Spain's Santander books record 11.1 billion euros quarterly loss on Covid-19 writedowns

MADRID (BLOOMBERG, REUTERS) - Spain's Banco Santander posted a net loss of 11.1 billion euros (S$17.9 billion) for the second quarter - the first in its 160-year history and the biggest blow yet to a European bank industry struggling to contain the fallout from the Covid-19 health crisis.

The euro zone's second-biggest bank by market value took a huge 12.6 billion euros impairment charge after a deterioration of the economic outlook forced it to cut its goodwill on past acquisitions. That includes 10.1 billion euros related to lower expected cash flows at its units in the UK, the US, Poland and Santander Consumer Finance.

It's the most significant damage yet for European bank from the pandemic that has forced lenders to set aside billions of euros to cover bad loans, write down the value of assets and eradicate dividends under pressure from regulators. Santander already had the highest provisions of any European bank before the pandemic due to its exposure to emerging markets such as Brazil and Mexico and its sub-prime auto loan business in the US.

The bank also took a charge of 2.5 billion euros related to the recoverability of tax deferred assets. Still, besides the sticker shock of the size of the loss and impairments the charges are mostly an accounting matter and won't have any material effect on capital levels or cash flow. The bank's non-performing loan ratio also declined.

On an underlying basis, the bank also did better than expected, posting underlying profit of 1.5 billion euros compared to analyst forecasts of 944 million euros. Core revenue was in line with expectations, while expenses were better than forecast at 5.1 billion euros, down from 5.8 billion euros a year earlier.

Santander shares declined 2.2 per cent in early Madrid trading. The bank has seen a 45 per cent drop in its market value this year, making it among the continent's worse-performing financial institutions.

The full impact of the deteriorating economic outlook is set to pressure consumers and companies later this year once government aid programs come to an end. More than a third of the impairment charges at Santander are coming at the UK business, which the bank built into a consumer lending powerhouse through acquisitions of Abbey National and Alliance and Leicester. In the US, its auto finance business typically lends to consumers with poor or incomplete credit histories.

The unprecedented impairment charges were only part of the damage the bank had to contend with in one of its most volatile quarter since the financial crisis and perhaps since its founding in the northwestern Spanish port town in 1857. The bank gained a reputation as a voracious dealmaker under former head Emilio Botin, the father of current chairman Ana Botin, gathering up assets across the globe after emerging stronger than many rivals from the financial crisis.

"The past six months have been among the most challenging in our history," Botin said in the statement. "The impact of the pandemic has tested us all."

The lender held back 1.6 billion euros in the first quarter specifically for Covid 19-linked losses, pushing total provisions to a record 3.9 billion euros. Santander expects costs to keep rising this year, reiterating expectations they'll reach between 1.4 per cent and 1.5 per cent of its total loan book by year-end. While the European Central Bank has asked banks not to pay dividends, Santander said that it expects to move to an all-scrip payment until conditions normalize.

More than a decade after the financial crisis, Europe's banking industry is once again facing the prospect of a surge in soured loans as companies from small-town restaurants to global airlines see business come to a standstill.