(Updates with closing share price in fifth paragraph, analyst comment from sixth.)
July 27 (Bloomberg) -- Banco Santander SA, Spain’s biggest bank, said second-quarter profit fell 38 percent as loan losses rose in Spain and Brazil and the company set aside money to compensate U.K. customers mis-sold mortgage-loan insurance.
Net income dropped to 1.39 billion euros ($2 billion) from 2.23 billion euros a year earlier, the Santander, Spain-based bank said in a filing to regulators today. Earnings missed the 2.05 billion-euro average estimate of 13 analysts surveyed by Bloomberg as the lender set aside 620 million euros to cover future U.K. loan-protection claims.
Santander fell 3.2 percent in Madrid trading after a decline in profit in its three main markets -- Brazil, the U.K. and Spain -- led the bank to report the lowest quarterly result since 2005. An unexpected surge in loan impairments in Brazil on top of the increase analysts had foreseen in Spain means the bank’s earnings outlook will probably “remain under pressure” said Daragh Quinn, an analyst at Nomura International in Madrid, in a report.
“It’s disappointing that the results don’t just reflect Spain and its problems but other markets as well,” said Peter Braendle, who holds Santander shares as part of the 57 billion Swiss francs ($71.3 billion) he helps manage at Swisscanto Asset Management in Zurich. “It was a big surprise that profit in Brazil also fell.”
U.K. IPO Shelved
Santander slumped 24 cents to 7.34 euros in Madrid, extending the decline this year to 7.4 percent. That compares with a 12 percent drop in the 46-company Bloomberg Europe Banks and Financial Services Index.
“All the business units reported weaker numbers than expected,” said Santiago Lopez, an analyst at Exane BNP Paribas in Madrid, who cut profit estimates for Santander for the next three years by an average 13 percent. He reduced his rating on the stock to “neutral” from “outperform.”
Chief Executive Officer Alfredo Saenz said the bank has shelved plans for an initial public offering of its U.K. unit this year, even though it remains committed to the plan. In a gesture to protests in Spain accusing banks of contributing to the country’s economic crisis, Saenz announced a three-year moratorium on payments of mortgage principal for unemployed customers or those that have suffered a 25 percent drop in earnings.
Chairman Emilio Botin, 76, told shareholders on June 17 that Santander would aim for 2011 profit in line with the 8.18 billion euros earned last year. Saenz said today the bank expects profit excluding one-time items in 2011 will be similar to last year’s. The company maintained its dividend target of 60 cents a share this year.
Santander’s core capital ratio, a measure of financial strength, fell to 9.2 percent from 9.66 percent in March, the bank said.
Bad loans as a proportion of total lending at Santander rose to 3.78 percent from 3.61 percent in March, the company said. The bad-loan ratio in its home market climbed to 4.81 percent from 4.57 percent three months earlier. Net new loans into default jumped to 4.02 billion euros from 3.11 billion euros in the first quarter and 3.39 billion euros a year ago.
Santander’s profit from Spain slumped 45 percent to 387 million euros from a year earlier as lending declined 7 percent, the bank said. Net interest income at the business rose to 1.51 billion euros from 1.49 billion euros.
Second-quarter profit from Latin America rose to 1.19 billion euros from 1.12 billion euros a year earlier.
Earnings from Brazil, which contributes 25 percent of profit, the most of any unit, slipped to 649 million euros from 686 million euros a year before, as loan-loss provisions jumped to 1.23 billion euros from 930 million euros. The bank’s Brazilian loan book grew at a 14 percent annual clip.
“While higher loan losses could be expected in Spain, the rise in the risk premium in Brazil is likely to raise concerns on the outlook for Brazil,” said Nomura’s Quinn. Saenz said Santander is optimistic about its Brazilian business and doesn’t believe there’s a credit bubble in the country, where its loan default ratios are in line with its peers.
Profit from the bank’s U.K. unit, led by Botin’s eldest child Ana Patricia Botin, 50, posted a second-quarter loss of 144 million euros compared with a profit of 524 million euros in the year-earlier period. “Financial results are, however, being adversely impacted by costs of liquidity, term funding and low interest rates,” Ana Botin said in a statement.
Stripping out the impact of the U.K. charge, Santander’s second-quarter profit would have been 2.01 billion euros.
--Editors: Frank Connelly, Francis Harris
To contact the reporters on this story: Charles Penty in Madrid at firstname.lastname@example.org
To contact the editors responsible for this story: Frank Connelly at email@example.com