Spain, Brazil Offset Britain’s Slowdown

Banco Santander SA is riding Spain’s economic recovery and rising demand for loans in Brazil, offsetting emerging market currency volatility and a slowdown in Britain.

The lender’s net income of €1.7 billion ($2 billion) compared with analyst estimates for earnings of €1.67 billion. Earnings were up in Brazil even after the currency depreciated amid a sell-off in emerging market assets. Clients in Spain took advantage of the country’s economic upswing to take on more loans and also parked more money with the bank, Bloomberg reported.

Santander has relied on growth in Brazil, its largest market, to drive profits. While Latin America’s largest economy continues to power earnings, a fifth year of growth in Spain is now starting to bear fruit with a recovery in local credit markets. The bank boosted lending in all of Santander’s developed economies, Chief Financial Officer Jose Garcia Cantera said in a Bloomberg TV interview.

“We have seen in Europe a positive quarter—probably the best quarter we’ve seen in a number of years,” Cantera said.

In Britain, lenders have had to set aside almost £40 billion ($52.5 billion) to compensate customers who were mis-sold payment protection insurance. Santander said it has had to invest money in regulatory projects such as ring-fencing, which obliges banks to separate their investment arms from retail banking, and the European Union’s Second Payment Services Directive which regulates payments in the region.

Santander shares were little changed at €4.74 in Madrid.

The bank’s CET1 capital ratio of 10.8% for the second quarter—a key metric of financial strength—fell because of Santander Consumer USA minority interests and the restructuring of Banco Popular. The lender has one of the lowest core capital levels among its peers but Chairman Ana Botin has said that its target of 11% for 2018 is appropriate for a bank focused on lending, rather than the more volatile environment experienced by investment banks.

Net interest income in Spain rose by a quarter while fees were up 19% to €671. Loan growth rose 1% in Spain and Britain from the first quarter and 4% and 3% in the US and Brazil in constant euros, the bank said. The bank reported a €300 million charge in Spain for the consolidation of Banco Popular which it bought last year for 1 euro.