Santander Earnings Drop 24% in Quarter

Banco Santader

8:08 a.m. | Updated

Banco Santander of Spain announced on Thursday that net profit fell 24 percent in the first three months of the year, as the bank set aside billions of euros to cover rising levels of bad loans.

The drop in earnings, to 1.6 billion euros ($2.1 billion), comes as the Spanish bank’s home market continues to struggle from the European debt crisis. Santander’s other businesses — particularly in Latin America, where the bank now makes more than 50 percent of its profit — also have begun to slow down.

Santander, based in Madrid, said it had increased provisions for nonperforming loans by 51 percent, to 3.1 billion euros, to offset an increase of loan defaults throughout its operations.

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The increase was due to the poor economic conditions in Spain and Portugal, as well as a rising level of loans in Latin America, the company said in a statement.

The jump in loan defaults comes after almost a decade of excess spending, particularly in Spain’s real state market, which has seized up. The Spanish economy is expected to contract 1 percent this year, and unemployment stands at 23.6 percent, according to statistics from the European Union.

The bank’s first-quarter profit from its Continental European businesses fell 34 percent, to 584 million euros, while earnings from its Brazilian operations dropped 12 percent, to 647 million euros.

Santander’s share price fell 4.7 percent in early afternoon trading in Madrid on Thursday.

The increase in the bank’s provisions for bad loans has helped to support Santander’s struggling Spanish operations. Nonperforming loans in the bank’s home market increased 1.2 percentage points, to 5.75 percent. Nonperforming loans for the entire group stood at 4 percent in the first three months of the year.

The bank’s revenue in the period grew 8 percent, to 11.3 billion euros, but was offset somewhat by a 7 percent increase in costs, to 5.1 billion euros.

In an effort to reduce its balance sheet, Santander has cut its loan-to-deposit ratio, a measure of the bank’s exposure to bad loans, to 115 percent of its deposits in the first quarter, according to a company statement. The bank had a loan-to-deposit ratio of 150 percent in 2008.

European banks have come under increasing regulatory pressure to raise their capital reserves to protect against future financial crises. Santander said its core Tier 1 capital ratio, a measure of bank’s ability to withstand financial shocks, now stood at 9.1 percent, compared with the 9 percent requirement of the European Banking Authority.

Correction: April 26, 2012
An earlier version of this article misstated the time period covered by Banco Santander's earnings report. It was for the first three months of this year, not 2011.