Santander improves in UK in second quarter, Spain and capital disappoint

Banco Santander started off the bank results season in Spain and reported profits of €3.7bn in the first half of the year, 4% more than in the same period in 2017.

Net profit of €1.7bn for the second quarter was more than 4% above the consensus forecast, even though costs were slightly higher than expected. Underlying profit before tax for the quarter of €3.8bn was 9% above consensus expectations, driven by lower impairments and higher other income/trading income, partially offset by higher costs.

The profit for the first half as a whole was dented by a €300m charge for the takeover of the troubled Banco Popular and exchange rate impairments, which Santander had previously flagged will occur annually until 2019.

Profits rose after strong growth in the US and Brazil from January to June as customer numbers increased by around 3m to 140m. Net earnings jumped 6% in Brazil, its largest market, while its US profits climbed 37.5%, much better than expected.

Spanish profits fell 29% in the second quarter and for the half year fell 20% to €500m euros, due to the costs of the integration of Popular, which amounted to €280m.

UK profits rose 16% in the second quarter to cut the first half decline to 16% to €692m because of investment costs and weaker revenues. The UK accounts for a fifth of the bank’s profits.

Tier-one capital decreased by 26 basis points in the second quarter to 10.53% from 10.79%, with management having previously set an 11% target for the full year.

The return on equity (ROE) was 8.24% in the first half of the year, from 7.97% a year ago. Meanwhile, the return on tangible capital increased to 12.24% from 11.82% twelve months earlier.

Santander’s executive chair Ana Botin said the bank had delivered "strong growth in underlying revenue and improving credit quality, despite strong currency headwinds".

She also said the group’s balanced presence in Europe and America helps it achieve predictable results and thanks to growth in Brazil in the US that had “more than offset a more challenging environment in other markets”, the company had been able to report positive results.

Analysts at UBS said the clean core capital of 10.62% was roughly 10 basis points below its forecast, which "will raise questions" about management's 11% full year target.

The UK was "more resilient than expected" and overall with growth from Brazil and the US and Spain bucking the recent trend, it was "a sound set of numbers" after a mixed first quarter, "with limited downside risk to consensus forecasts at first sight, which should support the stock" though "the miss on capital and questions about sustainability of Brazil's performance might temper the share price reaction".