SAN Banco Santander SA

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), roughly in line with analysts' expectations of EUR1.7 billion, according to a poll by data provider FactSet.

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 chairman, 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 same period last year, roughly in line with analysts' forecasts of EUR7.9 billion. 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.

At a regional level, net interest income figures showed weakness in Latin America that was counterbalanced by somewhat stronger lending in Europe.

Net interest income in Latin America fell more than 2% to EUR3.3 billion in the third quarter from a year earlier. In contrast, net interest income rose nearly 7% in continental Europe during the same period to about EUR2 billion.

Santander reported a "fully loaded" capital ratio of 9.85%, a sliver higher than in the second quarter. Despite a hefty capital increase in January, Santander's financial cushion remains below its European banking peers.Santander is targeting a capital ratio of more than 11% by 2018.

Santander "reported unsurprising third-quarter results, with weak underlying trends and limited capital generation," said N+1 Group analyst Francisco Riquel. Santander shares were down 3% around noon in Madrid.

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 and has made it a priority to shape up in that market.

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.

Investors and analysts had expected a decline in net interest income, a key profitability figure. 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 out bet," Mr. Álvarez said, "To have more loyal customers in Spain."

Write to Jeannette Neumann at jeannette.neumann@wsj.com

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(END) Dow Jones Newswires

October 29, 2015 07:09 ET (11:09 GMT)

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