Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


World stocks advance to three-month high
By Telis Demos in London
Copyright The Financial Times Limited 2010
Published: July 29 2010 09:11 | Last updated: July 29 2010 14:45
http://www.ft.com/cms/s/0/78cc6728-9adc-11df-ae58-00144feab49a.html


Thursday 14.40 BST. Risky assets are gaining as strong company earnings and some good news on the US jobs front counteract a cautious assessment of the economic recovery by the Federal Reserve.

The FTSE All-World stock index is up 0.8 per cent, with shares in all regions are gaining. The world index is at its highest point in eleven weeks, or mid-May. The S&P 500 index is higher by 0.8 per cent just after the opening bell.

The euro is stronger as perceptions of European sovereign risk continue to decline, and is currently at a three-month high. More good European economic data rolled in, showing that German unemployment had declined and eurozone industrial sentiment was higher than expected.

But forward momentum for risk remains capped, as it has been all week. While Europe may be on the upswing, the fulcrum economy is still the US. The dollar has tumbled to three-month lows after the Fed’s Beige Book, its anecdotal survey of the economy, said that while “economic activity has continued to increase, on balance”, in some regions manufacturing activity had “slowed or levelled off”.

A bit of confidence was restored after US jobless claims declined by more than expected in the past week. The less-volatile four-week moving average of claims also dipped. Stocks rose and core safe haven bonds were sold off. Benchmark US Treasury bond yields are rising, with the yield curve steepening.

But earnings of late have told a story similar to the Fed’s – that the economy has rebounded to a large degree, giving a floor to risky assets, but that there is little surety in how much further it may go. While 86 per cent of US companies have beaten earnings expectations, for example, analysts in July have still shaved 0.5 per cent off 2011 S&P 500 profit estimates.

“There was an embryonic recovery, no doubt. The question is how long you expect it to persist,” said Eric Fishwick, head of economic research at CLSA in Hong Kong. “It is not unusual to see a profit upswing in the first year of a business cycle, but it is a process that can only go on so far. If we don’t get better breadth to the US investment cycle, it will be difficult to grow profits further out than six months or so.”

This is also not just a US phenomenon. Nissan, the Japanese carmaker, said its sales had surged in China, helping quarterly profits reach their highest level since 2008. South Korea’s Hyundai also reported profits that beat expectations. But both companies warned that the second half would be slower and saw nothing to alter those forecasts.

☼ Factors to watch. Core economic reports at the end of the week promise to give traders a fresh injection of confidence – or pull the rug from underneath them. With the job numbers coming in strong, traders may set up for a more positive GDP report on Friday.

There will be a final auction of debt by the US Treasury in a $104bn series this week. Previous sales have seen strong demand, despite the risk appetite upswing elsewhere. So many caution factors remain. How will traders respond to California’s looming budget crisis, with 150,000 more state workers laid off on Wednesday? ☼

• Europe. The broad FTSE Eurofirst 300 index of Europe’s largest companies is up 0.9 per cent. With defence contractor BAE swinging to a profit, the FTSE 100 index is up 0.7 per cent. Germany’s Dax index is close behind, rising 0.9 per cent. Chemicals giant BASF reported earnings higher than expected and Siemens swung to a profit and raised its forecasts, helping to reverse weakness in the chemicals and industrial sectors that dragged down indices on Wednesday.

• Asia. Stocks failed to capitalise on big gains on Wednesday when Chinese and Japanese shares rose by more than 2.5 per cent. The Nikkei 225 was 0.6 per cent softer following Nissan’s downbeat forecast and an earnings miss by Nintendo.

However, other indices moved higher. Toshiba released expectation-beating earnings after the Tokyo close, and Panasonic said it was buying back stakes in its subsidiaries for $9.4bn. The Hang Seng index in Hong Kong was flat, recovering from a dip, and China’s Shanghai composite was up by 0.6 per cent.

Australia’s ASX/S&P 200 index was the laggard, following the central bank’s statement on Wednesday that inflation was cooling, and on fears that slowing Chinese demand could hit miners’ earnings. Shares were down 0.1 per cent.

• Forex. The dollar index, a measure of the buck against a trade-weighted basket of currencies, is 0.8 per cent lower, its lowest mark since April. While in the past this trade has suggested a flight from risk, it is currently also indicative of sentiment on the US economy.

The Japanese yen, a funding currency for the carry trade, is stronger against the dollar by 0.3 per cent. Yet it was also dropping against risky currencies, dropping 0.5 per cent against the South African rand. The New Zealand dollar was also stronger against the yen, by 0.7 per cent, after the central bank raised rates as expected.

