Real Estate Losses Weigh On Santander

Sergio Perez/Reuters

Emilio Botin, chairman of Banco Santander.

LONDON – Banco Santander, the largest bank in the euro zone, reported an increase in fourth-quarter net profit on Thursday even as it continued to set aside billions of euros to cover loan losses in its domestic Spanish market.

Santander, based in Madrid, said net income rose to 401 million euros ($544 million) in the three months ended Dec. 31. The bank posted a net income of 47 million euros in the period a year earlier, when it set aside 1.8 billion euros to offset exposure to Spain’s troubled real estate market.

Net profit for 2012, however, plunged 59 percent, to 2.2 billion, compared with the year-earlier period, as Santander was required to make provisions of billions of euros because of an increase in faulty real estate loans.

In total, Santander set aside 18.8 billion euros in 2012 to cover delinquent mortgages in Spain and an increase in other troubled loans across its businesses, particularly in struggling European markets.

While the bank now generates half of its earnings in Latin America’s emerging economies, a slowdown in Brazil and Mexico, combined with financial troubles in Europe, weighed on Santander’s earnings last year.

The bank’s management said it hoped the worst of the financial crisis was now behind it.

“In 2013, with the exceptional write-offs behind us, we should see a marked recovery in results,” Santander’s chairman, Emilio Botín, said in a statement.

Shares in Santander fell 2.3 percent in morning trading in Madrid on Thursday after the bank’s fourth-quarter earnings fell below analysts’ expectations.

The bank’s stock price has rallied more than 50 percent since July, after European policy makers gave renewed support to the struggling euro zone.

Despite growing confidence that the euro zone will survive its financial troubles, Spanish banks will continue to be hampered by weak domestic growth and potential further provisions to cover faulty loans, according to Citigroup analysts.

Since the beginning of the financial crisis, Santander has been shifting its focus away from its domestic market in search of growth. Yet as Europe’s debt troubles have continued to affect global markets, some of Santander’s new markets, particularly in Latin America, have also suffered.

Last year, Santander’s net income for its combined Latin American unit, excluding certain provisions, fell 8 percent, to 4.3 billion euros, compared with 2011, while its British operations reported an 11 percent drop in profit before provisions, to 1.1 billion euros. Santander raised $4.2 billion in September, after a dual listing of its Mexican subsidiary in New York and Mexico to increase its own cash reserves.

In Spain, Santander said it had cut its net exposure to the domestic real estate market by half last year, to 12.5 billion euros, after it sold almost 34,000 properties owned by the bank and real estate developers. The turnaround is likely to take some time. The bank’s ratio of delinquent loans in Spain rose 1.25 percentage points, to 6.74 percent, compared with 2011.

Santander also said deposits in its domestic market now exceeded loans, as the bank reduced lending to cash-strapped Spaniards. In December, the bank had announced that it would absorb Banesto, its main domestic subsidiary, as part of its plans to close 15 percent of its retail network in the southern European country.

The cutback in domestic lending comes despite a huge influx of cheap money from the European Central Bank at the end of 2011 aimed at easing institutions’ ability to raise money in the financial markets.

European policy makers had hoped that firms would inject the cash into domestic economies to stimulate growth. Many banks have instead hoarded the money in case Europe’s debt crisis further hurts their operations.

As fears over Europe’s future have waned, many of Europe’s largest banks have been able to tap wholesale markets for new financing. The European Central Bank said last week that 278 banks would now return a combined 137 billion euros of short-term loans to the European Central Bank.

On Thursday, Santander confirmed that it had returned 24 billion euros to the European Central Bank, adding that it still had 11 billion euros of outstanding loans from the agency.

By the end of last year, Santander said its core Tier 1 capital ratio, a measure of a bank’s ability to weather financial shocks, had increased to 10.3 percent, which is above targets set by regulators.

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