By Simon Nixon
A DOW JONES COLUMN
Crisis? What crisis? Santander's decision to shell out $2.5
billion to buy out Bank of America's 24.9% interest in the Spanish
bank's Mexican subsidiary shows admirable sangfroid at a time when
Spain's economy and financial system is under siege. Santander's
shares have fallen 40% already this year. But buying back the
Mexican stake, up for sale as a result of BofA's changed strategy,
is a sensible move as well as a clear signal that Santander's
balance sheet remains strong and that the bank is well-placed to
pounce on other opportunities that may emerge from the crisis.
Santander investors won't complain at the bank increasing its
exposure to Mexico, one of the faster growing and under-banked
markets in Latin America in terms of private credit as a proportion
of gross domestic product. The deal values the Mexican unit at $10
billion, some 40% more than Bank of America paid in 2007. But at 10
times expected 2011 earnings, the price isn't demanding. Santander
estimates the deal will increase earnings per share by two
percentage points and will deliver a 15% return on investment, well
above its weighted average cost of capital. True, the deal will
reduce core Tier 1 capital by 0.3 percentage point, but Santander
currently generates almost as much organic capital per quarter.
This is unlikely to be Santander's only acquisition this year.
It is in exclusive talks to buy SEB's branches in Germany and is
still hoping to buy the UK branches being put up for sale by Royal
Bank of Scotland. That may seem reckless with Spain currently in
the eye of the euro-zone storm. But Santander has a robust core
Tier 1 ratio of 8.8% and is well diversified--just 25% of operating
profits are generated in Spain.
Santander's Spanish operations deliver around EUR2 billion of
operating profit per quarter after provisions and the bank had
nearly EUR7 billion of generic provisions still available at the
year end of 2009. According to Santander's own stress tests, its
Spanish operations would remain profitable even if the country's
economy contracted by 3% for each of the next two years and Spanish
house prices fell by 40%. Meanwhile, it holds just EUR2 billion of
Portuguese government bonds and EUR24 billion of Spanish government
bonds out of a total balance sheet of EUR1.2 trillion.
This may not be enough to halt the slide in Santander's shares
as investors look to reduce exposure to Spain. Even after recent
falls, Santander shares continue to trade at a premium to the
European banking sector. Some degree of de-rating is justified as
doubts over Spain's sovereign rating feed through to higher funding
costs, squeezing margins. But Santander's Mexican deal is a
reminder that Santander remains a profitable, well-run bank likely
to emerge stronger from the crisis.
(Simon Nixon is European editor of Heard on the Street. He can
be contacted on +44 207 842 9206 and simon.nixon@wsj.com)
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