MADRID The euro zone's biggest bank, Santander (SAN.MC), said on Thursday first-half profit halved after it took writedowns on deteriorating Spanish real estate assets while deposits in Spain jumped during the quarter.
Santander said it had now completed 70 percent of required writedowns against repossessed housing and unrecoverable loans to developers demanded by regulators in an attempt to belatedly recognize losses from a 2008 property crash.
Although in line with the provisions ordered by the Spanish government, traders were surprised the bank was willing to take such a slice of these losses so early in the year. Shares were trading 1.7 percent higher at 1000 GMT at 4.1 euros per share, outpacing a steady blue-chip index .IBEX.
"The provisions we are making will allow us to put real estate write-offs in Spain behind us by the end of this year," said Chairman Emilio Botin in a statement.
Santander said at an analysts' presentation there would be no change to its dividend policy. On Wednesday Spain's Telefonica (TEF.MC) said it would scrap its dividend for 2012 as it battles to bring down its debt pile in a tough recession.
A funding gap in Spanish banks' balance sheets due to bad property investments, worsened by loan defaults in a recession, has pushed Spain to ask Europe for a credit line of up to 100 billion euros ($121 billion) line to prop up lenders.
Spain is not considering seeking immediate help from the European Union to ease tensions on its sovereign debt, two Spanish sources said on Thursday, although the euro zone is eyeing possible action for later this year.
Spain's borrowing costs reached this week new record highs since the launch of the euro 13 years ago. The country's 10-year bonds were trading at around 7.4 percent on Thursday, down from around 7.7 percent in previous days; this level is still seen as unsustainable.
Despite these woes gripping the banks, Santander said deposits in Spain had grown 15 percent, while quarterly revenues were the highest in the last 10 quarters.
"They are benefitting from everything that has happened. They have an enviable position in Spain. There are many customers that are leaving the bank they have been with all their lives to move to more solid banks," said Alejandro Varela, fund manager at Renta 4 with 400 million euros of assets under management, including Santander shares.
Santander has suffered less than domestic rivals from a severe Spanish economic downturn and the property crash due to its diversified business in Brazil, Mexico, Poland and Britain. Latin America comprises half of profit.
Analysts however pointed to weaker revenues in Latin America and higher credit losses in the quarter, particularly Brazil which is suffering a sharp slowdown in economic growth, pushing up the rate of defaults across the banking sector.
"No foreign unit has beat our estimates by a sufficient margin to compensate for what we see as a steady decline of Spanish earnings in coming quarters,' said Ignacio Cerezo, analyst at Credit Suisse.
Jaime Becerril of J.P. Morgan said "Brazil was the main disappointment."
Britain was also a weak spot, where historically low interest rates are eating into margins. Second quarter revenues for the British business were down 21 percent on the year-ago period to 954 millon euros.
The April to June period covers the nationalization of Bankia, Spain's biggest bank rescue ever, which sent shock waves through the country's financial system.
Santander and smaller rival BBVA often gain clients during times of uncertainty in Spain, as they are seen by Spaniards as strong, stable banks.
The bank reported net profit of 1.7 billion euros after writing down losses of 2.78 billion euros on Spanish property assets. Profit for the period before provisioning was 3 billion euros, in line with analysts' expectations.
Santander is required to write down 8.8 billion euros by the end of the year following two banking reforms put out by the government in February and May.
From that, including today's announcement, it has so far covered 5.99 billion euros. This includes 1.8 billion euros from 2011 earnings, 2.8 billion euros this quarter as well as a 900-million-euro profit from the sale of the Colombian unit and 490 million euros from a reassurance deal with Abbey Life Assurance.
In a recent external audit of Spain's banks, Santander was one of three judged not to need capital even in a stressed scenario, alongside BBVA (BBVA.MC) and CaixaBank (CABK.MC).
Mid-sized Spanish banks Bankinter (BKT.MC) and Sabadell (SABE.MC) have both reported first half results brought low by writedowns against toxic property assets.
($1 = 0.8248 euros)
(Additional reporting by Jesus Aguado; Editing by Julien Toyer and Stephen Grey)