Santander, the euro zone's largest bank, reported a 26 percent drop in first-quarter net profit as slowing growth in some South American markets added to the gloom at home in Spain.

The bank, which relies on South America for about half its profit, missed analysts' forecasts as lending in continental Europe shrank and lower interest rates ate into margins.

Santander is one of Spain’s healthier lenders and survived a real estate market crash without state help. The country was forced to seek €41 billion of European aid for its ailing banks last year.

But while Santander’s overseas businesses have helped offset problems at home, earnings have come under pressure in Brazil, which contributes a quarter of profit.

And like domestic rivals including rescued Bankia, it is suffering in Spain’s deep recession which has reduced demand for loans and driven up bad debt.

Shares in Santander, Spain’s largest bank by market capitalisation, were the biggest losers among European financial stocks today, down 4 percent at €5.40.

Net interest income, the profit margin on its loans, slid 6.3 per cent from the fourth quarter and was down 14.3 per cent from a year ago. In Spain, it dropped 17 per cent.

“Net interest income was very weak, in Spain and Brazil. There is a lot of revenue pressure, and we expected downward pressure on asset quality,” said Daragh Quinn, analyst at Nomura in Madrid.

The bank did post strong loan growth in some South American countries such as Mexico, but lending in Brazil was little changed from the previous year as economic growth there remained tepid.

Lending in continental Europe, including Spain, shrank by 4.5 per cent from a year ago.

Santander said the first quarter compared unfavourably with a strong start in 2012 and insisted this year would be one of strong earnings growth, although chief executive Alfredo Saenz said he saw no “drastic change” in the economic outlook.

Net profit fell to €1.21 billion, below the average estimate of €1.3 billion in a Reuters poll. Net profit from Latin America fell 18 per cent and in Britain it was down by nearly a quarter.

Spain’s unemployment rate rose to a new record of 27 per cent in the first quarter, with 6.2 million people out of work.