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Spain Banesto Q1 net profit drops in sickly market

Source: Reuters - Tue 12th Apr 2011

Spanish retail bank Banesto's net profit slumped 20% in the first quarter, dragged lower by rising bad loans in a stunted economy and as higher funding costs bit into margins.

The bank said it had set aside 25 million euros in provisions against real estate writedowns in the first quarter, less than expected and helping to improve profit against expectations.

Banesto, majority owned by Santander, is the first Spanish bank to report earnings for the first quarter, as investors focus on strict recapitalisation rules set by the Bank of Spain and exposure to the country's battered property market.

"It's a decent enough quarter with better than expected results, but the key will be managing expectations for provisions for the remainder of the year," said banking analyst at Nomura, Daragh Quinn.

Spain has undertaken a wide-ranging reform of its banking system as part of measures to reassure markets on the health of its economy and ward off concerns it may be next to seek a European Union bailout after Greece, Ireland and Portugal.

Ireland's Allied Irish Banks reported a massive net loss on Tuesday, and said it would cut 2,000 jobs over this year and next.

Banesto has been tipped as a possible buyer for the branch network and deposits of Caja Mediterraneo (CAM), the troubled savings bank based which has asked for state funds as part of a government-driven overhaul of the banking sector.

Investors will watch for news on Banesto's possible interest in CAM at a results presentation at 0830 GMT.

Banesto's net profit fell to 169.5 million euros in the first quarter compared with a Reuters forecast for 143.4 million euros.

Net interest income, broadly what a bank earns on loans minus what it pays for deposits, dropped 11% to 380.4 million euros compared with a forecast for 374.5 million euros.

Spanish banks have found it harder and more expensive to access the wholesale markets as confidence in the country's economy has ebbed. This has led to a pricing war on interest paying savings accounts as banks chase retail deposits.

Bad loans reached 4.15% of the total at the end of March compared with 4.08% end-December.

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