Spain's Santander, the euro zone's largest bank, beat first-quarter profit forecasts on Wednesday as the management of loan rate margins and strong business volumes offset rising default levels among borrowers.
Chief Executive Alfredo Saenz told a webcast he was confident earnings could be sustained in the quarters ahead and was less downbeat about the bad debts outlook in Spain which accounts for one quarter of profit. "We are more optimistic than we were at the end of the year. Now we don't believe bad debt debts in Spain will reach 4.5 percent by year end," Saenz said.
He later added that this was not due to any improvement seen in the economy, but rather because of more efficient loan management at the bank. Santander's share price was up 5.2 percent at 6.9 euros at 1234 GMT after the bank said its net profit fell 5 percent to 2.096 billion euros ($2.73 billion), above the average forecast of 1.865 billion euros given in a Reuters poll of analysts, and versus a 0.7 percent rise in the European sector.
Recurrent profit this year should be roughly in line with last year, Saenz added, without providing further detail. Interest income in the first quarter rose 22.2 percent to 6.23 billion euros while operating profit rose 12 percent to 9.454 billion euros, both outpacing market expectations. "In Spain loans are reprised only once a year, giving banks plenty of time to play with interest rates in between times and make money on them," a London-based analyst said, explaining higher-than-expected revenues.
Bad loans as a percentage of total lending rose to 2.49 percent, as expected, at the end of the first quarter from 2.04 percent at the end of 2008 and 1.24 percent a year ago. The bank's worst performing unit was Consumer Finance, where bad debts reached 4.64 percent of lending. Santander, the largest bank in the euro zone in terms of market value, said group provisions rose 73 percent to 2.23 billion euros, with the global recession expected to boost bad debt rates.
In Spain alone, unemployment is now at 17 percent, and analysts have expected loan defaults to soar. Currently the rate for Santander's Spanish branch network is 3.14 percent. "What I like most about these results is that they are good across the board. There's only one region that didn't outperform and that's Mexico, but Latin America in general was much better than expected ... as was continental Europe," said Antonio Ramirez, senior analyst at KBW.
Latin American units posted an 8 percent fall in net profit to 890 million euros, due to exchange rate effects, but loans and deposits were both up. Mexico's contribution however was down 41 percent at 111 million euros. "These results highlight the advantages of geographical diversification ... in a very difficult environment in international banking," said the bank, whose businesses span three continents.
Sovereign Bancorp Inc, which Santander acquired in the United States in the wake of the subprime crisis, posted a net loss of $25 million for two months. The bad loans ratio at Sovereign was 3.98 percent of total loans, and was expected to increase. Results at UK unit Abbey were strong as expected, with a 31 percent increase in profit to 409 million euros, boosted by the incorporation of mortgage lenders Alliance & Leicester and Bradford & Bingley in the second half of last year.