UK worries offset Santander's solid Brazil performance

By Jesús Aguado

MADRID (Reuters) - Santander <SAN.MC> reported a 75% fall in third-quarter net profit after one-off costs in Britain, while ongoing pressure on financial margins in Spain offset a solid performance in Brazil, its biggest market.

The euro zone's biggest lender by market value booked one-off charges of around 1.5 billion euros (£1.3 billion) as a result of a review of the goodwill ascribed to Santander UK, with uncertainty around Brexit.

On top of the goodwill impairment, Santander also set aside 103 million euros for payment protection insurance compensation in Britain.

Santander's expansion overseas, especially in Latin America, has helped the bank cope with tough conditions for lenders in Europe in the years since the financial crisis.

"Our diversification is one of the defining characteristics (...) and because of this we have continued to deliver predictable, profitable growth," Santander Chairman Ana Botin said in a statement

Santander reiterated the bank's commitment to reach a medium term return on tangible equity target (ROTE), a measure of profitability, of 13-15%.

Santander's shares opened about 0.3% higher before falling by more than 4% by 1335 GMT, underperforming the Spanish Ibex <.IBEX> blue chip market. The European banking index was down a little more than 2%.

"In a negative market session, Santander is being penalised but it looks like profit taking," said Nuria Alvarez, analyst at Madrid-based broker Renta 4, referring to a broader sell off in financial shares.

Goldman Sachs highlighted that Santander's better than expected fees in South America broadly offset weaker financial margins in developed markets, notably Spain, Britain and the United States.

In Britain, its third-largest market after Spain and Brazil, profit fell 63.4% due to a continued squeeze on mortgage margins and restructuring costs of 12 million euros, while financial margins also remained under pressure.

Overall, Santander reported net profit of 501 million euros in the July to September period. Analysts expected net profit to come in at 445 million euros, according to a Reuters poll.

Excluding the impairments, underlying profit rose 7% in the third quarter helped by trading gains.

Overall, net interest income, a measure of earnings on loans minus deposit costs, was 8.8 billion euros, up 5.5% from the third quarter of last year boosted by Latin America.

Analysts had forecast a net interest income of 8.85 billion euros.

LATIN AMERICA SUPPORTS GROWTH

In Brazil, where Santander already makes nearly a third of its overall profits, net profit rose 24.7% in the quarter, while net interest income increased 7.7%.

As part of its growth strategy, Santander recently increased the ownership of its Mexican business to 91.7% from 75%. In this market, net profit rose 20.6%

In Spain, net profit rose 1% in the quarter though net interest income was down 7.4% against the same quarter last year and 4.2% lower against the previous quarter due to pressure from low interest rates.

Chief executive officer Jose Antonio Alvarez said that a slowing of Spain's economic growth was also "having a gradual impact" on business activity.

In terms of solvency, Santander ended the quarter with a core Tier-1 capital ratio, a closely watched measure of a bank's strength, of 11.3%, the same as in the previous quarter and in line with its medium-term target of 11-12%.

Alvarez told analysts the bank expected to end 2019 with a capital ratio of between 11.4% and 11.5%.

Taking into account a regulatory impact of 23 basis points with the full implementation of new accounting standard IFRS-9, the capital ratio stood at 11.07%.

Looking forward, Alvarez said that between 2019 and 2020 he expected regulatory headwinds to impact solvency by between 80 and 90 basis points, with 60 basis points of that already accounted for.

(Reporting By Jesús Aguado; Additional reporting by Jose Elías Rodríguez and Paola Luelmo; Editing by Ingrid Melander, Jane Merriman, Kirsten Donovan)