Santander poised for big profit jump as bad debt provisions fall

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Santander , the euro zone's biggest bank, and two smaller rivals are expected to reveal a surge in profits when they report nine-month results on Thursday due largely to a reduction in bad debt provisions.

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The earnings from Santander, Sabadell and Bankinter will give a flavour of how the banks are recovering as Spain emerges from recession.

The banks' profits already rose strongly in the first half of the year and they are likely to add to those gains in the third quarter.

But a key question for investors will be how the banks' underlying business is evolving as they recover from a five-year-old property market collapse. And while the banks' headline profit figures are likely to look solid, income from lending is expected to fall.

Spain's property crash left many banks short of capital as defaults rose, forcing the country to turn to Europe last year for 41 billion euros in funds to help the weakest.

This did not include the three banks reporting on Thursday. Santander, which makes half its profit in South America, was able to offset troubles at home with overseas revenues.

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But the three banks have had to sell assets or turn to investors to strengthen their solvency and capital levels, which remain under scrutiny by regulators ahead of a European Central Bank review of euro zone banks' assets.

The banks' net interest income, or earnings on loans minus deposit costs, will likely fall in the nine-months versus a year ago as low interest rates bite and credit shrinks.

In the third quarter, though, net interest income may improve compared to the second quarter of 2013.

"Spanish banks will kick off the reporting season ... with attention focused on net interest income dynamics, with the cost of deposits coming down rapidly, we expect a sequential pick up in margins," analysts at N+1 said in a note.

For Santander, the performance of its Brazilian unit, one of its key profit engines, will also be under scrutiny after falls in net interest income earlier this year.

Santander is forecast to post a 77 percent rise in nine-month profit to 3.3 billion euros ($4.5 billion), according to a Reuters poll of 11 analysts.

Bankinter is expected to more than double profits in the period to 151 million euros, while Spain's fifth biggest lender by market value, Sabadell, should also see profit leap to 172 million euros, according to analysts polled.

($1 = 0.7260 euros)

(Reporting by Sarah White. Editing by Jane Merriman)