By Sarah White and Jesús Aguado
MADRID (Reuters) - A buoyant performance from its British business helped Spain's Santander (MC:SAN) to increase second-quarter revenues, offsetting a weaker home market and driving an 18 percent rise in net profit.
The strong growth is a positive sign for the bank's boss Ana Botin, who has embarked on plans to boost profits by expanding the group's lending rather than through acquisitions.
Europe's economic recovery is starting to help and a turnaround in the British market has made this the biggest engine of Santander's profits, ahead of Brazil.
In Britain, lending rose nearly 3 percent from the end of April to June, when measured in euros. Net interest income, a measure of earnings on loans minus deposit costs, grew more than 4 percent quarter-on-quarter, even though the average interest the bank charges on loans shrank.
The British arm's results also benefited from a strong pound and a recent restructuring to focus more on commercial loans.
Across the group as a whole, net interest income came in ahead of forecasts. It was up 12 percent in the April-June period from a year ago, at 8.3 billion euros ($9.10 billion), and 3 percent up on the previous quarter.
Santander's net profit rose to 1.71 billion euros in the period, also helped by falling bad debt charges.
Analysts had expected a slightly higher profit and steeper cost cuts.
Shares in the bank were down 1.5 percent by 0800 GMT, reversing earlier gains. Some analysts highlighted disappointing trends in Spain as well as the need to step up revenue growth in the second part of the year.
SPAIN UNDER PRESSURE
Like its peers in Spain, Santander is facing pressure on margins from fierce competition to lend to small businesses.
The bank's revenues there shrank nearly 1 percent in the second quarter from the first, though it also cut the charges it takes against bad debts, helping profits to rise.
Other banks such as Sabadell (MC:SABE) have noted similar trends even though the Spanish economy is reviving. The margin squeeze could affect rival BBVA (MC:BBVA), due to report results on Friday.
In Brazil, Santander's lending dipped slightly in the second quarter compared to the first and the ratio of bad loans as a percentage of credit inched up to 5.13 percent as Latin America's biggest economy heads for a recession this year.
But Santander's profits in Brazil still grew slightly quarter-on-quarter.
"There is some evidence of weakness in Brazil, but (the) consensus is so bearish on this division in our view it was still a modest beat (against forecasts)," RBC Capital Markets analyst Robert Noble said in a note.
Britain made up about 21 percent of profit in the first half of the year, Brazil 20 percent and Spain 16 pct. Europe as a whole accounted for 54 percent and Latin America, once the big driver, is down to 37 percent.
Botin, who took over from her late father as chairwoman last September, has taken action to set her mark on the bank, including bolstering its capital with a cash call.
Santander's core capital ratio under the strictest international "fully-loaded" criteria rose to 9.83 percent at the end of June, just shy of the 10-11 percent target it has set itself for 2017 and which would bring it in line with many major European rivals.
($1 = 0.9112 euros)
(editing by Julien Toyer and Jane Merriman)