NET PROFIT at Banesto, the Spanish domestic bank controlled by Santander, has fallen 88 per cent to €20.2 million in the first quarter of this year from €169.5 million in the same period of 2011.

Banesto, closely watched because it is the first Spanish bank to publish its results each quarter, said it attributed the profit fall mainly to the extra provisions for bad property loans demanded by the new centre-right government in a drive to clean up banks’ balance sheets.

The bank said it had set aside €475 million of the new provisioning requirements in the first quarter, half the amount that would be needed in the full year, in addition to other provisions.

The bottom line was also helped by €365 million of extraordinary gains, partly from the sale of shareholdings and loan assets, without which the bank would have made a loss. Net profit also benefited from a €4 million tax credit.

In an attempt to improve their capital ratios, Spanish banks have been cutting their lending, especially to the private sector. Banesto’s total lending fell 8.3 per cent in the first quarter. Customer deposits slid 10 per cent, the bank said.

The bank’s net interest income fell 8.6 per cent to €347.8 million compared with the first quarter of last year, but the bank said it was up 7.4 per cent over the final quarter of 2011. Its bad loan ratio continued to rise, increasing to 4.93 per cent of risk-weighted assets from 4.15 per cent a year earlier, but it remains below the average for Spanish banks.

Its core tier one capital ratio rose to 9.23 per cent from 8.64 per cent and already exceeds the new minimum targets set by European and Spanish regulators.

“The Spanish economy needs to deleverage and the deleveraging needs to be seen in the Spanish banks’ balance sheets,” chief executive José Antonio Garcia Cantera said. “We think that is going to continue for quite a while.”

Banesto sold more than 1,500 homes in March at an average discount that was less than the provisioning rate of 45 per cent applied to the assets, Mr Cantera added. “That demonstrates that at a certain price there is significant demand for housing in Spain.” – Copyright The Financial Times Limited 2012