Santander sees Americas surge make up for weak Europe profit

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BANCO SANTANDER reported a profit of $2.4 billion in the second quarter. / BLOOMBERG FILE PHOTO/ANGEL NAVARRETE
BANCO SANTANDER reported a profit of $2.4 billion in the second quarter. / BLOOMBERG FILE PHOTO/ANGEL NAVARRETE

MADRID, Spain – It looks like Banco Santander SA picked the right time to grow in Latin America.

The Spanish lender’s surging businesses there delivered second-quarter profit growth that made up for a lackluster performance in Europe. Shareholders on Tuesday approved a capital increase to buy out the 25% of the bank’s Mexican unit that it doesn’t already own, continuing its expansion in the region.

As years of low interest rates weigh on the profits of European peers, Santander is leaning ever more on Latin America, where it seeks to benefit from growing populations, including many people who are using banking services for the first time. The results highlight the diverging fortunes of the bank’s business as North and South America account for a rising share of underlying earnings with Brazil, the bank’s main profit driver, rising 19%.

Net income fell 18% year-on-year to $1.59 billion, beating the analyst consensus of $1.45 billion.

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Underlying profit at the Madrid-based lender rose 5% to $2.4 billion in the three months through June, the best quarterly performance in eight years, according to Chairman Ana Botin. The results would have been even better if Brazil’s real hadn’t fallen against the euro.

Meanwhile, the lender’s European business is marked by cost reductions, branch closures and a long struggle to improve profitability at its U.K. unit. Santander is cutting more than 3,000 jobs and shuttering duplicate branches in Spain as part of the integration of Banco Popular Espanol, contributing to a 706 million euro charge in the second quarter that caused net income to drop by 18%. The bank is also pulling back in the U.K. and Poland.

Sweet spot

While Santander’s $752 billion of deposits in Europe are more than twice the total of the Americas, the latter accounts for 55% of the group’s underlying profit.

Santander rose as much as 3% in Madrid trading and was up 2.9% at $4.69 as of 11:38 a.m.

“The evolution of countries in Latin America continues to be a vital support,” said Nuria Alvarez, an analyst at Renta 4 Banco in Madrid. That’s “in spite of the complicated environment that they have in the U.K and in Spain.”

The bet on Latin America looks likely to continue and even increase. On Tuesday, the bank’s shareholders voted to approve a $3 billion capital increase to fund the purchase of the Mexican unit stake. The business had a 13% market share in Mexico at the end of 2018.

Santander is rolling out a digital-banking app, designed to capture low income customers who have never had an account, in Mexico and Chile after piloting the service in Brazil.

In Spain, underlying profit was virtually flat, held back by stagnant net interest income and fees. Santander’s U.K. unit continued to struggle with regulations that oblige the bank to separate its investment arms from retail banking. Net income at the British business fell to $374 million in the second quarter compared with $428.6 million a year ago.

The job reductions are part of a global plan to reduce annual costs by 1.2 billion euros, with most of the cutbacks coming in Europe.

Santander U.S. performance:

  • Net interest income was $1.6 billion in the quarter, a 7% increase year over year
  • Fee income for the quarter totaled $541 million, a 3.1% increase year over year
  • The segment reported $447 million on financial transactions and leasing income in the quarter, as well
  • Total U.S loans were 92.5 billion at the end of the quarter, a 9% increase year over year. The quarter ended with $55.5 million in retail loans (including $32.4 million in automobile lending) and $32.9 billion in commercial loans.

Here are some highlights from Santander’s second-quarter report:

  • The bank’s fully-loaded and phased in CET1 ratio was 11.3% , in line with its medium-term target
  • Net interest income of $10.2 billion in the second quarter beat the consensus of $10 billion

Charlie Devereux is a reporter for Bloomberg News. PBN contributed to this article.