The euro was up by 0.9 per cent against the greenback, to $1.3095, above the technical retracement at $1.3043 it had struggled to cross earlier in the week. Sovereign credit risk as measured by swaps is declining, and a leading analyst at Moody’s, in a widely noted interview, highlighted risks to the US balance sheet, not European ones.

The pound is also higher, shrugging off a report of contraction in UK consumer credit in June. It is up 0.4 per cent to $1.5647.

• Debt. The safe-haven complex was mostly sold off. Benchmark 10-year US Treasury yields are up 3 basis points, to 3.00 per cent, while the two-year is flat and the 30-year is up 5 basis points. That means the yield curve has steepened, suggesting confidence in the economy.

European “peripheral” debt prices continued to rise as perceptions of risk diminish. Greek two-years bond yields are down 20 basis points, though Spanish and Portuguese 10-year bond yields are slightly higher. The 10-year German euro Bund is flat.

Credit default swap spreads on European sovereigns were narrower, continuing their decline after a brief uptick on Wednesday. Greek and Spanish CDS are both at three-month lows, more than 30 per cent down from their 2010 peak spreads.

• Commodities. US crude is higher by $1.25 cents to $78.27. Hopes for global growth have supported oil – in spite of weak inventory data from the US – but it has traded in a tight band with traders unwilling to put on big positions in either direction. Meanwhile copper is up 1.1 per cent to $3.28 in Nymex electronic trading.

Gold is flat per cent at $1,162 an ounce. The metal has been weakening following the recovery of the euro and a decline in perceptions of interbank lending risk, touching April levels earlier in the week.



US borrowers pay down mortgages
By Suzanne Kapner in New York
Copyright The Financial Times Limited 2010
Published: July 28 2010 19:57 | Last updated: July 28 2010 19:57
http://www.ft.com/cms/s/0/69e515ee-9a6d-11df-87fd-00144feab49a.html


More homeowners are paying down their principal balances when they refinance their mortgages, reversing a trend that became popular during the housing bubble, when rising prices allowed borrowers to “cash out” by taking on more debt, Freddie Mac, the government-sponsored mortgage finance company, said on Wednesday.

The trend is part of a broader deleveraging by US consumers, after a binge that for years had fuelled the economy. Nominal household debt has fallen by almost 3 per cent since its peak in the second quarter of 2008 to $13,500bn (€10,390bn £8,645bn), with credit card and car loans shrinking the most.

Close behind is mortgage debt, which had received a boost from rising house prices. Now that prices were falling, “there is a physiological shift in the way people view their homes”, said Dean Maki, the chief US economist for Barclays Capital. No longer seen as piggy banks from which to withdraw cash, homeowners are more focused on cutting their monthly payments by refinancing and paying down principal.

Of the homeowners who refinanced their first-lien mortgages in the second quarter, 22 per cent paid down their principal balance, compared with 19 per cent in the first quarter. So-called “cash-in” rates have only exceeded current levels twice before in the past 25 years, Freddie Mac said.

Borrowers are still “cashing out” when they refinance by increasing their principal balances and pocketing the difference, but the rate is the lowest since Freddie Mac began keeping records in 1985. During the second quarter, $8.3bn in equity was cashed out during the refinancing of conventional prime-credit mortgages, bringing the net dollars of home equity converted to cash to its lowest in 10 years.

Two of the primary causes of the shift in behaviour are lower prices and tighter underwriting standards, which make it harder for people to take cash out by increasing the size of their loans. Of the mortgages that Freddie Mac analysed, the value of the underlying property fell by an average of 5 per cent over the past four years.

But low interest rates on traditional savings accounts are playing a role, according to Frank Nothaft, Freddie Mac’s chief economist. Borrowers might find they saved more money by paying down their mortgage principal, rather than funnelling money into low-interest bearing certificates of deposit and other savings products, he said. As a result, “the choice of paying down mortgage principal is very attractive to borrowers with extra cash”, he added.

Despite the broad and continued attempt to pay down debt, consumers have started spending again, Mr Maki, the Barclays economist, pointed out. But they are financing that spending with higher household income, rather than by taking on more debt. Wage and salaries have grown 3.2 per cent over the past six months, despite high unemployment. That is because companies are trying to produce more with fewer workers, meaning that those employed are working longer hours and earning more.







