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UPDATE 1-Santander Brasil's net profit falls on higher provisions, pressured margin

(Adds details, context)

SAO PAULO, Oct 26 (Reuters) - Banco Santander Brasil SA said on Wednesday that its third quarter net profit dropped 23.5% from the previous quarter as loan loss provisions increased amid higher interest rates, pressuring the lender's market activities margin.

The Brazilian unit of Spain's Banco Santander SA said that net income reached 3.12 billion reais ($586.89 million) in the period, below expectations as analysts polled by Refinitiv had forecast a 3.76 billion-real profit.

Chief financial officer Angel Santodomingo said in a press release that the bank is still going through a challenging period for the loan loss allowance while the cost of credit remains under pressure.

Santander Brasil's loan loss provisions rose 8.1% from the second quarter to 6.21 billion reais, helping net interest income to drop 1.4% in the period, while its loan portfolio rose 3.4% to 484.25 billion reais.

The firm's market activities margin, Santodomingo said, is expected to remain pressured in the next year due to higher interest rates - Brazil's benchmark rate currently stands at 13.75% after an aggressive monetary tightening aimed at curbing high inflation.

The South American country accounts for more than a quarter of the Spanish group's earnings.

Santodomingo said the quarterly results reflected capital and liquidity at comfortable levels for the company as he reaffirmed an ongoing pursuit of cost control.

Even so, Santander Brasil's return on average equity (ROAE), a gauge of profitability, came in at 15.6%, a steep drop of 5.2 percentage points from the previous three months.

Its Spain-based parent had also

reported quarterly results

earlier in the day, with higher loan loss provisions in some key markets - including Brasil and the United States - and a rise in costs overshadowing better than expected earnings. ($1 = 5.3162 reais) (Reporting by Gabriel Araujo; Editing by Steven Grattan)

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