 Bloomberg -- Banco Santander SA is facing a potential hit to its capital levels in the second quarter after it boosted lending to businesses hurt by the Covid-19 outbreak, a setback to its stated aim to meet the top end of its target range.The lenders key CET1 ratio, a key measure of capital strength, could decline even after the lender gets an expected a 20-25 basis-point boost from the easing of capital requirements by European regulators, a person with knowledge of the matter said without being more specific.Spains largest bank has long faced criticism from investors for trailing its European peers on financial buffers, though it argues that its model is more resistant to stress. The virus crisis and Santanders decision to participate heavily in a state-backed loan program to small businesses makes its goal to increase the CET1 ratio to the upper end of its target of 11 to 12 this year more challenging. It stood at 11.58 as of March 31.The bank is expecting another boost of 10-20 basis points to its CET1 ratio by the end of the year through a measure that allows lenders to include software investments as part of their capital, the person said, asking not to be named because the information is private.The relief from regulators should stop capital from falling any further and Santander will probably begin building up its buffers again in the second half, the person said. Chief Financial Officer Jose Garcia Cantera told investors at a Goldman Sachs Group Inc. conference in June that the bank is maintaining its objective of having capital levels near 12 by the end of the year.Santander declined to comment.Santander shares fell on the news and were trading down 2.8 as of 4:33 p.m. in Madrid. The stock has declined 39 this year, compared with a 45 drop by the STOXX Europe Banking Index.The European Central Bank has told lenders to dip into their capital cushions to keep lending flowing during the pandemic. It has also allowed them to use subordinated debt to help meet a key measure of financial strength, which lowers their minimum requirement for common equity. On top of that, the ECB is giving banks more time to address deficiencies such as dealing with their stock of bad loans or improving their risk models.Europe ContributesMeasures adopted by the European Union include deferring higher requirements for banks leverage ratios by one year to January 2023. The measure is the ratio between the banks capital and its exposures.Santander has been one of the most active banks in Spains Covid-19 lending program, in which the government is backing 100 billion euros 112 billion of loans. The bank expects to have lent 32 billion euros under the plan by the time the current guarantees are exhausted, the person said. It had 84.5 billion euros of outstanding loans to Spanish SMEs in March.Santander made 1.6 billion euros of provisions in the first quarter specifically for losses linked to the virus, while total provisions jumped to a record 3.9 billion euros, causing net income to plunge 82, the bank said in April.Spains loan program was deployed in tranches, allowing the government to make tweaks as it went along. Spanish companies had received 85.2 billion euros in financing as of July 1. The government has been guaranteeing 80 of loans to SMEs and 70 to large companies with the banks assuming the risk for the remainder.The government last week pledged an additional 40 billion euros in so-called ICO loan guarantees to inject more funds into struggling Spanish companies.Santander has lent above its market share. It was assigned about 27 of the final 28 billion tranche of ICO loans, the person said. That compares to a market share of 25 on SME loans.Updates with details of comments by CFO in fifth paragraphFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.2020 Bloomberg L.P. 