By Jeannette Neumann 

MADRID-- Banco Santander SA said fourth-quarter net profit tumbled from a year earlier as the bank set aside millions to cover claims related to payment protection insurance sold by the lender's U.K. unit.

Santander reported net profit of EUR25 million ($27.12 million) in the fourth quarter, a dive from the EUR1.46 billion the bank reported a year earlier.

Santander said it booked EUR1.7 billion in charges in the fourth quarter of last year, including EUR600 million to address potential claims by clients for the wrongful sale of payment protection insurance in the U.K.

Santander Executive Chairman Ana Botín said at a news conference that the majority of the wrongful sales had been made by U.K. lender Abbey National, which Santander bought in 2004.

Royal Bank of Scotland Group PLC also announced a provision on Wednesday to cover claims against its sale of payment protection insurance, which was widely sold to people who didn't need it. U.K. authorities have set a proposed deadline in 2018 for compensation claims.

Santander faced lower global growth rates in 2015 compared with 2014 as well as falling commodity prices, market volatility and low interest rates, Chief Executive José Antonio Álvarez told investors on Wednesday,

"In this environment, it was not easy," Mr. Alvarez said. Net interest income was roughly in line with what the bank reported a year earlier at EUR7.89 billion.

Santander shares were down around 1.3% in late-afternoon trading in Madrid.

Without the charges, the bank said it would have reported a fourth-quarter net profit roughly in line with the previous year.

"There was underlying weakness across all divisions quarter-on-quarter," Barclays PLC analyst Rohith Chandra-Rajan wrote in a research report, "with Europe and the U.S. seeing the most significant declines."

Profit at Santander's units in continental Europe slipped in the fourth quarter compared with the third quarter of last year, weighed down by weak results in Spain. Profit in the U.S. plummeted during the same period as the bank continues to step up spending to address regulators' concerns about how Santander manages its capital and corporate governance.

The bank reported a "fully loaded" capital ratio of 10.05% compared with 9.85% as of September of last year. Investors and analysts welcomed that slight climb upward as they are closely watching the pace at which Santander is able to generate capital given concerns that the bank is one of the most weakly capitalized European lenders.

If Santander continues the current pace of building capital, the bank should have a "fully loaded" ratio of 11.1% by the end of 2017, Exane BNP Analyst Santiago López Díaz wrote in a research report.

"Although we would not consider such a level to be outstanding, we think it would be comfortable enough for the regulator to remain calm and not force the company to raise equity," Mr. López Díaz wrote.

The bank's ratio of bad loans to total loans fell to 4.36% in 2015 down from 5.19% in 2014. The bank said the level of nonperforming loans fells in all its markets except for recession-hit Brazil.

Spain was a weak spot. Net interest income in Santander's Spanish banking unit fell 16% in the fourth quarter of 2015 from a year earlier.

Net interest income, a key driver of profit for retail banks such as Santander, is the difference between what lenders pay clients for deposits and charge for loans.

In Spain, total loans dropped in the fourth quarter from a year earlier and from the previous quarter. While Spain's economy is recovering after a deep recession, many individuals, businesses and public institutions in the country aren't taking out new loans, instead focusing on paying down their existing debts.

Rock-bottom interest rates have also hurt the net interest income of Spanish banks. Most mortgage loans in Spain, for instance, are variable rather than fixed.

Santander's launch of a higher-interest checking account for clients has taken a further toll, analysts say, since existing clients who have switched to the new account become more expensive for the bank than they were before. Santander executives say that over time the 1|2|3 account, as it is called, will be profitable.

Profit in the Spanish unit took a nose dive to EUR94 million in the fourth quarter from EUR289 million a year earlier. The bank also made a required contribution to Spain's deposit guarantee fund.

At Santander's U.K. unit, net interest income grew in the fourth quarter from a year earlier. But analysts highlighted a weak spot with a decline in year-over-year and quarter-on-quarter in fees.

In Brazil, lending income and net profit in euros fell in the fourth quarter compared with a year earlier. While the Latin American country posted an increase in net interest income and net profit in the local currency, the Brazilian real's 26% fall in value against the euro last year chips away at Santander's revenue there when it is converted into euros on the lender's financial statements.

Provisions on bad loans in Brazil also increased in the fourth quarter compared with the third. Francisco Riquel, an analyst with Madrid-based financial-services firm N+1 Group, estimates that Santander's nonperforming loans in Brazil will more than double by 2017 compared with 2014.

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

Corrections & Amplifications

Santander posted net profit of EUR25 million ($27.12 million) in the fourth quarter, a dive from the EUR1.46 billion the bank reported a year earlier. An earlier version of this article misstated the net profit figure.

 

(END) Dow Jones Newswires

January 27, 2016 10:55 ET (15:55 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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