July 23 (Bloomberg) -- Sovereign Bancorp Inc., the second- largest U.S. savings and loan by assets, said second-quarter profit fell 14 percent as it set aside more money to cover soured loans.

Net income declined to $127.4 million, or 22 cents a share, from $147.5 million, or 29 cents, in the same period a year earlier, the Philadelphia-based lender said in a statement today. Eleven analysts surveyed by Bloomberg expected, on average, profit of 16 cents a share.

Chief Executive Officer Joseph Campanelli raised $1.9 billion by selling shares and fixed-rate notes this year after cutting the dividend and recording a $1.3 billion loss at the end of 2007. Sovereign, whose largest shareholder is Spain's Banco Santander SA, curtailed lending and is shrinking its balance sheet as defaults increase.

``Capital is not a concern,'' Albert Savastano, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, said in a note to investors today. ``Sovereign has significantly strengthened its capital ratios with the offering it completed'' during the quarter. He rates the shares ``in-line.''

Sovereign's provision for credit losses was $132 million, more than doubling from $51 million in the second quarter of 2007, ``due to continued deterioration in asset quality for the commercial portfolios, particularly in the for-sale housing segment,'' the lender said.

`Solid' Footing

The lender rose 49 cents, or 5.6 percent, to $9.21 at 12:01 p.m. in New York Stock Exchange composite trading. Sovereign fell 59 percent in the 12 months through yesterday.

Sovereign is ``well-equipped'' for future credit deterioration, Campanelli said on a conference call with analysts. Capital ratios exceed what regulators consider ``well- capitalized,'' the lender said in a regulatory filing today. Sovereign has $9.02 billion in residential mortgages excluding Alt-A mortgages, it said in the filing.

The company's collateralized debt obligation holdings aren't from subprime or asset-backed securities. Sovereign had an unrealized pretax loss of $390.5 million at the end of the quarter.

Chief Financial Officer Kirk Walters said on the call that Sovereign held stakes in Fannie Mae and Freddie Mac valued at $623 million, adding that it may have to take a ``significant'' charge on the holdings in the future. Fannie Mae and Freddie Mac account for 70 percent of new U.S. mortgages, and the two companies own or guarantee about half of the $12 trillion in outstanding U.S. home loans.

Auto Market

Debt Sovereign doesn't expect to be repaid climbed to $86.9 million from $25.7 million a year earlier as more auto and home- equity loans defaulted.

Sovereign, which made loans through car dealerships outside its home market, was ``stretching and stretching to get volume,'' Collyn Gilbert, an analyst at Stifel Nicolaus & Co., said before the earnings were released. She rates the stock ``hold.'' ``The auto market right now, with oil where it is, is taking a huge hit.''

The world's biggest banks and brokerages have disclosed at least $467 billion of writedowns and credit losses tied to collapsing prices in U.S. mortgage markets. The companies have raised more than $345 billion to replenish capital, according to data compiled by Bloomberg.

Loans for which Sovereign no longer received interest rose to $490.5 million from $282.4 million in the same period a year earlier on housing loans.

The lender said its net interest margin, the difference between what the bank pays in deposits and charges for loans, rose to 3.06 percent from 2.71 percent a year earlier.

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net

Last Updated: July 23, 2008 12:02 EDT