Santander CEO, Chairman May Face Grilling on Capital, Loan Woes

Santander CEO, Chairman May Face Grilling on Capital
Banco Santander SA Chairman Emilio Botin, left, and Banco Santander SA Chief Executive Officer Alfredo Saenz. Photographer: Santi Burgos/Bloomberg

Banco Santander SA Chief Executive Officer Alfredo Saenz and Chairman Emilio Botin may be grilled by investors over the next two days on whether Spain’s biggest bank needs more capital as a surge in bad loans curbs profit.

Saenz kicks off the lender’s “Investor Day” tomorrow with the first of 13 presentations on the firm’s business, according to a program for the event in London. The outlook for Santander’s core capital, a measure of financial strength, is one point that the bank will need to clarify, said Andrea Williams, a fund manager at Royal London Asset Management.

“Whenever you look at a list of the capital ratios of the main European banks, Santander seems to come out near the bottom,” Williams, who holds the company’s shares and plans to attend the investor meeting, said by telephone. “Their capital is too light.”

Santander has a lower capital ratio than nine of the 11 European banks it compares itself to when awarding shares to top executives. It was dented in the second quarter by the acquisition of Poland’s Bank Zachodni WBK SA and after the company set aside money to cover mis-sold U.K. payment-protection insurance. The firm already pays out about 40 percent of its dividend in scrip.

The core tier 1 capital ratio for the Santander, Spain-based lender was 9.2 percent at the end of June, compared with 9.6 percent for Paris-based BNP Paribas SA, 10.2 percent for Italy’s Intesa Sanpaolo SpA and 11 percent at Sweden’s Nordea Bank AB.

Less Risk

Santander executives have pointed out that since the company’s business is concentrated on retail and commercial banking, it takes less risk than other lenders that rely more on investing banking. Saenz told analysts in July that “we continue to have very solid capital ratios matched our business model.”

The results of European stress tests published in July showed Santander would end 2012 with a core Tier 1 ratio of 8.4 percent in the most adverse scenario, evidence the bank said pointed to its focus on “commercial banking, capital strength and prudent risk management.”

“They do have a good base, bearing in mind that risk-weighted assets are conservatively estimated,” said Inigo Lecubarri, who helps manage about $300 million at Abaco Financials Fund in London. “They can argue that capital ratios are sound.”

A spokesman for Santander, who asked not to be identified in line with company policy, declined to comment.

Brazil Woes

Investors and analysts may also question Santander managers on the prospects for Spain, where defaults keep rising as lending shrinks, and for Brazil, where costs of covering bad loans have jumped. The South American country contributes a quarter of the bank’s profit.

Former Brazilian President Luiz Inacio Lula da Silva will be the keynote speaker at a company dinner at London’s Natural History Museum tomorrow night and Botin will close the event on Sept. 30.

Santander, which has earned almost 30 billion euros ($40.8 billion) in profit since 2007, expects earnings before one-time costs will be similar to the 8.18 billion euros it reported last year, Botin told shareholders in June.

“Santander and BBVA are traditional banks that collect deposits and lend them out -- that’s the business you want to be in for the next 10 years,” said Simon Maughan, head of sales and distribution at MF Global Ltd. in London.

Still, a slow recovery in Spain from the worst recession is 60 years has forced Saenz to put back his assessment of when loan defaults will peak.

Impairment Concerns

The CEO in July 2010 said he’d called the peak of Spanish loan defaults too soon and predicted they’d reach their high point in early 2011. A year later he said the fact that lending was shrinking at a 7 percent annual clip made it harder to predict when the ratio would stabilize, while the executive estimated bad loans would not grow further into 2012.

More impairments in Spain may mean the bank will need to raise more funds to absorb them, Santiago Lopez, an analyst at Exane BNP Paribas who rates the bank “neutral,” said in a report dated Sept. 11.

Meanwhile, the economic outlook for Spain, where unemployment already tops 21 percent, is worsening, leading Prime Minister Jose Luis Rodriguez Zapatero to declare Sept. 14 that Spain may miss its 1.3 percent growth target this year because of the “situation of financial tension and economic uncertainty, mainly because of Greece.” Funcas, the research arm of the Spanish savings bank association, on Sept. 7 cut its forecast for 2011 growth to 0.7 percent from 0.9 percent and now predicts 1 percent growth in 2012, down from 1.5 percent.

U.K. Business

“I don’t attach much confidence” to Saenz’s predictions of when Spanish loan defaults will peak in a scenario of lower economic growth next year, said Royal London’s Williams. Bad loans as a proportion of total lending at its Spanish business jumped to 4.8 percent in June from 3.7 percent a year earlier, while the ratio for its domestic branch network was 6.7 percent.

Other areas of Santander’s business that had been driving earnings such as Brazil and the U.K. are now causing more concerns for investors, said Royal London’s Williams.

Default rates in Brazilian banking industry climbed to 5.2 percent in July, the highest level since February 2010, according to data from the country’s central bank.

“Asset quality is an issue for all of the Brazilian system, not just Santander Brazil,” said Gustavo Schroden, an analyst at BES Securities Brazil in a phone interview from Sao Paulo.

Share Sale Delay

At Santander’s U.K. business, profit has been hurt by higher term funding costs and regulators’ efforts to force lenders to bolster liquidity as its bank there, run by Botin’s eldest daughter Ana Patricia Botin. The unit set aside 620 million euros to cover claims for mis-sold payment protection insurance.

Another setback has been the delay of a share sale by its U.K. bank planned for this year that would have raised capital, said David Moss, director of European equities at F&C Investments in London, where he helps manage about 8.5 billion euros in non-U.K. equities including Santander shares.

“I do have some sympathy for the points they raise about their capital, but I don’t think they are out of the woods completely with some of the issues around,” said Moss, who said he hoped to be able to catch some of Santander’s investor presentations. “If other banks raise capital, the bar then gets higher.”