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Santander sees Spain bad loans rising

Source: Reuters - Fri 28th Oct 2011

The euro zone's biggest bank Santander said it expected bad loans in Spain to keep on growing as Spaniards, blighted by unemployment and heavy mortgage debt, fall into arrears on payments.

Spain remains a weak spot for Santander, despite a decade of aggressive expansion abroad, as souring loans related to a steep property downturn call for greater provisions.

"We see bad loans on the rise in Spain," Chief Executive Alfredo Saenz told reporters at a press conference. "I said at the last presentation that the peak could be around 5% but I got it wrong."

Bad loans as a percentage of total lending are likely to hit a ratio of up to 5.8% in the second half of next year, he said. Santander had a bad loan ratio of 5.15% at end-September, below August's nationwide level of 7.2%.

Investors are concerned about Santander's capital levels given its exposure to toxic Spanish real estate assets and to its home country's sovereign debt amid a crisis of confidence in peripheral euro zone countries.

The European Banking Authority (EBA) has identified a capital shortfall of 15 billion euros at Santander, or 6.5 billion euros if a convertible bond is taken into account. The recapitalisation programme does not include provisioning for real estate exposure.

Spanish banks represented a quarter of the 106 billion euro shortfall for European banks estimated by the EBA. This is double the weight of Spain's gross domestic product in the euro zone.

The lender reported a 13 percent drop in nine month net profit to 5.3 billion euros, missing a 5.5 billion euro Reuters polled forecast, due to a hit to cover mis-selling of UK insurance policies taken in the second quarter.

The company said it hoped to achieve similar results to 2010 in 2011, and it would not need to raise capital or cut dividends to meet the European regulator's capital requirements.

Shares jumped 6.4 percent, undershoooting a 9%jump in European banks. Analysts pinpointed disappointing performance at the bank's engine of growth, Brazil, which is showing signs of a slowing economy and rampant inflation.

"Brazil was the main negative surprise in the quarter, affected by the local currency devaluation and posting yet another quarterly drop in profits," said JP Morgan analyst Jaime Becerril.

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