In the first quarter of the year, Spain’s largest bank, Grupo Santander SAN , earned EUR 1,205 million, up significantly from the EUR 401 million it earned in the trailing quarter. Most of this increase was due to the non-recurrence of special loan loss provisions in the fourth quarter; excluding this, earnings were up 18% sequentially, but down 26% from the year-ago quarter because of the weaker economic environment. We had already factored in the roll-off of these extraordinary provisions and we are leaving our fair value estimate at EUR 7 per share. For the moment, we are also leaving our $9 per ADR and GBX 570 per British share fair value estimates unchanged, but we will monitor exchange rate movements. If the euro keeps up its recent strengthening streak we would make a positive adjustment to our dollar-and pence-denominated fair value estimates.

Credit quality remains the main headwind for Santander, in our view. Overall, the group’s nonperforming loans rose to 4.8% of the portfolio (versus 4.5% in at year-end). Notably, in the Spanish core portfolio, NPLs rose to 4.12%, up from 3.8% at year-end. In the run-off Spanish portfolio, NPLs rose 220 basis points to a whopping 56.2%. After being nudged up in 2012, coverage fell in the first quarter. Loan loss provisions cover 70.9% of NPLs compared to 72.4% at yearend. We see no indication yet that a peak in dud loans is nigh. Thus, after fully complying with governmentmandated reserves, we expect to see regular provisions for loan losses run close to EUR 3 billion per quarter, or around 1.7% of loans.