Beige Book survey reports signs of slowdown
By Robin Harding in Washington
Copyright The Financial Times Limited 2010
Published: July 28 2010 20:18 | Last updated: July 28 2010 20:18
http://www.ft.com/cms/s/0/dac3245a-9a7b-11df-87fd-00144feab49a.html


US economic activity has “continued to increase” over the past seven weeks but there are signs of a slowdown, according to the Federal Reserve’s latest Beige Book survey, released on Wednesday.

Only 10 of the 12 Federal Reserve districts said that activity had risen compared with all of them last time. Cleveland and Kansas City both said that activity was flat.

The report fits the Fed’s basic view that the recovery is on track – albeit a little weaker in recent weeks – and is unlikely to move the central bank towards easier monetary policy.

But the Beige Book, which is based on contacts between regional Federal Reserve banks and local businesses, found several signs that the recovery has slowed.

“Among those districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two districts, Atlanta and Chicago, said that the pace of economic activity had slowed recently,” it said.

Activity in manufacturing, transport, services, tourism and retail continued to increase across most of the country. Car production expanded and the semiconductor industry was strong: some companies reported that their sales were higher than before the recession.

But there were also pockets of weakness, such as falling steel production, and an Atlanta Fed report that the BP oil spill is hitting tourism to the Gulf Coast. In retail, clothes, food and other necessities sold well, “while big-ticket items were weak sellers”.

Real estate markets – both residential and commercial – remained weak around the country. Many banks said that demand for loans was low and that credit conditions remain tight.

Several regional Fed banks reported stronger labour markets, including New York, Chicago and Atlanta, but others such as San Francisco said that companies are continuing to rely on temporary staff instead of permanent hiring.

A separate report issued on Wednesday by the Census Bureau showed that durable goods orders unexpectedly fell by 1 per cent on the previous month in June. In a more positive sign for business investment, however, non-defence orders for capital equipment rose by 1.6 per cent.

The Federal Reserve is watching new economic data with even greater than normal interest because the recovery has reached a turning point, where self-sustaining growth in consumption and investment needs to take over from inventory building and fiscal stimulus.

In testimony to Congress last week, Ben Bernanke, Federal Reserve chairman, said that the outlook is “unusually uncertain”.

The next big clue about the state of the economy will arrive on Friday with the first estimate of growth in the second quarter. But the crucial report – the number of jobs created in July – will be released on August 6 ahead of a Fed rate-setting meeting on August 10.








US jobless claims drop more than expected
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: July 29 2010 15:05 | Last updated: July 29 2010 15:05
http://www.ft.com/cms/s/0/edbcb408-9b12-11df-ae58-00144feab49a.html


New claims for unemployment insurance fell in the US last week, offering a glimmer of hope that firings could be abating in the stricken labour market.

Initial jobless claims declined by 11,000 to 457,000, the labour department said. That was a modestly steeper drop than economists had anticipated and left the less volatile four-week average of claims down at 452,500.

Meanwhile, the number of people continuing to claim benefits crept higher, climbing by 81,000 to 4.56m. Continuing claims had been easing recently as unemployed workers saw their benefits expire but analysts forecast that they will swell again now that Congress has approved another extension of unemployment insurance.

In spite of last week’s improvement, economists argue that claims remain too high for the economy to sustainably create jobs. Some claim that the traditional link between jobless claims and payrolls has been skewed because of ongoing extensions of benefits.

“We strongly suspect that the claims figures have been distorted upwards by the various benefit extensions available to the long-term unemployed,” noted economists at Capital Economics. They forecast that next week’s non-farm payrolls figures will show that the economy lost 75,000 jobs in July as census workers were dismissed.

With unemployment hovering near 10 per cent, the labour market remains the biggest weakness hindering the economy’s recovery.

In its latest Beige Book survey, the Federal Reserve noted pockets of improvement, with hiring stronger in the cities of New York, Chicago and Atlanta. However, Ben Bernanke, Fed chairman, said last week that the economic outlook remained “unusually uncertain”.

New claims were most prevalent in California and South Carolina, where job cuts in the services and manufacturing sectors grew. Fewer workers made new claims in New York, where firings in the transportation and services industries eased.





Sales of Droid boost Motorola profits
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: July 29 2010 14:13 | Last updated: July 29 2010 14:13
http://www.ft.com/cms/s/0/0ea09334-9b0d-11df-ae58-00144feab49a.html

Motorola, the US mobile phone handset maker, said on Thursday that profits surged in the second quarter, aided by the popularity of its popular Droid smartphone.

