Banco Santander SA, Spain's biggest bank, urged the government to seek an international bailout to reduce borrowing costs for struggling lenders, as writedowns on bad property investments almost wiped out its third-quarter profit.
Santander, the euro zone's largest bank by market capitalization, has weathered Spain's property market crash and sovereign debt crisis better than rivals because it makes less than a fifth of its profit in the country after years of expansion abroad into regions like Latin America.
However, its shares and funding costs have suffered as Spain, after agreeing a credit line from the European Union worth up to €100-billion ($130-billion U.S.) to rescue its banks, drags its feet on requesting a full bailout.
"A situation in which the Treasury funding is being helped by contingency credit lines offered by any international body will produce a fall in the sovereign debt risk premium and, as a consequence, a fall in banks' risk premium," chief executive Alfredo Saenz told analysts on Thursday.
Santander passed an independent audit of the country's banks with flying colours in September, meaning it will not be among lenders receiving funds from the European credit line. Yet credit ratings agency Moody's rates the bank just two notches above junk - one rank higher than the sovereign.
"Short term, the stock's performance continues to be driven by investors' sentiment towards the sovereign," said Antonio Ramirez at broker KBW.
Saenz said Santander's holdings of Spanish sovereign debt were €30-billion at end-September, down from €35-billion at end-June, due to maturing positions, adding the bank was happy with these levels.
Santander shares have underperformed European peers this year. They were little changed in Thursday trade.
Santander said its third-quarter net profit plunged to just €100-million from €1.8-billion in the same period last year, hit by writedowns on bad property investments.
The group said it had completed 90 per cent of government-enforced writedowns on toxic real estate assets after absorbing €5-billion of losses in the first nine months of the year.
Other banks are also hurting from the balance sheet clean-up, which the government hopes will restore confidence and free up credit for households and businesses in a deep recession.
Sabadell on Thursday reported a 56 per cent drop in nine-month earnings, also hit by writedowns.
But bad loans have spread beyond the real estate sector in Spain as more people default on their debts, with a quarter of the workforce out of a job..
Santander's loans in arrears as a percentage of total loans rose to 6.38 percent in Spain from 5.98 percent at end-June, which - while well below the national average - shows an accelerating trend.
"(The rate is) probably still far from peaking given rising unemployment and increasingly cash-strapped local businesses," said Flemming Barton, an analyst at CM Capital Markets.
While benefiting from its international footprint, Santander's earnings in Brazil - about a quarter of the total - have waned following a sharp slowdown in the economy there which has prompted its government to roll out stimulus measures.
Fresh from a $4-billion September stock market flotation of its Mexican subsidiary, Santander was able to use funds from this operation to increase its core Tier 1 capital - a key measure of financial strength - to 10.4 percent despite real estate writedowns in Spain.
"They have shown they can strengthen capital and still take the provisions," said Daragh Quinn, an analyst at Nomura bank.
In Britain, Santander wrote off £52-million ($83-million) of costs incurred during its abandoned purchase of 316 branches from Royal Bank of Scotland.
Mr. Saenz said a long-awaited listing of the British subsidiary was still on hold, waiting for better market conditions.