Santander Underlying Profit Gains as Charges Hurt Net Income

(Bloomberg) -- Banco Santander SA benefited from a surge in earnings in Brazil during a quarter that saw profit hit by restructuring costs, mainly to absorb Banco Popular Espanol SA.

Net income fell to 1.46 billion euros ($1.7 billion) in the three months through September from 1.7 billion euros a year earlier, Spain’s largest lender said Thursday. That missed estimates because analysts weren’t expecting the bank to begin booking consolidation costs until next quarter. Discounting 515 million euros in charges, underlying profit rose 17 percent to 1.98 billion euros, with Brazil contributing about a third.

“The numbers came in better than expected in most of Santander’s divisions,” Daragh Quinn, an analyst at Keefe Bruyette & Woods, said by phone. “The contribution from Popular also was stronger than expected.”

Santander raised its profitability target this month, citing a brighter outlook in Latin America and positive trends in Europe. Chairman Ana Botin also noted a better-than-expected performance in the U.K., where the economy has slowed since the 2016 vote to leave the European Union.

Santander Underlying Profit Gains as Charges Hurt Net Income

Profit from Brazil rose 35 percent to 659 million euros in the three months through September despite economic and political turmoil in the country. The U.K. business, the bank’s biggest market after Brazil, generated 377 million euros, up 4 percent from a year ago. In Spain, profit rose around 15 percent to 311 million euros.

The restructuring costs included 300 million euros to integrate Banco Popular, the failing lender purchased in June. Santander took over Popular for a nominal one euro after European regulators wiped out its shares and junior debt to offset losses from bad assets.

“When we bought Popular, we said there would be costs of around 900 million after tax,” Chief Financial Officer Jose Garcia Cantera said in Bloomberg television interview.“This 300 million euros of restructuring charges was very much in line with those charges, which will come over a two- to three-year period. ”

Santander’s non-performing loans ratio fell to 4.24 percent from 5.37 percent in the second quarter. Excluding Popular, it was 3.51, the lowest since the end of 2010, the bank said. Net interest income, the difference between what a bank charges for loans and pays for deposits, rose to 8.68 billion euros from 7.8 billion euros a year earlier.

Catalonia Risk

The bank’s common equity Tier 1 ratio, a key measure of financial strength, rose to 10.8 percent from 10.72 percent at the end of June. Santander raised about 7 billion euros in a stock sale in July to help cover the acquisition of Banco Popular.

Santander in August agreed to sell a 51 percent stake in Popular’s real estate to Blackstone Group LP. Banco Popular still has 10 billion euros in non-performing loans, the bank said.

The shares were trading 0.7 percent higher at 10:56 a.m. in Madrid for a gain of more than 16 percent this year. The stock has declined since Catalonia’s independence vote on Oct. 1, even though Santander is based in Madrid, outside the secessionist region.

Santander sees no “catastrophic” outcome for Catalonia, which only represents two percent of its loans and deposits, Cantera said.

©2017 Bloomberg L.P.