Santander in shock profits warning amid pain in Spain

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Santander, the Spanish banking giant that owns Abbey and Alliance & Leicester, shocked the market yesterday by warning that annual profit would fall short of its forecasts.

The bank blamed new rules imposed by the Bank of Spain requiring earlier recording of bad debts, as well as the worsening economy in its home market. And it confirmed a partial float of its UK arm in the first half of 2011, which could raise more than £3bn to bolster its capital base.

The news was a rare glitch for Spain's biggest bank, which avoided the blow-ups that afflicted rivals and spent tens of billions on acquisitions in the wake of the financial crisis.

As recently as June, Santander's chairman, Emilio Botin, told shareholders to expect full-year profit in line with last year's. Santander reported a 9.8 per cent fall in net profit to €6.1bn for the first nine months of the year after a one-off hit of €472m (£412m) for bad debts. The charge sent profits down 26 per cent to €1.6bn – the lowest quarterly profit since early 2006.

The bank said it would call a halt to its acquisition spree to bed down recent buys after spending about $6bn since June on Royal Bank of Scotland branches in the UK and assets in Poland, Germany and the US.

"There's nothing expected, nothing on the horizon," Alfredo Saenz, the chief executive, said who confirmed the UK float plan, an open secret in the City for months.

The Spanish central bank's new rules speed up the timetable for recognising unpaid loans and repossessed real estate. The rules were outlined in May, before Santander made its profit prediction, but the bank said it was not clear then how the rules would be treated for accounting purposes. Santander said it had decided to take a tough line with its own loan book and had chosen not to release up to €725m of reserves against general bad debts.

Santander's string of acquisitions has raised concerns about its capital strength as regulators force banks to hold more and better quality capital under the so-called Basel III rules.

But Mr Saenz insisted yesterday that the bank "roundly" rejected any suggestion that it will raise more cash from shareholders to support its balance sheet.

Santander's deal making has helped cushion it from the troubled Spanish economy, where unemployment has soared after the bursting of the country's property bubble.

Joseph Dickerson, a banking analyst at Execution Noble, said: "It's a double-edged sword. It's good to diversify to dilute Spain [as a share of the business] but the capital position is stretched on the back of those deals."

Mr Dickerson said Santander had done the right thing by not releasing its reserves and that the lender remained a well-run bank. Profit from Santander's Spanish retail network plunged to €83m from €469m in the third quarter because of the bad debt charge. In Brazil's booming economy, Santander's profit jumped to €785m from €628m.

Mr Botin has expanded in Brazil, the UK and the US to diversify his business through canny deal making. Santander was part of the RBS-led consortium that bought ABN Amro in 2007 but the deal that nearly destroyed RBS made Santander billions from selling ABN's Italian business and buying its Brazilian operations. Mr Botin also added Alliance & Leicester and Bradford & Bingley's savings business to Abbey National to expand in Great Britain.

UK profit for the first nine months of the year rose 13 per cent to £1.3bn as Santander wrote nearly one in five British mortgages.