Net income at the company soared to $162m (€124m, £104), or 7 cents a share, from $26m, or a penny a share, in the same period a year ago. That exceeded expectations of Wall Street analysts and sent the company’s shares up by 1.69 per cent to $7.81 in pre-market trading on Thursday.

“The Droid X launch has been very well received and is seen as one of the best smartphones in the market today,” said Sanjay Jha, Motorola’s co-chief executive.

Sales at Motorola slipped by 2 per cent to $5.4bn, with mobile devices falling overall by 6 per cent. However, the mobile device unit swung to a $87m operating profit in the quarter and 1.7m smartphone devices were shipped.

Blunting the sales decline was a 10 per cent jump in sales in the company’s mobile enterprise division. The recently-sold networks unit also performed well.

Earlier this month, Nokia Siemens Networks agreed to pay $1.2bn in cash for most of the mobile network infrastructure unit of Motorola, as part of its plan to split the company’s handset and infrastructure operations.

Illinois-based Motorola is betting on the continued success of the Droid, which has emerged as an alternative to Apple’s iPhone. This week, Motorola launched an advertising campaign poking fun at the “bumper” iPhone case Apple is giving away to correct the phone’s antenna problems.

Billed as “No Jacket Required”, Motorola’s advert says: “We believe a customer shouldn't have to dress up their phone for it to work properly.”







Amazon rolls out new version of e-reader
By David Gelles in San Francisco and Kenneth Li in New York
Copyright The Financial Times Limited 2010
Published: July 29 2010 00:40 | Last updated: July 29 2010 00:40
http://www.ft.com/cms/s/0/a536eaf0-9a9f-11df-87e6-00144feab49a.html


Amazon is aiming to take digital reading into the mainstream as it rolls out a new generation of its Kindle e-reader ahead of the crucial holiday shopping season.

A sleeker and cheaper Kindle comes as Amazon works to maintain its tenuous lead in the fast-growing market for e-books and e-readers.

The debut of the refreshed Kindle coincides with the launch of Amazon’s local UK store at the end of August. The UK store will offer 400,000 titles, or what the company claims is the widest selection of books in the UK market.

The new base model Kindle is smaller, lighter and faster than its predecessor, with more storage and battery life.

However, it still has a relatively small, grayscale screen that is not touch-sensitive. It will sell for $189 in the US with free 3G downloading, while a wi-fi-only version will cost $139.

Jeff Bezos, Amazon chief executive, touted the launch with customary brio. “Kindle is the best-selling product on Amazon for two years running,” he said. “At this price point, many people are going to buy multiple units for the home and family.”

But Amazon’s push comes amid an increasingly crowded e-book market and growing tensions between the e-commerce behemoth and the publishing world.

Book publishers are wary that cheap e-book prices will eat into their margins. These fears have been exacerbated in recent days as Andrew Wylie, the literary agent, struck an exclusive agreement to sell electronic versions of classics such as Vladimir Nabokov’s Lolita and Salman Rushdie’s Midnight’s Children through Amazon.

The refresh of the Kindle comes on the heels of price cuts. In June, Barnes & Noble lowered the price of its Nook e-reader below $200, prompting reductions by Amazon and Sony, and bringing e-readers within reach of mainstream customers.

The price war was sparked in part by the success of Apple’s higher-priced iPad, which has highlighted the gulf between multifunction tablet devices and standalone e-readers such as the Kindle.

Amazon does not release unit sales figures for Kindles or e-books. However, it says “millions” of Kindles are in use.

Last week it said five authors had each sold 500,000 e-books through the Kindle platform, and that Stieg Larsson, the deceased writer of the Millennium trilogy, had sold a million.

But Amazon faces mounting pressure from competitors including Apple, Borders and Google, which plans to launch a digital bookstore this year.

Goldman Sachs analysts predict Amazon’s share of the market could fall to 28 per cent in 2015 from 50 per cent this year.

Borders, one of the largest sellers of books and entertainment in the US, has launched an e-books business. Mike Edwards, Borders chief executive, told the FT in early July that a price war at this early stage of the business, when only about 3 per cent of US readers own dedicated e-readers, was not necessarily a bad trend.








EU watchdogs push for market transparency
ByNikki Tait in Brussels and Jeremy Grant in London
Copyright The Financial Times Limited 2010
Published: July 29 2010 11:48 | Last updated: July 29 2010 11:48
http://www.ft.com/cms/s/0/16d8d7ee-9af6-11df-ae58-00144feab49a.html


European regulators kicked off the biggest overhaul of the region’s securities regulations in years on Thursday, calling for a wide range of reforms to bolster the transparency of Europe’s increasingly fragmented equities and over-the-counter derivatives.

