Santander Upbeat on Banco Popular Buy as Profit Rises -- 3rd Update

Banco Santander SA on Friday reported a rise in second-quarter profit and said its recent acquisition of Banco Popular Español SA would boost returns as Spain's economic recovery accelerates.

The Spanish banking giant said net profit rose to EUR1.75 billion ($2.04 billion) in the second quarter from EUR1.3 billion a year earlier. Net interest income was EUR8.61 billion compared with EUR7.57 billion. Those figures include its acquisition of Banco Popular.

The figures were in line with those it had pre-announced early this month when it launched a capital increase to fund its cleanup of Banco Popular, which was beset by souring loans.

The acquisition makes Santander Spain's leading bank in loans and deposits at a time when the country's economy is resurgent. Economists expect growth to top 3% this year for the third consecutive year, outpacing most major eurozone countries.

Santander Executive Chairman Ana Botín said that executives are "extremely confident that the acquisition of Popular will deliver a return on investment of 13%-14% by 2019."

Santander's capital ratio was 9.58% in June compared with 10.66% in March under international regulations known as "fully loaded" Basel III criteria. Santander has among the lowest ratios of major European banks and investors are closely attuned to how it builds its capital.

Taking into account Santander's EUR7.07 billion capital increase, which closed Wednesday, its "fully loaded" capital ratio was 10.72% as of June 17, which the bank said keeps it on track to meet its target of above 11% in 2018.

Santander's ratio of bad loans to total loans edged up with the acquisition of Banco Popular to 5.37% in the second quarter from 3.74% in the first quarter. Excluding Banco Popular, that ratio would have fallen to 3.55%. Banco Popular's balance sheet was weighed down by tens of billions of euros worth of foreclosures, unsold land and other nonperforming assets accumulated when Spain's real estate boom went bust starting in 2008.

Concerns about how Banco Popular was coping with its soured assets, and whether it would be able to find a buyer or raise capital, accelerated into an outright bank run earlier this year. Banco Popular was rescued by Spanish and European Union authorities and sold to Santander for a token EUR1 on June 7.

Santander executives said Friday they had to inject EUR13 billion of liquidity into Banco Popular the day they took it over. Its deposits had fallen by about EUR20 billion from December 2016 through June to around EUR51 billion, Santander executives told analysts. Since Santander acquired Banco Popular, deposits have increased by more than EUR5 billion, they said.

Santander is likely to sell 51% of Banco Popular's real-estate assets, pending regulatory approval, Chief Executive José Antonio Álvarez told analysts.

"That is what I see as the central scenario for us," he said.

While Mr. Álvarez acknowledged that Spain's real-estate market is recovering, Santander already has enough property assets to capitalize on price increases, he said. After taking on the assets from Banco Popular, Santander has a "high real estate exposure, which if possible, we want to reduce very quickly," Mr. Álvarez said.

In Santander's Brazil unit, net profit rose strongly year-over-year in the second quarter. Meanwhile, net profit fell in the bank's U.K. unit in both euros and sterling.

Write to Jeannette Neumann at jeannette.neumann@wsj.com

(END) Dow Jones Newswires

July 28, 2017 05:56 ET (09:56 GMT)