UPDATE 2-Spain's Santander profit leaps even as Brazil falters
* H1 group net profit up 29 percent at 2.25 bln euros
* Provisions against loan losses drop sharply
* LatAm net profit down more than 16 percent
MADRID, July 30 (Reuters) - Earnings from Santander SA's flagship Latin American businesses fell in the first half of the year as lending income from Brazil faltered, taking the shine off a turnaround in group profits.
A shaky economic recovery in Brazil - Santander's biggest Latin American market - has been a top concern for investors and analysts tracking the bank in recent months, although loan delinquencies fell across the sector there in June.
"We still have not seen an improvement in volumes from Brazil," said Nuria Alvarez, an analyst at brokerage Renta 4. "We still believe a recovery in volumes and earnings in one of the principle areas of the group is key."
In Latin America, a key growth motor for the lender and where it still makes half its money, net profit fell by more than 16 percent in the six months to June, the bank said on Tuesday.
Santander's Brazil operation posted a 17.5 percent fall in net interest income - a measure of interest earned on loans minus what is paid out on liabilities such as deposits - to 5.5 billion euros ($7.3 billion).
Yet Santander, Spain's biggest bank by stock market value, still managed to post a 29 percent jump in group profit in the six months through June, as provisions against loan losses dropped sharply.
Spanish banks last year booked billions of euros of provisions on soured real estate deals, gutting their profits at the time but setting some at least up for a dramatic turnaround in the first half of 2013.
Santander's 2.25 billion euro net profit in the first half of 2013 was almost as much as what the bank made for the whole of last year.
Across the Santander group, net interest income, which has been squeezed by low interest rates in Europe, fell in the first half. But it was up 1.1 percent in the second quarter compared with the start of the year, helped by a recovery in some countries such as Portugal and Britain.
Santander shares were down 0.3 percent at 5.4 euros by 0800 GMT while the European sector was down 0.1 percent.
SPAIN STILL SHAKY
In Spain, net interest income was down sharply from a year earlier, but it also improved in the second quarter compared with January-March, a trend some Spanish rivals have also noted.
But many also face an uphill battle to contain growing bad debts in a deep recession.
Santander's proportion of bad debts to its oustanding loan book rose to 5.18 percent across the group at the end of June compared with 4.76 percent at end-March, after the bank reclassified 2 billion euros of refinanced loans as non-performing under new Bank of Spain rules.
It said it would not have to take extra writedowns later in the year to cover these changes, as they were covered by existing provisions, although these rose in the second quarter in Spain, causing net profit for the country to fall.
Santander said its core capital ratio, a measure of its capital strength, was 11.11 percent at the end of June, up from 10.67 percent at the end of June.
Although this is measured under Basel II, ahead of a change to stricter international Basel III rules next year, analysts were encouraged by the improvement, partly down to Santander cutting lending.
"Capital is probably the most positive area of (the) results, which would probably relieve some pressures around the bank's need to raise equity," analysts at Credit Suisse said in a note.
Santander said its Basel III capital ratio would be more than 9 percent at all times on a "fully-loaded" basis, which takes into account changes that have to be made by 2019 under stricter international capital rules.
It was not yet clear whether its deferred tax assets - which occur when a bank makes losses that it can offset against future tax bills - will be counted towards capital under Basel III.