Santander profit halves on real estate losses

But it said deposits in Spain reached their highest level in 10 quarters during the April to June period.

Santander reported net profit of 1.7 billion euros ($2.1 billion) after completing 70 percent of the writedowns ordered by regulators against repossessed housing and unrecoverable loans to developers.

Although in line with provisions ordered by the Spanish government, part of an attempt belatedly to recognize losses from a 2008 property crash, analysts had not expected the bank to take such a large slice of the losses so soon.

"The provisions we are making will allow us to put real estate write-offs in Spain behind us by the end of this year," said Chairman Emilio Botin.

Spain has asked for up to 100 billion euros in aid from Europe to prop up failing banks. But alongside smaller rivals BBVA (BBVA.MC) and CaixaBank (CABK.MC), Santander was one of three Spanish banks judged not to need rescue funds - even in a stressed scenario - in an external audit carried out in June.

Santander benefited in the second quarter from the receipt of deposits from shocked Spaniards shifting their cash during a period in which the state took over troubled rival Bankia (BKIA.MC) in Spain's biggest ever bank rescue.

"They are benefiting from everything that has happened. They have an enviable position in Spain. There are many customers that are leaving the bank they have been with all their lives to move to more solid banks," said Alejandro Varela, fund manager at Madrid-based broker Renta 4, which has 400 million euros of assets under management, including Santander shares.

Apart from property losses, Spanish lenders have been suffering from the vicious link between sovereign and banking risk, which remain a major concern in the euro zone. Spain's borrowing costs reached euro-era highs this week on investor worries that the country might not be able to meet its debt repayments.

Santander, which enjoys a better rating on its debt than the Spanish state, said its sovereign holdings had been maintained unchanged in the last quarter.

Santander shares were trading 7.8 percent higher at 9:52 a.m. EDT (1352 GMT) at 4.4 euros per share, as Spanish shares jumped in response to European Central Bank President Mario Draghi's pledge to do whatever necessary to prevent the euro zone from collapse.

BRAZIL SLUMP

Santander has suffered less than domestic rivals from a severe Spanish economic downturn and the property crash due to its diversified business in Brazil, Mexico, Poland and Britain. Latin America comprises half its profit.

Analysts, however, pointed to weaker revenues in Latin America and higher credit losses in the quarter, particularly Brazil, which is suffering a sharp slowdown in economic growth, pushing up the rate of defaults across the banking sector.

Banco Santander Brasil (SANB11.SA)(BSBR.N), which accounts for over a quarter of group profit, saw its earnings slump in the second quarter after a spike in bad loans forced the bank to increase loan loss provisions by 23 percent.

"Brazil was the main disappointment," said Jaime Becerril of J.P. Morgan.

Britain was also a weak spot, where historically low interest rates are eating into profit margins. Second quarter revenues for the British business were down 21 percent on the year-ago period to 954 million euros.

Santander Chief Executive Officer Alfredo Saenz said plans to float the British unit were on ice.

One analyst said the performance of the overseas business was not sufficiently good to offset forecast weak domestic earnings.

"No foreign unit has beaten our estimates by a sufficient margin to compensate for what we see as a steady decline of Spanish earnings in coming quarters," said Ignacio Cerezo, analyst at Credit Suisse.

"ENVIABLE POSITION"

Santander said at an analysts' presentation there would be no change to its dividend policy. On Wednesday Spain's Telefonica (TEF.MC) said it would scrap its dividend for 2012 as it battles to bring down its debt pile.

Mid-sized Spanish banks Bankinter (BKT.MC) and Sabadell (SABE.MC) have both reported first half results brought low by writedowns against toxic property assets.

Santander said first half net profit had also halved at its majority-owned domestic subsidiary, Banesto (BTO.MC), to 82 million euros.

Santander is required to write down 8.8 billion euros by the end of the year following two banking reforms put out by the government in February and May.

From that, including today's announcement, it has so far covered 6 billion euros, including 1.8 billion euros in 2011 and 2.8 billion euros in the latest accounts.

Which banks will receive aid will be made clear in September or October, when the results of a extensive independent audit of Spain's banking sector are released. Santander is expected to be among a small group of lenders with no need of aid.

(Additional reporting by Jesus Aguado; Editing by Julien Toyer and Stephen Grey)