Bank Santander Profit Drops 24% on Provisions, U.K. Slump

Banco Santander SA (SAN), Spain’s biggest lender, said first-quarter profit dropped 24 percent as souring loans crimped income from its home market, Brazil and the U.K.

Net income fell to 1.6 billion euros ($2.1 billion) from 2.11 billion euros a year earlier, the bank said in a filing today. That missed the 1.65 billion-euro average estimate in a Bloomberg survey of 14 analysts. The shares fell as much as 3.6 percent.

The lender predicted reduced U.K. profit this year and said it increased provisions for asset impairments to reflect the weak economies in Spain and Portugal as well as bad loans in Brazil, the nation that contributes the most to the bank’s earnings. The Spanish government has ordered banks including Santander to book more losses on their real estate holdings as the recession threatens to force more loans to homeowners and companies into default.

“I value Santander’s diversification, but then again their home market is a real worry,” Peter Braendle, who helps manage about $60 billion, including Santander shares, at Zurich-based Swisscanto Asset Management, said in a phone interview. “Each of their local markets has different problems and challenges, but it’s good that they’re in them and not just in Spain.”

Santander shares fell 3.4 percent to close at 4.75 euros in Madrid. The stock has tumbled 16 percent this year, giving the company a market value of 44.9 billion euros.

Bad Loans

The results follow figures yesterday from Santander’s closest Spanish rival, Banco Bilbao Vizcaya Argentaria SA, which is more dependent on the Spanish market. Shares in BBVA (BBVA), which yesterday posted 13 percent decline in first-quarter profit, fell 2.1 percent today.

Bad loans as a proportion of total loans rose to 3.98 percent from 3.89 percent in December and 3.61 percent a year ago. The bank booked 3.64 billion euros in loans newly classified as in default from 4.05 billion euros in the fourth quarter and 3.11 billion euros a year ago.

Provisions for asset impairments surged in the quarter to 3.13 billion euros from 2.07 billion euros a year earlier because of Spain and Portugal and growth in its Latin American loan book, Santander said. The bank didn’t make any provisions related to the government’s real estate cleanup order in the quarter and still has about 1 billion euros to do after tax, Chief Executive Officer Alfredo Saenz said at a news conference today.

Dividend Unchanged

Santander will maintain its dividend at 60 cents a share, Chairman Emilio Botin said in a statement. The bank said it posted a core capital ratio under European Banking Authority criteria of 9.11 percent. The bank plans to sell 25 percent of the bank’s Mexican unit in an initial public offering planned for this year, Saenz said.

The bank has also exhausted an extra provisioning buffer built up in previous years, and replenished it in the quarter with 99 million euros. Profit before provisions rose 9 percent to 6.28 billion euros, a quarterly record, Santander said.

Profit from Santander’s Spanish retail network plunged 73 percent to 75 million euros as its loan book shrank 8.7 percent from a year ago, the bank said. The bad-loans ratio at the unit rose to 8.90 percent from 8.47 percent in December and 5.99 percent a year ago.

Profit from the U.K. fell 40 percent to 306 million euros as provisions surged 40 percent in the first quarter, amid increased charges across the growing company loan book and real estate risks predating 2008, the U.K. unit said in a filing.

‘Good Proxy’

First-quarter profit trends for the division, led by Botin’s daughter Ana Patricia Botin, will remain similar all year, Saenz said.

“The profit we’ve posted for the first quarter is, I think, also going to be quite typical of the profit levels for the U.K. in the coming quarters,” he said. “That is, if you multiply that by four, you will have a good proxy for the year- end profit for the U.K.”

Earnings from Brazil, where the economy slowed last year from a boom as the central bank raised interest rates, dropped 12 percent to 647 million euros. Provisions jumped to 1.49 billion euros from 1.05 billion euros, while the bad-loans ratio in the country climbed to 5.76 percent from 5.38 percent in December and 4.85 percent a year ago.

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