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By Jesús Aguado
MADRID (Reuters) -Santander's solid second-quarter results in Europe and the Americas were somewhat overshadowed by higher loan loss provisions, costs and lending pressure in Brazil, the Spanish banking group's main market, sending its shares lower.
Higher revenues in Europe and still strong profitability in the Americas helped the euro zone second-biggest lender lift the net profit by 14% year-on-year to 2.35 billion euros, just below the 2.38 billion euro forecast by analysts polled by Reuters.
Santander joined other European banks in flagging challenges ahead amid raging inflation, war in Ukraine and energy shortages.
"Looking ahead, the economic context will likely be difficult for governments, central banks, businesses and individuals," Santander Chair Ana Botin said in a statement.
Santander shares were 2.5% down in mid-morning trade, lagging Spain's blue-chip index Ibex-35, which was down 1.4%.
Broker Jefferies described second quarter earnings as mixed given results before taxes represented a 3% miss as higher costs and provisions outweighed better net interest income performance.
Overall, net loan loss provisions rose 49.5% in the second quarter compared with the same quarter a year ago, though part of that increase was also due to a lower level of impairments last year when it released some COVID-19 related provisions.
Cost of risk, which measures the cost of managing credit risks and potential losses for the bank, rose to 83 basis points from a previous 77 points in March.
At a group level, second-quarter net interest income, a measure of earnings on loans minus deposit costs, rose 15.9% year-on-year to 9.55 billion euros, beating forecasts of 9.35 billion euros, on the back of higher interest rates in emerging and developed markets, such as the UK and Poland.
Santander's diversification, especially in Latin America, has helped the bank cope with tough conditions for lenders in Europe since the financial crisis.
The bank has also benefited from higher interest rates in some areas mainly outside the euro zone and movements in local currencies in Latin America, but results in this region were also marked by rising inflation across emerging markets, especially in Brazil.
Inflationary effects, particularly in South America, led to an increase of 5% year-on-year in costs in constant euros in the first half at a group level.
Net interest income in Brazil, which accounts for almost a third of the bank's overall underlying profits, rose 18.9% compared with the same quarter a year ago. But at constant euros, it was down around 4.9% compared with the previous quarter.
Cost of risk rose 32 basis points in Brazil to 426 basis points compared to the previous quarter, while provisions rose more than 70% year-on-year in the quarter.
In terms of solvency, Santander's tier-1 fully loaded capital ratio, the strictest measure of solvency, stood at 12.05% at the end of June, in line with its capital target.
Santander said it was on track to meet the 2022 targets, such as a mid-single digit revenue growth, an underlying return on tangible shareholders' equity of above 13%, and a cost-to-income ratio of 45%.
The bank also reiterated its policy to distribute 40% of underlying profit to shareholders, split evenly between cash dividend and share buybacks.
(Reporting by Jesús Aguado; additional reporting by Emma Pinedo; editing by Inti Landauro, Jane Merriman and Tomasz Janowski)