Santander lending drive lifts first-quarter profits

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* Q1 net profit up 32 pct y/y at 1.717 bln euros

* Net interest income beats forecasts

* Weaker euro, lower charges also help profit

* Shares (Berlin: DI6.BE - news) rising 1.12 pct

By Sarah White and Jesús Aguado

MADRID, April 28 (Reuters) - Santander on Tuesday showed the benefits of a drive to boost lending across its main markets, which helped the bank to produce a 32 percent jump in first-quarter profits.

Under new boss Ana Botin, the euro zone's biggest bank by market value is trying to grow income by expanding its loan book rather than through acquisitions.

Lending was up in most of its key markets since December, including in Brazil and Britain. Net income also grew in nine of its 10 core countries, except for Chile.

Botin, who took over as chairwoman from her late father Emilio last September, boosted capital levels with a 7.5 billion euro share sale in January to back the lending push.

But Santander said rising competition could squeeze margins in markets such as Spain. It will have to keep adding new clients to make up for this margin pressure, which is fuelled by cheap European Central Bank loans.

Santander said it would be able to achieve this in most countries, in an environment in which rivals are facing similar difficulties, even as European economies recover.

"We are facing a relatively benign growth environment in our main markets, probably (except) Brazil, with some uncertainties, very low interest rates and increasing regulatory requirements," Chief Executive Jose Antonio Alvarez told an investor conference call.

Alvarez said net interest income, or earnings on loans minus deposit costs, could suffer in Spain in the coming quarters. Net interest income and fees there dropped 1 percent in the January-March period from a year ago, disappointing some analysts.

"Spain was the weakest link, especially in revenue terms," Credit Suisse (NYSE: CS - news) analyst Ignacio Cerezo said in a note.

Spanish banks are also facing subdued demand for loans even though Spain is finally putting the financial crisis behind it.

Santander said growth could slow in its British arm due to growing competition and it flagged increasing costs from implementing local regulations.

First (Other OTC: FSTC - news) -quarter profit in Britain, which like Brazil makes up about a fifth of earnings, rose 14 percent in pounds.

Santander's group profit of 1.72 billion euros ($1.9 billion) was in line with expectations. The bank said a weaker euro against the dollar and the pound had boosted earnings. Santander's shares were up 0.8 percent at 11.55 GMT.

The bank says it is now shying away from doing deals, though it is eyeing Novo Banco in Portugal, the only core country where Santander's lending was down versus a year ago.

Overseas income, which helped the bank weather a real estate crash and Spain's downturn, is still propelling profits.

Even (Taiwan OTC: 6436.TWO - news) in Brazil, where it has faced hiccups due to a slowing economy, first quarter net income was higher than expected, rising 41 percent as charges against soured debts fell.

Santander said it was on track to meet group targets for 2017. It aims for a return on tangible equity, a measure of profitability, of 12 to 14 percent, and said this stood at 11.5 percent at end-March. ($1 = 0.9199 euros) (Editing by David Holmes and Jane Merriman)