Santander signals start of Spanish turnaround

 

Spanish bank Santander flagged a turning point for its struggling domestic business, shrugging off a 5% fall in first-quarter earnings on Thursday.

"Revenues are growing at a good pace throughout the group and in Spain reversed the downward trend of recent quarters. I am convinced that this change will continue in coming months," said Emilio Botin, chairman of the euro zone's largest bank.

While analysts agreed things looked better in Santander's home market, they said it would be a while before Spain was out of the woods. The country has been a focus of market attention since a property crash unleashed high personal debt levels and unemployment affecting one in five people.

Santander's profit in its home market, which accounts for less than Brazil or Britain, fell 31% year-on-year but was up 54% quarter-on-quarter.

"These are basically solid results and I think this quarter will be the worst in terms of comparables because, after the weakness of 2010, revenues will be more stable," Evolution Securities analyst Arturo de Frias said.

"Spain will start to look better in terms of profitability, but it will still be weak for a while."

Chief financial officer Jose Antonio Alvarez told analysts Santander did not expect higher euro zone interest rates, if the European Central Bank were to raise them, to prompt a big rise in its bad debt rate, which was expected to peak this year.

Spanish bad loans as a percentage of total loans were 4.57% at end-March versus 4.24% at December, and compare with 5.83% for the Spanish banking sector as a whole at the end of 2010.

Also on Thursday, Spanish peer Banco Sabadell said first-quarter net profit fell 22% to 84 million euros, hit by provisions for exposure to a sickly property market, with its bad loan rate standing at 5.46%.

Santander shares were 1.6% higher at 8.614 euros at 1130 GMT.

BOOMING BRAZIL

Retail Spanish banking makes up 13% of Santander's profit, less than its business in Britain, which makes up about 17%, or Brazil, which contributes a quarter.

Group net profit dropped to 2.11 billion euros, compared with aforecast for 2.19 billion.

Brazilian profit rose 22.5% to 732 million euros, the main contribution to a 1.3 billion profit in Latin America.

Analysts highlighted strength in core capital, which rose to 9.66 percent from 8.8 percent in December, comfortably above the Bank of Spain's 8% minimum requirement.

"Core capital ... is better than expected and is meeting at key concern for investors at the moment," Nomura analyst Daragh Quinn said.

A 7% dividend yield, the highest among Europe's nine biggest banks, has supported Santander's shares, which have gained 7% this year versus a 2.7% rise for the European banking sector.

Fund managers, such as Yohan Sallerton at Mandarine Gestion in France with about 1 billion euros under management, like the bank because of its diversification.

"Its geographic footprint covers Latin America and Europe, where it used the crisis to its advantage by increasing its presence in countries like UK and Germany. It is going to turn out to be a winner from the financial turmoil as it has amassed quite a few assets at attractive prices," he said.

Spanish banks have been struggling with a property crisis which many analysts believe is far from over, keeping economic growth muted for years to come.

Unemployment of 20 percent, more than double the European average and the highest rate in the region, has weighed on Spaniards' ability to repay mortgage debt.

Banks meanwhile have had to set aside more and more to offset falling property values.

In broad terms, Santander's business has been performing well, with net interest income - broadly what a bank earns on loans, less what it pays for deposits - up 5.5% to 7.51 billion euros, just pipping expectations for 7.42 billion.

European rival Deutsche Bank (DBKGn.DE), with a market capitalisation of just over half that of Santander, posted an 18% rise in quarterly net profit as good results for its investment bank and deals to expand retail and wealth management operations bolstered the bottom line.