Santander profit hit by provisions, rules out buys

 

Santander, the euro zone's biggest bank, said new central bank rules would hit 2010 profit and called a halt to acquisitions while provisionally scheduling a flotation of its UK unit in the first half of 2011.

The aggressively acquisitive bank said it would work to consolidate recent buys after a multi-billion euro spending spree since the beginning of the summer on assets from Britain to Mexico.

"(There's) nothing expected, nothing on the horizon" Chief Executive Alfredo Saenz told analysts.

The bank said profit for 2010 would fall short of its forecasts after taking a greater-than-expected charge for bad Spanish assets under new Bank of Spain accounting rules enforced after a property crash and the nation's worst recession in half a century.

Santander reported a 9.8 percent fall in nine-month net profit after the one-off hit of 472 million euros ($652 million) for the provisions, against around 400 million euros estimated by the bank at end-July, and higher-than-expected costs.

"The miss was cost and provision driven" said Ronit Ghose, analyst at Citi.

Shares fell 1.00 percent against a little changed Spanish blue chip index .IBEX and a 0.1 percent rise in European banks. The stock fell as low as 8.985 euros, its lowest in nearly a month.

Santander had previously said it expected 2010 net profit to be in line with the 8.9 billion euros it achieved in 2009.

"Underlying trends are quite solid but the numbers look weak at first glance and are not a positive catalyst" said analyst Arturo de Frias at Evolution Securities, who rates the stock "buy".

Under new rules which came into effect on Sept. 30, the Bank of Spain has cut the time over which banks can fully provide for estimated losses on non-performing loans. It has also required a further 10 percent writedown on properties held for more than two years.

Home market Spain, comprising the Santander retail banking network and the contribution from majority-owned unit Banesto, now accounts for 23 percent of Santander's net profit, less than the 25 percent brought by Britain and 34 percent from Brazil.

Santander shares have fallen 19 percent from the beginning of the year. Hedge funds used Spanish banking shares as proxies for Spain earlier this year as investors fretted the country faced a Greek-style debt crisis.

The bank, whose shares have underperformed European peers by around 16 percent since the beginning of the year, said its bad loans as a percentage of total loans at a group level rose to 3.42 percent, from 3.37 percent at end June.

Santander's list of acquisitions has raised concerns about its capital strength just when regulators are forcing banks to hold more and better quality capital under the Basel III rules.

"Our key concern remains capital adequacy under Basel III" said Andrew Lim, analyst at Matrix.

Saenz ruled out a capital hike to boost the bank's reserves but said a flotation of its UK business was likely for the first part of 2011.

No adviser had yet been appointed for the deal, he said.

A UK listing would be the highest profile London flotation since telecoms firm Orange nine years ago and Santander is expected to sell about 20 percent of the business, sources have told Reuters.

That could value the business at over 15 billion pounds and raise more than 3 billion pounds to boost strained group capital.