Santander defies Brazil gloom, beats capital and profit forecasts

By Jesús Aguado and Angus Berwick

MADRID (Reuters) - Banco Santander (SAN.MC) answered long-standing investor questions with an improved capital ratio on Wednesday, which combined with an above forecast profit pushed its shares higher.

Overall group profit at the euro zone's biggest bank beat average analyst forecasts, despite it reporting a near 5 percent slide in net profit in the first quarter due to a deepening recession and falling currency in Brazil, its second-biggest market.

Once converted into euros, profit also dipped in Britain, the Spanish bank's largest market and where Chairwoman Ana Botin has said the bank has contingency plans in case voters support a British exit from the European Union at a referendum in June.

However, Santander shares were up 1.2 percent at 1045 GMT, one of the leaders on Spain's blue-chip Ibex index (.IBEX) and outperforming domestic peers as investors and analysts welcomed a rise in its capital ratio under the strictest criteria to 10.27 percent from 10.05 percent in December.

The bank has long been under scrutiny over its capital buffers since it lags behind its European peers in a key measure of a bank's financial strength known as its "fully-loaded" Common Equity Tier 1 ratio (CET1).

Europe's 23 largest banks have an average fully loaded CET1 ratio of 12.7 percent, Deutsche Bank said in a report last month. Santander said on Wednesday it was on track to lift its ratio above 11 percent by 2018.

However, analysts at UBS said they now expected Santander to meet the 2018 target a year ahead of schedule. "This is a welcome development, given Santander's core solvency still fares badly within a European perspective," they wrote.

The lender achieved the capital increase through a mix of organic improvement, a regulatory one-off lift and a rise in assets available for sale.

PROFIT PRESSURE

Santander reported a net profit of 1.63 billion euros (1.23 billion pounds) for the three months through March, down from 1.72 billion euros in the same quarter last year, but it beat analysts' forecasts of 1.5 billion euros in a Reuters poll.

In Brazil, its profit slumped by 25 percent from a year ago and was also down on the previous three months. Revenues and profit also fell in other markets such as Argentina and Mexico.

Brazil's economic gloom threatens to hamper Chairwoman Ana Botin's strategy of organic growth for the bank, which under her father and predecessor expanded rapidly through acquisitions.

Growth in Brazil and other emerging markets largely compensated for the collapse of the bank's domestic market during Spain's financial crisis.

However, despite Brazil's economy contracting by 3.8 percent last year, non-performing loans there fell from the last quarter, as they did across all of Santander's main markets apart from Portugal. Overall, provisions on bad loans were down 6 percent when converted into euros.

Profit in Britain was down almost 4 percent on the quarter and Santander's CEO Jose Antonio Alvarez said on Wednesday a so-called Brexit would have a short term impact on the bank's finances due to the potential fall in the value of sterling.

"In the long term, Britain's exit would be bad for the British economy and for the euro zone," he told a news conference, adding that the bank's contingency plan did not involve transferring employees abroad.

At a group level, Santander's net interest income, a measure of earnings on loans minus deposit costs, was 7.62 billion euros, down 5.2 percent from a year ago.

This mirrors the margin-squeezing effect of low interest rates experienced by other Spanish banks and increased competition for lending that has seen it roll out a new current account scheme which offers generous cashbacks.

Alvarez told analysts the bank expected to save 100 million euros a year by closing hundreds of branches.

(Editing by Alexander Smith and Louise Heavens)