impact of the Spanish property crash is finally catching up with Santander?

Santander, Spain's largest bank, have been apparently defying gravity.

While the Irish banks have crashed and burned, Santander, seemingly insulated by its international diversification and superior regulation by the Spanish central bank, has carried on regardless.

But do last week's worse-than-expected third-quarter results, which show increased loan-loss provisions, indicate that the impact of the Spanish property crash is finally catching up with Santander? For the three months to the end of September, Santander reported loan loss provisions of €2.93bn, up €400m on the same period last year and €450m higher than for the second quarter of 2010.

While the Spanish banking giant blamed the higher loan loss provisions on tougher provisioning standards imposed by the Bank of Spain -- one of the few central banks to emerge from the global financial crisis with its reputation intact -- investors will be worried that Spain's well-charted property bust is finally hitting Santander's bottom line.

At the end of September, Santander has total loans to customers of just over €700bn. Approximately €280bn of these loans, almost 40 per cent, were to customers in Spain, Portugal and elsewhere in the eurozone. Given what we now know about the state of the Spanish and Portuguese economies -- Portugal's government is on the brink of collapsing this weekend after the government and opposition failed to agree a budget -- how confident can we be about the quality of this loan book?

While the Santander share price has held up remarkably well over the past three years, the higher third-quarter loan loss provisions will give investors plenty of food for thought.

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