The local unit of Spain's Banco Santander SA, which accounts for more than a quarter of group earnings, saw its quarterly bottom line drop by more than half year-on-year, falling short of expectations.

Santander Brasil was the first major lender in Latin America's largest economy to report results this season, with Bradesco and Itau Unibanco set to follow next week.

The bank's quarterly net profit reached 1.69 billion reais ($334.3 million), down 56% from the previous year, as provisions for bad credit nearly doubled amid higher interest rates.

Analysts polled by Refinitiv had forecast a 2.86 billion-real profit in the period.

Chief financial officer Angel Santodomingo said the results came as Santander continued to push for an "operational adjustment" started in the previous year, when it became "more selective" in lending, as credit conditions deteriorated.

He said net interest income came under pressure from changes in the product mix and higher interest rates, a trend set to persist throughout this year.

Santander Brasil's loan-loss provisions reached 7.36 billion reais, pressured by bad credit in loans to individuals, the bank said.

In the full year of 2022, its net profit dropped 21.1% from the previous year to 12.9 billion reais, while full-year provisions rose 72.7% and net interest income fell 6.8%.

Quarterly return on average equity (ROAE), a gauge of profitability, plummeted to 8.3% from 20% in the same period of 2021, while the loan portfolio rose 5.8% to 489.7 billion reais.

"We begin 2023 with a solid balance sheet and a portfolio of higher quality," Santodomingo said. "We will continue to grow sustainably".

($1 = 5.0547 reais)

(Reporting by Gabriel Araujo; Editing by Steven Grattan and Emelia Sithole-Matarise)