January 31, 2013 10:05 am

Property loans hurt Santander earnings

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Banco Santander returned €24bn of loans to the European Central Bank earlier this month as Spain’s largest lender by assets said it had set aside €18.8bn in provisions against soured property loans last year, sharply pushing down its earnings.

Santander, the largest bank in the eurozone by market value, said that net profits after provisions for last year tumbled by 59 per cent to €2.2bn following its hefty round of provisioning, with earnings in Latin America, the UK and US all slipping at a time when those markets have been hailed as crucial in protecting the bank from a sharp recession in Spain.

The Spanish lender missed analyst forecasts for its fourth-quarter earnings, reporting a net profit of €401m – up from €47m in the same period last year when the bank took a large one-off writedown on property losses, but below average analysts’ predictions of about €800m.

Net interest income for 2012 rose by 3.6 per cent year on year to €30.1bn, but fell quarter on quarter by 5.1 per cent to €7.15bn.

The bank said an improvement in its liquidity position had allowed it to return €24bn to the ECB, the full amount borrowed from the central bank by Santander and Banesto under its December 2011 long-term refinancing operation (LTRO). Santander said that it still held a further €11bn taken in the second LTRO window.

Within Spain, where a government drive to clean up the country’s banking sector after a decade-long property bubble last year saw lenders set aside billions in provisions, Santander said that its bad loan ratio increased to 6.74 per cent in the fourth quarter of last year, up from 6.38 per cent in previous quarter.

While Santander has long argued that its international diversification, with the bank deriving more than half of its profits from Latin America, helped to shelter it from problems in its Spanish home market, the last quarter of 2012 did not provide encouraging signs about many of the lender’s key markets.

In the bank’s UK division, pre-provision profits fell by 20 per cent in the fourth quarter, by 25 per cent in the US and by 3 per cent in Brazil.

Santander said that of the €18bn in provisions it had set aside, which were up by €6.6bn compared with 2011, there was €12.6bn set aside for non performing loans, and a gross €6.1bn to cover Spanish property exposure.

The lender continued to shrink its loan to deposits ratio, which fell to 113 per cent by the end of the fourth quarter, compared with 150 per cent in December 2008, with Santander holding €96 of loans for every €100 in deposits, the bank said.

By the end of last year Santander said it had a core capital ratio, a measure of its balance sheet strength, of 10.33 per cent under Basel II rules, an increase of 0.3 per cent year on year.

The bank had throughout the year pushed ahead with a series of capital raising measures, such as selling 24.9 per cent of its Mexican subsidiary in a stock market listing in September that raised €3.2bn.

By December, the bank had announced it was going to buy up the remaining 10 per cent of shares in its Spanish subsidiary Banesto and merge it with Santander’s main domestic operations as part of a drive to close branches, although this did not boost its capital.

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