The call, by the Committee of European Securities Regulators (Cesr), included proposals for changes to the Market in Financial Instruments Directive (Mifid). Enacted in 2007, Mifid sparked competition against the region’s established stock exchanges – but that has resulted in what many market participants say is a confusing picture, as markets have fragmented across multiple new venues.

Among key measures urged by Cesr is the introduction of a mandatory “consolidated tape” in Europe showing post-trade data across all equity markets and tighter rules governing “dark pool” trading venues operated by big banks.

Cesr, a Paris-based body that co-ordinates the activities of EU securities regulators, also recommended that post-trade transparency for credit default swaps contracts be extended to those involving sovereign debt – an area regulators found difficult to monitor earlier this year during the Greek debt crisis.

The package of recommendations, delivered to Brussels on Thursday, goes on to call for a compulsory harmonised pre-trade transparency regime for non-equity financial instruments that are traded on organised markets, including both regulated markets and multilateral trading facilities.

The regulators also want more information about the clients for which firms are trading – for example powers to require the reporting of client identities to the relevant authorities when orders are transmitted for execution.

The slew of technical proposals was revealed in response to an EU consultation over how to improve Mifid. Cesr’s recommendations will be fed into a European Commission review of Mifid that will gather pace towards the end of this year. Legislative changes are likely to be proposed that could come into force in 2012.

Eddy Wymeersch, Cesr chairman, said that the Mifid review was very timely. It was “an important opportunity to review the availability of pre- and post-trade data in equity markets, which has become more complex with the development of multiple trading venues”, he said.

“It also enables us to expand transparency to non-equity markets, which the financial crisis highlighted as being of critical importance.”

The consolidated tape proposal is likely to attract much attention. Most industry participants have argued in its favour as a way of streamlining post-trade data, which in turn would help give a more unified view of price formation across multiple venues.

Mr Wymeersch said: “The creation of a consolidated tape... remains an area where it will be key to see concrete steps being taken in the very short-term as we remain convinced of its necessity.”





Russia confirms $29bn asset sales
By Courtney Weaver in Moscow
Copyright The Financial Times Limited 2010
Published: July 28 2010 20:37 | Last updated: July 28 2010 20:37
http://www.ft.com/cms/s/0/4bf555de-9a7d-11df-87fd-00144feab49a.html


Russia is aiming to raise up to $29bn (€22.3bn) through asset sales on the open market over the next three years in the biggest privatisation programme since the chaotic asset sales of the 1990s.

Confirming the privatisation strategy on Wednesday, Alexei Kudrin, Russia’s finance minister, said: “We will sell a significant stake in state companies on the market. We plan to keep controlling stakes.”

His comments, ahead of a government meeting on the issue on Thursday, appeared to end doubt over what form the share sales would take. But officials have yet to approve a final list of which state assets will be sold, even though the programme was first announced close to a year ago.

The economic development ministry issued a revised list of 11 companies to be privatised, having removed groups including Russian Railways, that had been suggested by the finance ministry days earlier.

Mr Kudrin said the sale of a minority stake in Russian Railways would be delayed by two to three years.

While the finance ministry had hoped the government would reduce its stake in companies including Transneft, the oil pipeline operator, to as low as 51 per cent, the economic development ministry said it would not support lowering the government’s stake below 75 per cent in the operator and other companies.

Investors welcomed the privatisation programme when it was first announced last September, but have grown frustrated with delays. The economic ministry says the privatisation proposal will not be passed until the end of November and investors are already questioning its merits in spite of the additional access it will offer to state-controlled blue chips such as oil company Rosneft and VTB Bank, which already trade on the London market.

Analysts said the sell-off would be nothing close to the sweeping privatisations of the 1990s: none of the state-owned assets will be fully privatised. Moscow plans to retain a stake of at least 51 per cent in all the companies.

“The big question is whether any of the mentioned companies will ever become real public companies because if they don’t there is little point in investing in them,” said Steven Dashevsky, a founding partner of Dashevsky & Partners, the investment fund.

“So far investors have seen very little dividends come out of state-owned companies both in good years and in bad years.”

One western banker, who said he was working on several privatisation deals, said it was doubtful the state would be able to sell as many assets as it hoped. “I would not make the assumption that it will be $29bn,” he said.







