Santander Posts Sharp Rise in Profit -- 2nd Update

By Patricia Kowsmann 

MADRID-- Banco Santander SA, the eurozone's largest bank by market value, on Thursday reported a near 18% rise in second-quarter net profit lifted by stronger lending and a continuing fall in charges from souring loans, particularly in its two big markets of Spain and the U.K.

"Despite market volatility during the second quarter because of the Greek crisis, Grupo Santander conducted its business in an environment of growth in most of the countries where it operates," it said in a statement, although it acknowledged economic performances this year will vary sharply among thecountries it operates.

For instance, it said while Spain and the U.S. are expected to grow over 3% this year, Brazil, where it generates about one-fifth of its profit, will likely see a contraction.

The Spanish lender said net profit for the period rose to EUR1.71 billion ($1.88 billion) from EUR1.45 billion reported in the same period last year.

Net interest income--the difference between what lenders pay clients for deposits and charge for loans--came in at EUR8.28 billion, up from the EUR7.37 billion last year, and beating analysts' forecasts of EUR8.17 billion.

The bank attributed the rise to its operations in Brazil, the U.K., the U.S., Santander Consumer Finance, Mexico and Portugal. It said its home country Spain, meanwhile, continues to face "an environment of low interest rates and tough competition in lending."

It set aside fewer funds to cover souring loans, reflecting the continuing improvement of the Spanish and U.K. economies. Bad loans as a proportion of total lending fell to 4.64% from 4.85% in the first quarter. Brazil, however, posted an increase to 5.13% from 4.9%, which Santander said was caused by a fall in lending during the quarter and higher nonperforming loans to companies.

Net loans to customers were up 13% in the second quarter, bolstered by lending at Santander's Latin American units, Poland, the U.K. and the U.S.

Santander touts its geographical diversity as a competitive advantage that allows strong growth in some countries to counterbalance weakness in others where the bank has major units.

In the U.S., Santander said it "continued to strengthen its management teams, risk management models, data bases and basic control functions," as it seeks to comply with regulator's expectations.

The U.S. holding company, which includes a retail bank and a consumer finance firm focused on car loans, failed the Federal Reserve's balance-sheet tests in 2014 and 2015 for what the regulator had said were "widespread and critical deficiencies" in governance and its inability to identify and plan for potential risks."

Santander Executive Chairman Ana Botín, who took over the bank from her father when he died suddenly in November of last year, has tried to put to work in the U.S. the skills she honed during four years as head of Santander's large unit in the U.K., where she tackled issues and new requirements raised by British regulators.

She has revamped the U.S. holding company's management and board members.

"I cannot fix the U.S. without the right team," Ms. Botín told The Wall Street Journal in early June.

The new team faces an uphill battle.

In July, the Fed issued a stinging lecture to Santander, faulting the U.S. unit for failing to meet regulators' standards on a range of basic operations. Many of the regulator's concerns echoed those it had already raised when Santander failed the stress tests.

Write to Patricia Kowsmann at [e-mail]

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