Banesto braces itself for a rise in bad debt

Spanish retail bank Banesto posted a 28 % drop in 2009 net profit, missing forecasts, as it ramped up provisions against bad loans during a prolonged recession.

Banesto, majority-owned by the euro zone's biggest bank, Santander, said on Thursday it made an extraordinary provision of 277 million euros in the full year to December, with 206 million earmarked for sliding property values.

It also boosted anti-cyclical provisions by 100 million euros to further strengthen its balance sheet, within results broadly described by analysts as sound.

On Wednesday, France's second-largest bank Societe Generale issued a profit warning for the fourth quarter, rekindling concerns about toxic assets."But Spanish banks have had to deal with their own toxic assets in the form of loans to real estate developers, which have deteriorated rapidly during the property sector slump," said an analyst at a local brokerage who asked not to be named.

Spain's property sector suffered a steep downturn after a decade-long boom, and many of the country's banks have accepted property from struggling real estate developers who would otherwise have gone bankrupt.

"Provisions were the main reason behind the bottom-line underperformance," Espirito Santo analysts said in a research note. "Adjusted for these extraordinary provisions, we believe the results are sound."

Spanish banks have withstood the global financial crisis better than their European peers, having not been exposed to some of the disastrous credit derivatives that burdened others, mainly due to strict Bank of Spain regulation.

Bad loans as a percentage of the total loan book rose to 2.94 percent at end-December from 2.59 % at end-September, when the sector bad loans ratio stood at 4.59 %.

"One of our targets for 2010 is to maintain this differential in bad loans with the rest of the Spanish banking sector," Banesto chairwoman Ana Patricia Botin told analysts during a conference call.

OPTIMISTIC ON REVENUE GROWTH

While acknowledging that 2010 will be a difficult year for the banks, Botin was optimistic about the outlook for revenue growth at Banesto, in contrast to comments made in October by a top executive at peers Bankinter and Sabadell.

"We are expecting net interest revenue to grow in 2010 ... We are not saying the situation in the market is much better, but it is no worse than in 2009, and our volumes are improving," Botin said.

Loan growth at Banesto fell 2.9 percent in 2009, reflecting the continued slump in core banking activity, while deposits were more or less stagnant, up 0.1 %

But costs performed better-than-expected, rising only 0.9 % year-on-year as Banesto continued with its strict cost control programme. Botin said the bank is targeting a cost : revenue ratio in 2010 of below the 38.9 % reached in 2009.

Net profit dropped to 559.8 million euros in 2009, missing a Reuters forecast for 577.2 million, while net interest revenue rose 9.6 % to 1.73 billion, in line with forecasts, and boosted by robust margins. At 1123 GMT, Banesto shares were up 0.44 percent at 8.76 euros, compared with a 0.08 percent drop on Spain's blue chip index .IBEX.

Banesto is well ahead of Europe's biggest banks in reporting 2009 results, with Spain's second-largest bank BBVA due to post results on Jan. 27, and most big rivals to follow in the five weeks after.