Shell chief defends deep-water drilling
By Adam Jones
Copyright The Financial Times Limited 2010
Published: July 29 2010 08:51 | Last updated: July 29 2010 12:29
http://www.ft.com/cms/s/0/ef3f7e60-9ada-11df-ae58-00144feab49a.html


Royal Dutch Shell tried to shrug off anxieties about deep-water oil drilling on Thursday as it announced a near-doubling of its second quarter profit and a beefed-up target for asset sales.

Peter Voser, Shell chief executive, said BP’s Gulf of Mexico deep-water oil spill was a tragedy but declared that Shell did not as yet need to change the way it operated, pending the results of the accident investigation.

He said Shell already complied with most of the new safety recommendations made by the US in the spill’s aftermath. “Worldwide deep-water production has an important role to play in the global energy supply equation,” he added.

Shell’s second-quarter profit rose 94 per cent to $4.53bn (£3.48bn, €2.90bn) on a current cost of supplies basis, a closely-watched post-tax measure that removes the effect of price changes on inventories.

Underlying CCS profit – a measure that further strips out one-off items – was $4.21bn, beating the average forecast of $3.99bn produced by a Reuters poll of 10 analysts.

The one-off items included a $56m charge resulting from a drilling moratorium in the deep waters of the Gulf of Mexico and a delay to exploration in Alaska. Seven Shell rigs are being kept idle as a consequence of the two measures, imposed after the spill.

BP, Shell’s biggest UK rival, reported a $17bn second-quarter loss on Tuesday and has suspended dividends because of the accident.

As expected, Shell’s second quarter dividend has been maintained at 42 cents a share. Shell’s B shares were trading 1.4 per cent higher at £17.30 in lunchtime trading in London.

The company disclosed that it expected to sell a total of $7bn-$8bn of assets in 2010 and 2011, an acceleration from the $2bn of disposals it would usually have targeted each year.

It said this would not affect production growth targets announced in March. Second-quarter oil and gas production rose 5 per cent year-on-year to 3.11m barrels of oil equivalent per day.

Shell said it saw “mixed signals in the global economy” that made the trading outlook uncertain. “Oil prices have remained firm so far this year, but refining margins, oil products demand and natural gas spot prices all remain under pressure,” it added.




Santander held back by Spain weakness
By Mark Mulligan in Madrid
Copyright The Financial Times Limited 2010
Published: July 29 2010 08:49 | Last updated: July 29 2010 10:58
http://www.ft.com/cms/s/0/bc3b44c0-9ae1-11df-ae58-00144feab49a.html


Santander on Thursday revealed a slight year-on-year fall in first-half net profits, as bad-loan provisions and domestic weakness offset solid growth across much of Spain’s largest banking group.

The bank, the eurozone’s largest by market value, said net profits for the six months to the end of June were €4.45bn ($5.8bn), compared with €4.52bn at the same stage last year.

Net interest income was up almost 15 per cent at €14.5bn as lending volume increased and the spread between the cost of funding and the margin on credits widened slightly, in spite of compression in the domestic market.

The bank set aside €4.9bn in provisions against non-performing loans, up 6 per cent on the year-ago figure. Nonetheless, Santander said the rhythm of provisioning was slowing, along with the rate of loan defaults.

The bank held its bad loan rate virtually flat at 3.37 per cent. The ratio for Spain, where a property bubble and broader recession has hit households and businesses hard, was 3.7 per cent, compared with a sector average of almost 5.5 per cent.

The results were slightly below expectations. Citigroup said in a note that Latin America – which accounted for about 37 per cent of group profits – had come in well below forecasts. The shares slipped about 1 per cent in early trading in Madrid, to €10.3.

Core business in Spain remained subdued as loan repricing and higher funding costs squeezed profitability. The banks said net profits from the Santander branch network in the home market were down more than 14 per cent to €912m. Lending was down 4 per cent in Spain, but almost 5 per cent up across the group.

In the UK, where Santander has acquired a series of banks over the past five years, net profits were up 14 per cent year-on-year to €1bn. The bank is to add 400 jobs in the UK at its branches and call centres by the end of this year.

For the three months to the end of June, group net profits were down about 8 per cent year-on-year to €2.23bn, on net interest income of €7.4bn, up almost 12 per cent on the year-ago period and a quarter-on-quarter rise of 3 per cent.

Emilio Botín, the chairman, said Santander was on target to report full-year profits similar to 2009’s €8.9bn.