Banco Santander earnings hit by real estate provisions

Banco Santander’s net profit in the first nine months of the year plunged 66 percent from the same period a year earlier to 1.804 billion euros, as Spain’s leading bank stepped up provisions for its exposure to the ailing domestic real estate sector.

Santander said Thursday that in compliance with government decrees issued in February and May of this year it had charged a net 3.476 billion euros against earnings for potential losses from real estate assets, 90 percent of the requirements dictated by the decrees.

The bank said it had reduced its exposure to the real estate sector from 42.5 billion euros at the end of 2008 to 26.5 billion as of the end of September.

Spain has been granted a loan of up to 100 billion euros to clean up the balance sheets of its banks because of their exposure to the property sector, which went into a tailspin around the start of 2008 after a giddy decade-long boom. The government is setting up a bad bank to absorb up to 90 billion euros in toxic assets from the country’s banks, mainly related to the real estate sector.

Santander also made provisions of 9.533 billion euros for non-performing loans. The bank’s overall default ratio climbed by 0.47 percentage points from a year earlier to 4.33 percent. The non-performing loan ratio in Spain rose by 0.89 points to 6.38 percent. The default rate in the sector as a whole hit a record 10.5 percent in August as unemployment of about 25 percent added to the real estate woes.

Santander comfortably passed the stress tests carried out by independent consultant Oliver Wyman. As of the end of September, the bank had a core capital ratio of 10.4 percent.

Provisions took an even heavier toll on earnings in the third quarter when net income plunged 94 percent to 100 million euros. The nine-month figures included a capital gain of 1.029 billion euros from the sale of Santander’s business in Columbia and a reinsurance transaction in Spain and Portugal. Santander said without provisions for the real estate sector, earnings would have amounted to 5.279 billion euros.

“The bank’s capacity to generate profit enables us to set aside hefty real estate provisions in Spain in 2012 and significantly increase non-performing loan coverage,” Chairman Emilio Botín said. “In the first nine months, we generated pre-provision profits of 18.184 billion euros.”

Latin America accounted for 50 percent of group earnings in the first quarter, with 26 percent coming from Brazil. Net profit in the region was down 6 percent at 3.306 billion euros. Spain now accounts for only 16 percent of group profits, continental Europe 28 percent, Britain 13 percent and the United States 9 percent.

Net interest income – the difference between what a bank earnings on its loan portfolio and what it pays out on deposits – rose 6.6 percent from a year earlier to 22.994 billion euros.

Lending continued to grow in emerging markets but fell in Spain and Portugal as a result of the recession in both countries and the ongoing process of deleveraging by companies and households. Santander’s total loan portfolio at the end of September stood at 754.094 billion euros, up 2.7 percent from a year earlier.