UPDATE 1-Santander sets securities swap worth 9.1 bln eur

* Santander says move will strengthen balance sheet

* Offer applies to 9.1 billion euros in securities

(Adds details)

MADRID, July 9 (Reuters) - Spain's Santander (SAN.MC) set out a securities swap of bonds and shares issued by its subsidiaries and worth a total of 9.1 billion euros ($12.67 billion) on Thursday, to strengthen its balance sheet and capital structure.

"As most of the relevant securities are trading at a discount to their nominal values, the proposed exchange is expected to result in a capital gain for the group," Santander said in a statement.

Any capital gain from the transaction would not be included in the ordinary profit for 2009.

"Should a capital gain arise, it is likely to be used to strengthen the group's balance sheet," it said.

Santander, the euro zone's largest bank by market capital, said its annual funding costs are not expected to increase following the exchange.

The bank will exchange securities issued by its subsidiaries for shares and bonds issued by the Santander parent group.

The exchange will cover certain types of 22 outstanding Euro, Sterling and Yen Tier 1 hybrid securities or Upper Tier 2 securities with a nominal value of around 5.9 billion euros.

Separate exchange offers would be offered for eight of the group's US-dollar denominated Tier 1 hybrid securities and Upper Tier 2 securities in the United States.

Also, Santander said its core capital ratio has risen from 7.3 percent registered at the end of the first quarter by an expected 10 to 15 basis points per quarter.

First half net profit is in line with its full year earnings target to match 2008 profit of 8.88 billion euros, the bank said, reiterating forecasts for a non-performing loan ratio at 3.5 percent by the end of the year.

(Reporting by Paul Day; Editing by Andrew Hay and Elaine Hardcastle)