Santander 1st-Quarter Profit Drops 8.7% on Currencies (Update8)

By Todd White

Madrid, April 28 (<a href=quote.bloomberg.com>Bloomberg) -- Santander Central Hispano SA, the largest bank in Spain and Latin America, said first-quarter profit fell 8.7 percent, hurt by declines in the Brazilian real and Mexican peso. The bank said it is ``optimistic'' about 2003.

Net income dropped to 613 million ($677 million), or 13 cents a share, from 671 million euros, or 14 cents, in the year-ago quarter, bank officials said. Discounting the effect of lower currencies against the euro, profit rose 21 percent.

Chairman Emilio Botin, 68, has begun hedging foreign exchange risk to better protect earnings for the rest of 2003. He's also expanding in Europe, cutting the bank's reliance on Latin America, which earned 38 percent of profit in the quarter.

This company has changed radically from what it was a year ago,'' Chief Financial Officer Francisco Gomez Roldan said in an interview. The bank's foreign exchange volatility is now at a minimum,'' he said.

The value of Santander's Latin American investment exposed to currency fluctuations fell to 2 billion euros at the end of the quarter from 7.6 billion euros a year earlier, partly by hedging against the Mexican and Chilean pesos, Gomez said today.

``Now their risk is smaller a region where growth prospects are improving.'' Jose Manuel Jimenez, who helps manage the equivalent of $7.7 billion at Grupo Generali in Madrid.

The economy of Latin America and the Caribbean will grow 1.5 percent this year compared with a 0.1 percent contraction in 2002, the International Monetary Fund forecast this month.

Shares

Santander's shares have gained 20 percent over the last three months as the real has started to reverse a yearlong decline. Santander owns Brazil's largest foreign bank, its biggest investment outside Europe. The performance of the stock tops the 13 percent increase in the 78-member Bloomberg Europe Banks and Financial Services Index.

Today, the bank's shares rose 2.3 percent to 7.10 euros.

Chairman Botin said in a statement that the group's dynamism, loan quality, efficiency and our solid capital base permit us to be optimistic facing 2003,'' Three months ago, presenting fourth-quarter earnings, Botin said 2003 would be a difficult'' year.

``We think the worst is now behind us in'' Latin America, Gomez Roldan told a press conference.

Latin America

Latin American profit fell 13 percent to 385 million euros in the first quarter. In constant foreign exchange it would have risen 34 percent, the bank said

Earnings from the region probably will account for 29 percent of Santander's total profit this year, down from 35 percent in 2002, according to analysts at Morgan Stanley.

European consumer banking profit rose 13 percent to 413 million euros in the first quarter.

In Europe, Santander is opening 100 branches and hiring 500 mostly sales employees at its flagship Spanish bank after three years of cutbacks. It's also expanding in consumer financing in Italy and Germany. That's reducing its reliance on Latin America.

Santander's interest in Germany doesn't include acquisitions. The bank has ``zero'' interest in buying in Germany, Gomez Roldan said.

Santander may return to annual profit growth in 2003, boosting net 6 percent, helped by European retail banking and corporate banking, Merrill Lynch & Co. analyst Jose Luis de Mora forecast before the earnings.

Provisions

Gomez Roldan said he expects write-offs and provisions for loan losses to ``remain stable this year.'' Provisions fell by one- third to 333 million euros in the first quarter, the bank said.

First quarter profit was up 17 percent on fourth-quarter profit. Some analysts said quarterly comparisons were more important because of the currency effects.

In the first quarter, the real was down 44 percent against the euro compared with the year-earlier quarter while the Mexican peso dropped 31 percent and Venezuela's bolivar plunged 58 percent.

Brazilian profit, down 18 percent to 197 million euros, would have risen 26 percent at a constant exchange rate.

That compares with a 41 percent drop to 50 million euros at the Brazil division of ABN Amro Holding NV, the second-largest foreign bank in that nation. Overall first-quarter profit at ABN Amro, the biggest Dutch lender, jumped 74 percent to 690 million euros, aided by job cuts and branch closures.

Santander's income from long-term investments fell 30 percent to 124 million euros, undercut by more than $7 billion of asset sales last year in profitable companies.

Asset Sales

The bank had to sell assets last year to improve investor confidence and solvency,'' said David Manso, who helps manage $1.6 billion, including Santander shares, at Gesatlantico SA in Madrid. Part of the result you see now is less recurring income.''

Botin sold assets to boost the bank's ratio of reserves and other core capital and protect its bond rating. Core capital is now 6 percent of assets compared with 4.4 percent at the end of the third quarter.

The sales included a 3 percent stake in Royal Bank of Scotland Group Plc for 2 billion euros, 25 percent of its Serfin Mexican bank unit for $1.6 billion, and a Peruvian consumer bank and mutual fund business.

Lending income fell 23 percent to 1.9 billion euros, also hurt by lower currencies. Eliminating the foreign exchange effect and removing the stalled Argentina business from the earnings, lending income would have risen 2.1 percent, Santander said.

Total loans fell 4.1 percent.

In Spain, Santander has been hurt by lower benchmark interest rates. Its interest spread narrowed to 2.71 percent from 2.91 percent in the 12 months ended Dec. 31. That's the difference between what the bank earned on assets such as loans and what it paid on deposits and other liabilities.

Santander's profit had been expected to fall to 607 million euros, according 10 analyst estimates.

Divisional profit was stated before ordinary write-offs for goodwill, the bank said. Last Updated: April 28, 2003 12:36 EDT