By Jeannette Neumann
MADRID-- Banco Santander SA on Thursday reported a 5% rise in
third-quarter profit as stronger lending income in Europe helped to
counter weakness in Latin American countries hobbled by currency
declines.
The eurozone's largest bank by market value said net profit for
the quarter was EUR1.68 billion ($1.86 billion). Profit increased
in Santander's three main businesses--the U.K., Brazil and
Spain.
"We view the economic situation as improving in the majority of
our core markets," said Santander's executive chairwoman, Ana
Botín. The bank highlighted annual economic growth expectations of
more than 3% in Spain, the U.S. and Poland and over 2.5% expansion
in the U.K., Mexico and Chile. Brazil and Argentina, on the other
hand, are contracting.
Santander said net interest income was EUR7.98 billion, up from
EUR7.5 billion in the corresponding period last year. Net interest
income, a key driver of revenue for retail banks, is the difference
between what lenders pay clients for deposits and charge for
loans.
But investors and analysts were concerned about what the decline
in quarter-on-quarter net interest income and net profit signals
about Santander's ability to generate strong profits in the coming
months. Santander shares were down 2.8% in late afternoon trading
in Madrid.
"We still see limited room for a significant improvement in the
short and medium term as, despite the diversified sources of
revenue, it seems that many units are showing slowdown or
deterioration of their performance," Kepler Cheuvreux analyst
Alfredo Alonso wrote in a research report.
"Our main concerns are the still important pressure on net
interest margin in Spain, and the uncertainties coming from the
increasing cost of risk in Brazil as a result of the deterioration
of its economy," Mr. Alonso said.
Santander reported a "fully loaded" capital ratio of 9.85%, a
sliver higher than in the second quarter but a disappointment to
analysts and investors. Despite a hefty capital increase in
January, Santander's financial cushion remains below its European
banking peers.
Santander "reported unsurprising third-quarter results, with
weak underlying trends and limited capital generation," said N+1
Group analyst Francisco Riquel.
Santander's shares have underperformed peers by about 28% so far
this year "due to a weak capital position, margin pressure in the
Spanish business, and exposure to Latin America," Carlos García
González, an equity analyst at Société Générale, wrote in a
report.
The bank is targeting a capital ratio of 10% by year-end and
more than 11% by 2018.
"In spite of the reported profit, capital accumulation (and the
absolute level of capital) remains below the European average and
at a level which we consider to be too low for a company like
Santander," Exane BNP Paribas analyst Santiago López Díaz wrote in
a research report.
One surprise for investors and analysts was a sharp decrease in
net profit from the U.S. both year-over-year and
quarter-over-quarter, triggered by the snowballing cost of tackling
regulatory problems there.
Santander remains caught in regulators' cross hairs for failing
to meet their standards on a range of basic business operations
such as how the bank's holding company manages its capital and
corporate governance. Ms. Botín has shaken up her management team
in the U.S. since she took over the bank in September 2014.
Santander Chief Financial Officer José García Cantera said he
expects U.S. regulatory costs to peak soon.
"We have been investing heavily to meet regulatory compliance
expectations," Mr. Cantera told analysts on Thursday. "We should
see lower costs in the coming quarters."
In the U.K., net profit was up 18% at EUR480 million in the
third quarter on stronger lending income and lower loan loss
provisions. One negative sign there was 6% decline in fees in the
third quarter compared with the second.
Profit at Santander's Brazil unit rose to EUR385 million from
EUR376 million on lower loan loss provisions. Net interest income
fell to EUR1.98 billion from EUR2.25 billion.
Accounted for in the Brazilian real, net profit and net interest
income both rose strongly during the third quarter. Santander
highlighted Brazil's slowing economy and an increase in the
unemployment rate to 7.6% in August from 6.9% in June. Inflation
was 9.5% in September.
Santander's Spanish business reported third-quarter net profit
of EUR311 million, up from EUR252 million a year earlier on sharply
lower loan loss provisions. However, net interest income fell
nearly 8%.
Net interest income also fell 2.2% in the third quarter from the
second quarter. Profit rose, however, in the third quarter from the
second on a greater-than-expected surge in income from trading.
Santander's Spain unit, like other Spanish banks, faces sluggish
borrowing demand and falling yields on the loans it is issuing.
Santander said mortgage lending was up 33% in the first nine
months from a year earlier. But borrowers are still paying off
their loans at a faster rate than they are taking on new ones. Loan
volume in Spain was roughly the same as a year ago and fell from
the previous quarter as deleveraging continues in Spain despite an
improving economy.
Investors and analysts had also expected Santander's net
interest income in its Spain unit to take a slight hit from the
expense of funding a new, higher interest checking account, called
the 1|2|3 account.
The bank said Thursday that 140,000 of the 500,000 clients who
had signed up for Ms. Botín's signature product by the end of the
third quarter had transferred their payroll deposit from another
bank. Ms. Botín is betting on being able to sell new and existing
clients more products to boost profitability.
Santander Chief Executive José Antonio Álvarez told analysts
Thursday that the 1|2|3 account is likely to have a negative impact
of around EUR30 million to EUR40 million in Spain this year, and
should "break even" in 2016.
"This is our bet," Mr. Álvarez said, "To have more loyal
customers in Spain."
Write to Jeannette Neumann at jeannette.neumann@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
October 29, 2015 11:55 ET (15:55 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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