Bloomberg News

Banesto Profit Drops 83% on Defaults, Higher Funding Costs

October 11, 2011

(Closes shares.)

Oct. 11 (Bloomberg) -- Banco Espanol de Credito SA, a Spanish retail banking unit of Banco Santander SA, said profit plunged 83 percent in the third quarter as loan impairments and funding costs climbed.

Quarterly profit fell to 11.59 million euros ($15.8 million) from 68.9 million euros a year ago, the bank said in a filing today. Earnings trailed the 56.4 million-euro average estimate in a Bloomberg survey of five analysts.

Banesto, the first Spanish lender to report earnings for the period, said “the most direct impact” on its accounts had been costlier wholesale financing. Spanish banks have faced surging costs as Europe’s debt crisis drives up the price they pay for financing while a darkening outlook for the country’s economy threatens to further delay any recovery in loan quality.

“The weaker activity of the banks is a negative for the economy,” said Daragh Quinn, an analyst at Nomura International in Madrid, who rates Banesto “buy.” He noted that Banesto’s smaller balance sheet was hurting revenue.

The bank’s loan book shrank 7 percent from a year earlier and deposits diminished 13 percent.

Net interest income dropped 14 percent to 361.7 million euros from 421.9 million euros a year ago, the Madrid-based bank said. Provisions to cover impairments climbed to 185.9 million euros from 106.2 million euros a year earlier, as the ratio of bad loans to total loans rose to 4.65 percent from 4.39 percent in June and 3.8 percent a year ago.

Weak Demand

The slump in lending was due to weak demand and the “current environment of greater credit and liquidity risk,” the bank said. Banesto’s retail funding base shrank as it refrained from renewing all the deposits it gathered in a campaign begun in the second quarter of last year.

Banesto’s core capital ratio reached 9 percent in September, allowing the bank to meet its target for the year. The lender said its ability to generate liquidity means it can cover debt maturities through 2012.

There’s little reason to suspect that the outlook for Banesto’s earnings will change much going into the fourth quarter, Chief Executive Officer Jose Antonio Garcia Cantera told reporters at a news conference in Madrid today. “The restoration of credit in Spain must come from the normalization of the wholesale debt markets,” he said.

Banesto shares rose 1.2 percent in Madrid to close at 4.61 euros, paring earlier losses of as much as 1.7 percent and trimming this year’s declines to 26 percent.

--Editors: Keith Campbell, Chris V. Nicholson.

To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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