Spain's biggest bank Santander followed the trend for extra bad loan provisions against the continuing economic slump, lifting its bad debt cushion in the first half and warning the setaside could hit 10 billion euros by end-2009.

Provisions against problem loans rose 60 percent to 4.626 billion euros ($6.54 billion) in the first half from a year ago, as bad loans reached 2.82 percent of total loans by end-June, up from 2.49 percent at end-March.

I agree that (first-half) provisions are high and I think at group level we could reach 10 billion in 2009, Chief Executive Officer Alfredo Saenz told a news conference on Wednesday.

Saenz reiterated the bank expects bad loans in Spain to run at a rate of 3.5 percent end-2009 and to continue to rise in the early months of 2010.

I don't think 3.5 percent is going to be the ceiling for bad loans, the CEO said.

The Euro zone's largest bank's cautious approach to provisioning is in line with other European lenders as the recession bites.

On Tuesday, Deutsche Bank, Europe's eighth biggest bank by market value, said its provisions for credit losses rose to 1 billion euros last quarter, while Santander's domestic arch-rival BBVA also said it had increased its provisions against future loan losses.

Even leading U.S. banks with retail businesses reporting bumper profits have not escaped the strain of bad debts.

Santander's net profit fell 4.5 percent in the first half to 4.519 billion euros, beating analysts' forecasts for 4.337 billion euros, with Santander's European operations accounting for 50 percent of the total profits.

All core divisions beat our net profit forecasts, Citigroup said in a research note, highlighting that Santander's Latin American operations were also ahead of forecasts across the board.

At 1344 GMT, Santander shares were down 2.5 percent to 9.73 euros compared with a 0.75 percent rise on the Dow Jones European banking index.

BRAZIL TOP LATAM DIVISION

Santander's Brazilian arm was its top performer in Latin America in the first half, contributing over 900 million euros to the region's earnings.

Santander plans to sell 15 percent of the division through a new share issue, Saenz said.

Santander has appointed advisors for the spin-off, people familiar with the matter said, and a deal expected in the second half.

The Spanish bank will lead and underwrite the share sale alongside Credit Suisse and Bank of America/Merrill Lynch MER.N, the sources said, with Brazilian bank Banco Pactual a bookrunner on the deal. 

 (Reporting by Judy MacInnes; additional reporting by Jesus Aguado and Steven Slater; Editing by David Cowell)