Santander's profit slides as it sets aside $1.7 billion for COVID-19 loan losses

By Jesús Aguado

MADRID (Reuters) - Banking giant Santander's <SAN.MC> quarterly net profit dived by 82% as it set aside 1.6 billion euros ($1.7 billion) to cover expected loan losses caused by the COVID-19 pandemic.

The Spanish bank, like its peers, has been taking steps to counter risk as the global economy reels as a result of the coronavirus crisis. The loan-loss provisions rose 80% in the first quarter, though CEO Jose Antonio Alvarez said they had not been allocated to any specific markets.

The euro zone's second-largest bank by market value, after BNP Paribas <BNPP.PA>, reported a net profit of 331 million euros for the first quarter that ended in March.

Excluding extraordinary provisions, which also included 46 million euros of restructuring costs in Europe, Santander's underlying quarterly profit rose 1% to 1.98 billion euros. That exceeded an average analyst estimate of 1.8 billion euros in a Reuters poll.

"Our underlying quarterly operating performance was strong, with a relatively limited impact from COVID-19. The pandemic is, however, causing a global health crisis and significant economic and social distress," Santander Chairman Ana Botin said.

The lender said it was still too early to know the full economic effects of the crisis, adding that the bank would revise its strategic targets once it had a more complete understanding of the full impact of COVID-19.

It said last April that it aimed to lift its return on tangible equity (ROTE), a measure of profitability, to 13-15% in the medium term. In March this year, it had fallen to 8.75%, from 12.62% at the end of 2019.

Shares in Santander rose 0.5% by 0723 GMT, outperforming Spain's Ibex-35 index <.IBEX>, which was down 0.3%.

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The bank has boosted its lending capacity, in part, by scrapping its final 2019 dividend

As of the end of March, Santander had a core tier-1 capital ratio - the strictest measure of solvency - of 11.58%, compared with 11.65% at end of last year. Including the full implementation of new accounting standard IFRS-9, with an impact of 25 basis points, Santander's capital ratio stood at 11.33%.

The bank's diversification overseas, especially in Brazil and Mexico, has helped it cope with tough conditions for lenders in Europe in the years since the financial crisis.

A solid underlying performance in Latin America and North America, boosted by strong loans growth, offset sluggishness in Britain and Spain in the quarter.

In Brazil, where the lender makes close to a third of its earnings, underlying profit fell 3.7% in the quarter though was up 10% when stripping out the variation from the exchange rate.

In Mexico, where it makes 10% of its earnings, operating profit was up 22%, while profits rose 50% in the United States.

Its net interest income, a measure of earnings on loans minus deposit costs, was 8.49 billion euros, down 2.2% from the same quarter last year due to pressure from low interest rates in Europe.

In Spain, its second-biggest market, net profit fell 1% though lending was supported by state credit lines, which resulted in higher activity in SMEs and corporates at the end of the quarter and in April, worth 9.6 billion euros.

In the UK, its fifth-largest market, net profit fell 26% due to competitive pressure in the mortgage market and looked likely to fall further after the division warned of tighter income resulting from weaker demand for loans.

It blamed a 122 million pounds ($152.1 million) COVID-19 impairment charge for a 58% fall in statutory pretax profits.

($1 = 0.9244 euros; $1 = 0.8021 pounds)

(Reporting By Jesús Aguado; Additional reporting by Sinead Cruise; Editing by Himani Sarkar, Inti Landauro and Pravin Char)