BOSTON – Sovereign Bank continued to bounce back in the second quarter, posting an operating profit of $132 million compared with a $10 million loss in the year-ago period, Sovereign’s parent, Spanish bank Banco Santander S.A., said Thursday.

Sovereign recorded $682 million in revenue from April through June, up from $544 million in the 2009 second quarter.

The second-quarter performance follows a first quarter in which Sovereign posted a $95 million operating profit. Santander said Sovereign reduced its efficiency ratio, and thus improved its profitability, going from 66.1 percent in the first half of 2009 to 44 percent in the first half of this year.

Santander itself posted an 8 percent decline in second-quarter profit after a drop in earnings in its home market offset growth in Brazil.

Sovereign – the No. 4 bank in Rhode Island by deposits - contributed 3 percent of the parent bank’s total profit, compared with 43 percent from Continental Europe; 37 percent from Latin America, including 22 percent from Brazil; and 17 percent from the United Kingdom.

Santander’s net income declined to 2.23 billion euros ($2.9 billion) from 2.42 billion euros a year earlier, the Santander-based lender said in a filing to regulators Thursday. That’s less than the 2.28 billion euro average estimate of eight analysts surveyed by Bloomberg.

The bank has bought businesses in Mexico, the United States and Germany as Chairman Emilio Botin takes advantage of opportunities to extend the lender’s reach across its nine main markets. As credit demand falters and funding costs rise in the aftermath of Spain’s worst recession in 60 years, Botin told shareholders last month that Santander’s Brazilian earnings would outstrip those at home for the first time this year.

Santander “gathered a lot of deposits and that has hit margins a bit,” said Daragh Quinn, an analyst at Nomura International in Madrid who has a “buy” rating on the shares. Still, “expectations for Santander earnings are always very high and they’ve come in slightly below consensus, but they’re delivering on everything they said they would.”

Botin today repeated guidance given at the June 11 shareholders meeting that Santander’s earnings this year would be “in the region” of last year’s profit of 8.94 billion euros. The dividend will remain at about 60 cents per share, he said in the statement.

The bank is in the final stages of talks to buy about 300 branches in the U.K. from Royal Bank of Scotland Group Plc and expects a “solution” in August, CEO Alfredo Saenz told analysts on a webcast. Santander is also studying the possible sale of a stake in its U.K. operations, although it hasn’t made any decision yet, he said.

The bank’s core capital, a measure of its ability to absorb losses, dropped to 8.6 percent from 8.8 percent in the first quarter, Santander said. Lenders in Spain are facing a squeeze on margins as defaults mount, credit demand flags and loan books re-price to reflect lower interest rates.

Stress results

Santander passed European stress tests that showed the bank would have maintained its Tier 1 capital ratio at 10 percent in the worst-case scenario.

Net interest income at the group level climbed 12 percent to 7.38 billion euros, while net loan-loss provisions rose 2.7 percent to 2.48 billion euros. Lending increased an annual 4.9 percent, compared with a 0.3 percent decline in the first quarter, as the bank also added 88.3 billion euros of deposits in the first half of the year, the company said.

Bad loans as a proportion of total lending rose to 3.37 percent from 3.34 percent in March and 2.82 percent a year ago. Net entries into default fell to 3.39 billion euros from 3.42 billion euros in the first quarter.

Saenz said that while defaults at the group level have probably peaked, his prediction in February that Spanish defaults would peak in the second or third quarter of this year was off the mark. He said he now sees defaults peaking next year at about 4.1 percent from 3.71 percent now.

‘Deposit war’

Profit from Santander’s Spanish retail branch network fell 21 percent to 412 million euros as net interest income dropped 9 percent. The company offered a 4 percent yield on deposits as it captured 30 billion euros from Spanish customers earlier this year in a campaign that Saenz said today was “life insurance” against stresses in the wholesale funding markets.

“Net interest income has taken a hit from the deposit war,” said Andrea Williams, who helps manage about 1 billion pounds ($1.56 billion), including Santander shares, at Royal London Asset Management in London.

Earnings from the U.K. rose 11 percent to 527 million euros. The bank said in a statement to U.K. regulators it would hire over 600 workers in the second half of the year to “support business growth.” Earnings from Brazil, where Santander owns the third-biggest non-state-owned bank, climbed 32 percent to 691 million euros, Santander said.

Banco Espanol de Credito SA, a Santander-owned Spanish retail bank run by Ana Patricia Botin, the chairman’s eldest daughter, said on July 14 that second-quarter profit fell 14 percent.