Santander Quarterly Profit Falls as Lending Margins Narrow

  • Chairman reaffirms guidance of earnings, dividend increase
  • Earnings hit by onetime items including reestructuring costs

Banco Santander SA’s profit fell in the second quarter as Spain’s biggest bank absorbed costs from closing branches and cutting jobs in its home market, where its lending business showed further signs of pressure.

Net income fell 50 percent to 1.28 billion euros ($1.41 billion) from 2.54 billion euros a year earlier, when a favorable tax ruling in Brazil allowed the lender to free up provisions, the Santander, Spain-based lender said Wednesday. Analysts were expecting a profit of 1.22 billion euros, the average of five estimates compiled by Bloomberg.

Jose Antonio Alvarez on July 27.

Photographer: Antonio Heredia/Bloomberg

Chairman Ana Botin is shutting hundreds of branches and plans to cut 1,400 jobs this year in Spain, where revenue remains under pressure from historically low interest rates, competition for customers and weak demand for credit. Santander also faces potential repercussions from the U.K.’s vote to leave the European Union, which is expected to slow the economy of the bank’s biggest market this year.

“We continue to deliver on our commitments and reaffirm guidance of an increase in earnings and total dividend per share in 2016, despite worse-than-expected economic conditions,” Botin said in a statement that noted the deterioration in the global outlook this year but did not mention any immediate effects from the U.K. ballot in June.

Merger Nixed

Also Wednesday, Italy’s UniCredit SpA said it ended talks with the Spanish bank to combine their asset-management units. Santander CEO Jose Antonio Alvarez said the banks weren’t able to meet regulatory expectations without “significantly harming the strategy of the deal.”

The stock was trading 2.5 percent higher at 3.84 euros at 1.41 p.m. in Madrid. Santander shares have fallen about 15 percent this year, valuing the bank at about 56 billion euros.

The lender took a hit of about 475 million euros in the second quarter, mainly reflecting the costs of laying off employees and closing branches as the bank steps up its digital service. Santander also booked a 120 million-euro contribution to the European Resolution Fund, set up after the 2008 financial crisis to prevent state-funded bailouts. Those charges were partly offset by the sale of a stake in Visa Europe Ltd. to Visa Inc., which lifted Santander’s pretax profit by 227 million euros.

“The bank’s reaffirmation of the target to increase dividend is important and quarterly results seem to support that goal,” Renta 4 banking analyst Nuria Alvarez said by phone. He said the results are positive for the lender, especially fee income, which increased 8.5 percent from a year earlier in constant euros. It fell 1.5 percent when factoring in the currency fluctuations.

Net interest income -- what the bank earns from lending after deducting what it pays on deposits and other liabilities -- dropped to 7.57 billion euros from 8.28 billion euros a year earlier. In Spain, the measure declined 4 percent from the first quarter as low interest rates and weak credit demand continue to weigh on margins.

Net interest income in Spain will remain “flattish” in coming quarters, CEO Alvarez said in a conference call with analysts Wednesday.

Brexit Outlook

Profit from the U.K. unit, the biggest contributor to Santander’s earnings, declined 28 percent. After last month’s referendum, the bank reiterated its financial targets for the year, including capital creation of 10 basis points per quarter and achieving a higher earnings per share than in 2015.

So far Santander has seen no impact from the vote on U.K. consumer loans or credit card use, Chief Financial Officer Jose Antonio Garcia Cantera said in a Bloomberg Television interview. “Santander is highly committed to the U.K.”

Brazil, US

In Brazil, the bank’s second-largest unit, profit declined 5 percent when calculated in euros from a year earlier and was up 11 percent in local currency. The real was the world’s best-performing currency in the first half on wagers that a new government would help pull Brazil out of its worst recession in a century.

Profit fell about 27 percent in the U.S., where Santander failed the Federal Reserve test for financial resiliency for the third straight year. The Fed said Santander suffers from “broad and substantial weaknesses” in how it manages capital. Earlier this week, the lender’s car-financing unit in the U.S. postponed release of its second-quarter financial report as it discusses “certain accounting matters,” mainly its method for estimating credit losses and the value of some assets.

Before it's here, it's on the Bloomberg Terminal.