UPDATE 3-Spain's Santander profit leaps even as Brazil flags

Tue Jul 30, 2013 8:39am EDT

* H1 group net profit up 29 percent at 2.25 bln euros

* Provisions against loan losses drop sharply

* LatAm net profit down more than 16 percent

By Sarah White

MADRID, July 30 (Reuters) - Earnings from Santander SA's flagship Latin American businesses fell in the first half of 2013 as lending income from Brazil faltered, taking the shine off improved group profits.

A shaky economic recovery in Brazil - Santander's biggest Latin American market - has been a top concern for investors and analysts tracking the bank in recent months.

The division is seen as an important earnings driver as Santander tries to offset woes in other markets such as recession-hit Spain, where profits also dropped.

"We still have not seen an improvement in volumes from Brazil," said Nuria Alvarez, an analyst at brokerage Renta 4. "We still believe a recovery in volumes and earnings in one of the principle areas of the group is key."

In Latin America, where it still makes half its money, net profit fell by more than 16 percent in the six months to June.

Santander's Brazil operation posted a 17.5 percent fall in net interest income - a measure of interest earned on loans minus what is paid out on liabilities such as deposits - to 5.5 billion euros ($7.3 billion).

It did see some improvements, however, and the Brazil unit's net income beat forecasts. Bad debts in the country, or loans in arrears for 90 days or more, fell at end-June to 6.49 percent of all loans, below the year-ago level.

"We believe we have reached the peak (of bad debts in Brazil), among companies as well as individuals," Javier Marin, who took over as chief executive of Spain's biggest bank in April, told a news conference.

Marin, 46, was a surprise choice after the departure of veteran Alfredo Saenz. In his first results presentation, he oversaw a 29 percent jump in group profit as provisions against loan losses dropped sharply.

Spanish banks last year booked billions of euros of provisions on soured real estate deals, gutting their income.

"This is a first step towards the normalisation of profits at the bank," said Marin, who maintained plans to pay a 2013 dividend of 0.60 euros per share in cash and stock.

Santander's 2.25 billion euros net profit in the first half of 2013 was almost as much as what the bank made for the whole of last year.

Santander shares were down 0.2 percent at 5.46 euros by 1140 GMT, while the European sector was down 0.6 percent.

SPAIN STILL SHAKY

Across the Santander group, net interest income, squeezed by low European interest rates, fell in the first half. But it was up 1.1 percent in the second quarter from the start of the year, helped by a recovery in Portugal and Britain.

In Spain, net interest income was down sharply from a year earlier, but also improved in the second quarter compared with January-March, a trend some Spanish rivals have also noted.

But a tough economic background across Europe is still weighing on business. Santander said it had no plans for a stock market flotation of its UK unit in the short or medium term. The bank had previously set out a timetable that envisaged a possible 2014 listing.

Santander and its rivals in Spain also face an uphill battle to contain growing bad debts in a recession.

Santander's proportion of bad debts to its oustanding loan book rose to 5.18 percent across the group at the end of June compared with 4.76 percent at end-March, after the bank reclassified 2 billion euros of refinanced loans as non-performing under new Bank of Spain rules.

Santander said its core capital ratio, a measure of its capital strength, was 11.11 percent at the end of June, up from 10.67 percent at the end of June, as it cut lending.

Ahead of a change to stricter international rules next year,

Santander said its Basel III capital ratio would be more than 9 percent at all times on a "fully-loaded" basis, which takes into account changes that have to be made by 2019.

Santander said it may not sell any of its 65 percent holding in its U.S. consumer finance business, which is being readied for a possible public listing, and which was seen as a means of boosting capital if it was under pressure.

That would leave private equity firms KKR, Warburg Pincus and Centerbridge Partners to sell down their 25 percent holding. The remaining 10 percent belongs to Dundon DFS, a unit affiliated with the head of Santander Consumer USA.

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