Sovereign Bank 3Q profit at $157M while Santander posts lowest profit in 4 years

By PBN Staff, Bloomberg News

PHILADELPHIA – Sovereign Bank contributed a profit of $157 million in the third quarter to parent Banco Santander SA, up 18.6 percent from its second-quarter results. Despite improved performance by its U.S. subsidiary, however, Santander said it expected to miss its 2010 goal after rules forcing the company to recognize bad loans more quickly led to the lowest quarterly profit in more than four years.

For the third quarter, Sovereign said it had gross income of $713 million and net operating income of $401 million.

Its nine-month attributable profit to the group was $384 million, Santander said, with gains in revenue and better credit quality in the U.S. responsible for a large part of the improvement. For the same period a year earlier, the unit had a negative contribution of $29 million.

Sovereign reported gross income of $2.08 billion for the first nine months of the year, which represented a 29.7 percent gain for February through September over on the same 2009 period (the bank noted that integration of Sovereign in Santander only allowed comparisons for that period).

Sovereign’s efficiency ratio including amortizations was “particularly good,” improving from 74.5 percent at the time of its integration into Santander to 43.9 percent for the quarter ended in September.

“Scant job creation, with unemployment at a high and still weak investment, particularly in the housing sector, continues to erode business generation,” said Santander about Sovereign, which has 720 branches and 1.7 million customers in the Northeast.

Santander fell as much as 2.1 percent in Madrid trading after saying it will miss a forecast for profit in 2010 similar to last year’s 8.94 billion euros ($12.4 billion), Bloomberg News reported. Third-quarter net income slipped 26 percent to 1.64 billion euros, the lowest level since the first quarter of 2006.

Bloomberg News reported that Santander has agreed to spend $10 billion since June on a Polish lender and assets in the United Kingdom, the U.S. and Germany as Chairman Emilio Botin diversifies across the bank’s 10 main markets and reduces dependence on Spain. While earnings rose in Brazil and Britain, profit fell at home, where funding costs have risen and the bank set aside 472 million euros to meet a Bank of Spain order to account for bad loans sooner.

“I’ve always thought the Spanish economy and the real estate market is in bad shape, and I’m not convinced it’s over yet,” said Peter Braendle, who holds Santander shares as part of the $61 billion he helps manage at Swisscanto Asset Management in Zurich. “One thing I like about Santander is the diversification of its earnings, but as we can see, Spain is still the problem.”

Santander’s stock was down 7.6 cents, or 0.8 percent, at 9.10 euros as of 11:40 a.m. in Madrid. The shares have fallen 20 percent this year, compared with a 3.1 percent drop in the 53-member Bloomberg Europe Banks and Financial Services Index.

Santander opted not to release as much as 725 million euros in reserves, applying the “most conservative” interpretation of the new rule as it increased loan-loss provisions. The central bank rule, announced in May, speeds up the calendar for covering unpaid loans, and acquired or repossessed real estate.

Bad loans as a proportion of total loans rose to 3.42 percent from 3.37 percent in June and 3.03 percent a year ago, Santander said.

Loans newly classified as in default fell to 2.9 billion euros from 3.4 billion euros in the previous quarter, as total bad loans reached 27.2 billion euros, a 20 percent increase from a year ago. Defaults may not reach their peak until mid-2011, CEO Alfredo Saenz said on a webcast today.

Santander has 15.5 billion euros in what the Bank of Spain terms “troubled” assets related to real estate, out of 181 billion euros for the industry as a whole. The share of 8.6 percent compares with its 15 percent share of lending in Spain, the bank said.

Stripping out the impact of the new regulations, net income in the quarter would have been 2.11 billion euros, the bank said.

Total shareholder remuneration for 2010 will stay at 60 cents a share, unchanged from last year, Santander said.

Profit from Santander’s Spanish retail network fell to 83 million euros from 469 million euros. Banco Espanol de Credito SA, a Santander-owned retail bank in Spain run by Botin’s daughter, Ana Patricia Botin, said on Oct. 7 that its quarterly profit fell 52 percent.

Earnings from Brazil, a country that Botin predicts will contribute more profit than Spain this year, jumped to 785 million euros from 628 million euros, as lending increased 29 percent. Profit from the U.K. climbed 23 percent to 527 million euros.

Santander’s core capital ratio slipped to 8.5 percent from 8.6 percent in June. The bank isn’t planning any acquisitions for now and ruled out any need for a capital increase, while it aims to have core capital of 9 percent at the end of 2011, Saenz said.

For Banco Santander’s third-quarter results, click here .