor, Dylan Griffiths
To contact the reporter for this story: Charles Penty in Madrid at cpenty@bloomberg.net
To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net
