By Sarah White
MADRID (Reuters) - Santander (MCE:SAN), the euro zone's biggest bank, on Thursday posted a big jump in nine-month profit as it put less money aside to cover losses in its Spanish home market, though a weak economy depressed income from lending.
Smaller Spanish banks Sabadell (MCE:SAB) and Bankinter (MCE:BKT) also saw profits to September rise, helped by lower provisions, in earnings also reported on Thursday.
But net interest income, a closely-watched measure of earnings on loans minus deposit costs, fell at the three banks compared to a year ago, knocked by low interest rates and a fall-off in lending.
The results highlighted the challenge ahead for Spanish banks as they prepare for a Europe-wide quality review of their capital base while funding conditions and credit remain tight and Spain faces another 18 months of slow growth.
Santander, which makes half of its profit in South America and has relied on motors such as Brazil to offset troubles at home, said net interest income, was 19.7 billion euros (£16.8 billion), 14 percent lower than a year ago and below analysts' forecasts.
The bank's net profit in Brazil, was down nearly 24 percent year on year in the nine months to September, to 1.3 billion euros. Unfavourable exchange rates were in part behind the fall but net interest income in Brazil also shrank.
In the third quarter, Santander's profit jumped from 122 million euros a year ago to 1.06 billion euros, in line with expectations and slightly higher than the second quarter.
Spanish banks' earnings have been flattered this year by lower provisions against losses on soured loans, after they were forced by the government in 2012 to put aside cash to counter rotten real estate deals.
A five-year-old property market crash had left many of the country's banks short of capital, and Spain turned to Europe for funds to help the weakest. This did not include Santander, Sabadell and Bankinter, though these banks have sold assets or turned to investors to strengthen their solvency too.
Spain's economy is forecast to have expanded slightly in the July-September period, ending a two-year recession. But households and small companies are still struggling, and credit is shrinking, which is pushing up banks' bad loans as a proportion of their lending book.
Non-performing loans in Santander's Spanish business rose to 6.4 percent of total credit at the end of September versus 5.75 percent at end June.
At Sabadell, where nine-month profit more than doubled to percent to 186 million euros, the bad loan ratio rose to 12.6 percent at end September, from 10.6 percent in June. Bankinter, which also doubled profits to 156 million euros, said its bad loans reached 4.99 percent at the end of September from 4.6 at end-June.
The bad loans ratio average in the sector was 12.1 percent in August.
(Reporting by Sarah White; Editing by Julien Toyer and Jane Merriman)