October 31, 2018 / 7:11 AM / 13 days ago

UPDATE 3-Santander draws on Spanish home comforts, capital improves

* Growth in domestic market helps to boost Santander

* Shares rise 4 pct as capital also improves

* Currency impact weighs on Brazil

* UK market shows signs of recovery (Adds analysts’ comments, updates share price)

By Jesús Aguado

MADRID, Oct 31 (Reuters) - A strong performance in its Spanish domestic market and a solid underlying business in Brazil drove Banco Santander third-quarter net profit up 36 percent from a year earlier while the lender also managed to improve its solvency position.

Shares in Santander, the euro zone’s biggest bank by market value, rose 4 percent on Wednesday, against a 1.5 percent rise on the European STOXX banking index.

Analysts welcomed the bank’s results at home in Spain and solid underlying performing in Brazil, as well as a recovery in Britain and its capacity to improve its capital ratios.

“Overall, this set of results seems to mean that the recovery remains on track, driven by a stronger Spain and the improvement in a surprisingly resilient UK,” BBVA said in a note.

Santander’s diversification overseas, especially in Brazil, has helped the bank cope with tough conditions faced by its European rivals since the onset of the financial crisis.

Santander reported a net profit of 1.99 billion euros ($2.3 billion) in the July-September period. Analysts expected a net profit of 1.92 billion euros.

At a time when regulators are demanding banks hold more capital, Santander managed to increase its fully-loaded core capital ratio, a closely watched measure of a bank’s strength, by 31 basis points to 11.11 percent, above its own target of 11 percent for the end of the year.

“Capital generation was stronger than expected, due to a combination of organic capital generation and lower risk weighted assets,” Goldman Sachs said in a note to analysts.

However, its capital ratio is still below its European peers that are subject to stress tests, the results of which will be released on Friday.

Including, the sale of its Wizink credit business its fully loaded ratio would have finished September at 11.20 percent.

UK RECOVERING

In Brazil, where Santander generates more than a quarter of its income, net profit in the quarter dropped 6.1 percent from a year ago after the country’s currency depreciated.

Without the currency impact in Brazil, net profit in the quarter jumped 16.7 percent, boosted by solid growth in business volumes.

In Spain, its second-biggest market, net profit almost tripled partially due to a positive contribution from the Banco Popular acquisition and favourable comparison against the same period last year when it had to book one-off charges.

The bottom line in Spain, where it increased its market share to 17 percent from 15 percent from the second to third quarter, was also underpinned by a 75 percent increase in trading income.

The lender posted a loss of 169 million euros in the quarter in its Argentina market, where the bank makes 1 percent of its net profit, due to hyperinflation in the country.

In Britain, its third-largest market, net profit rose 2.1 percent, while profits in the United States rose 34 percent.

The bank also managed to cut its non-performing loan ratio at group level to 3.87 percent from 3.92 percent in a sign that Spanish banks are cleaning up their balance sheets faster than rivals in Italy thanks to Spain’s solid economic recovery.

Santander said it remained on track grow earnings per share by double digits in 2018. ($1 = 0.8790 euros)

Reporting By Jesús Aguado Editing by Sherry Jacob-Phillips and Keith Weir

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