The quality of Santander's earnings pleased investors, but dealers said there was concern about the outlook for crisis-hit Spain, which accounts for about a quarter of group income.

“There are fears in general on Spain right now and as for Santander there are concerns it's not doing enough to address its property exposure,” a Madrid-based trader said.

A healthy net interest margin and a tight leash on costs helped the bank, one of Europe's strongest in the downturn, to make a 2009 net profit of €8.9 billion last year, up 0.7% from 2008.

It made further provisions for bad debts of €9.484 billion, which increased its bad debt ratio to 3.24% of total lending from 3.03% at the end of September. The bank said it is targeting a ratio below 4% for 2010.

However, in September Chief Executive Alfredo Saenz had said the bank was forecasting provisions of about €10 billion in 2009.

BBVA stunned investors last week with higher than expected provisions, including kitchen sinking its real estate loans in Spain, taking its bad loans ratio to 4.3%.

As expected, Santander took €1.4 billion of capital gains on the partial flotation of its Brazil unit to offset provisions made mainly for sliding property values, including the write-down of its stake in real estate firm Metrovacesa.

“There is real quality in Santander's results and they are using their strength to manage their business. A clear distinction between Santander and BBVA,” a bank analyst at a leading US fund manager said.

Santander said it will pay a total dividend for 2009 of €0.60 per share, an increase of 2%.

Chief Executive Alfredo Saenz told analysts the bank will keep the 2010 dividend policy unchanged.

Santander has increased market share after a clutch of acquisitions in Britain, and has betted strongly on Latin America, particularly Brazil.

Latin America contributed 36% of Santander's net profit, but was hurt by the global recession and currency moves, rising 11% in local currency but 6% in euros.

Brazil contributed 20% of group net profit. Britain, where Santander owns Abbey as well as Alliance & Leicester and Bradford & Bingley, chipped in with 16% of net income, although the gain in euros was limited by the weak UK pound.

Santander said it plans to “grow selectively” in the United States, while also looking to exit non-core operations.

“Santander's 2009 results are the best ever, if you take into account the difficult operating environment,” Chairman Emilio Botin said in a statement.

The bank's core capital ratio rose to 8.6% by the end of December from 7.5% a year earlier and is seen as benefiting from the Basel III regulatory proposals on improving banks' capital reserves.

Santander, BBVA and Credit Suisse stand out as the best capitalized banks with surplus capital, analysts at JP Morgan said this week. (Reuters)