Santander Mexico Investors Will Have to Look Past Spain

Santander’s Mexico Investors Will Have to Look Past Spain Woes
The performance of Santander’s Mexican bank contrasts with Spain. Photographer: Susana Gonzalez/Bloomberg

Investors seeking to ride a wave of growth in Mexico through the share offering of Banco Santander SA’s unit in the country must look past the difficulties dogging the bank in Spain.

Santander said today it would seek to raise as much as 3.41 billion euros ($4.29 billion) by selling up to 24.9 percent of its Mexican unit at 29 pesos to 33.50 pesos a share in the country’s biggest stock sale. The offering values its Grupo Financiero Santander Mexico unit at as much as 13.7 billion euros, and shares will start trading on or about Sept. 26 in Mexico and New York, the bank said in a statement.

Potential investors must consider the future capital needs of Santander as it absorbs mounting real estate losses in Spain and meets tougher regulatory requirements, said Bill Rudman, who helps manage about $250 million of emerging market shares at Blackfriars Asset Management in London. One risk is that Santander will sell more shares in Mexico as it did in Chile last November.

“Santander’s problems in Spain are absolutely an issue for holders of stock in its units overseas,” said Rudman, who already holds shares in the bank’s Brazilian unit. “The question of when they might sell the next 10 percent is always going to be on people’s minds.”

More Listings

Even so, Rudman said investors may welcome the sale because of a scarcity of listed banks in Mexico since Spain’s Banco Bilbao Vizcaya Argentaria SA bought out shareholders of Grupo Financiero Bancomer SA in 2004 and New York-based Citigroup Inc. acquired Grupo Financiero Banamex Accival SA in 2001.

“From my point of view, Mexico certainly needs more bank listings,” said Rudman, who owns shares in Grupo Financiero Banorte SAB, the No. 3 Mexican bank by outstanding loans.

Santander had been planning to sell shares in its Mexican lender for more than two years, Botin, 77, told reporters in Mexico City today. Santander is offering 20 percent of the shares on sale in Mexico and the rest in the U.S. and other markets, the bank said.

“We’re very satisfied with the trajectory of our bank in this country,” Botin said.

Santander already has units in countries including Brazil, Chile and Poland that trade on the stock market, as well as its Banco Espanol de Credito SA consumer bank in Spain. The bank plans to have all its major subsidiaries traded within five years, Botin said today.

Spain Austerity

The performance of Santander’s Mexican bank contrasts with Spain. In Mexico, profit jumped 14 percent in the first half to 556 million euros ($700 million) buoyed by surging loan growth, while earnings in Spain fell by 37 percent as the economy shrank and the sovereign-debt crisis worsened. The International Monetary Fund predicts 3.9 percent economic growth in Mexico in 2012, compared with a 1.7 percent contraction in Spain.

“The industry in Mexico still has a lot of potential,” said Jorge Lagunas, who oversees about $200 million in stocks at Mexico City-based Grupo Financiero Interacciones SA. “In consumer lending, there’s still very low penetration.”

In Spain, austerity measures that will equal 15 percent of gross domestic product by 2014 are contributing to an economic slump that pushed the unemployment rate to almost 25 percent. Shrinking deposits and credit, rising loan losses and the inability of most lenders to access debt markets forced the government to seek a bailout of as much as 100 billion euros for the financial industry in June.

Further Steps

The Mexico share sale may heighten scrutiny of Santander’s capital position at the group level, said Benjie Creelan-Sandford, an analyst at Macquarie Bank in London. The sale will add about half a percentage point to the group’s core capital ratio, which was 10.1 percent at the end of June under Basel II criteria, Santander said today.

Macquarie estimates Santander may still need as much as 15 billion euros of capital to cover Spanish real estate losses and reach a 10 percent core Tier 1 capital ratio under the standards of Basel III. Santander set aside 21 billion euros since the start of last year to cover losses on souring assets, including real estate, in its home market.

The bank’s decision to sell a chunk of the Mexican business may herald further capital raising steps such as cutting the dividend, said Andrea Williams, a fund manager who helps oversee about $1 billion at Royal London Asset Management.

Chile Unit

Williams said the fund had sold its shares in Santander and BBVA, Spain’s second-biggest lender, in part on concern that both still need to raise capital. “They are deferring the capital-raising,” she said in a phone interview, referring to the Mexican plans. “It’s still going to pretty dilutive when they do have to raise capital.”

Santander has said it’s committed to maintaining a dividend at 60 cents a share in 2012.

There is also the risk Santander will sell more shares in its listed units to raise money, said Rudman.

Banco Santander Chile, that country’s second-biggest lender, dropped 8.6 percent on the day Santander said it would sell 7.8 percent of the unit. The Chilean bank said at the time it “would not receive any proceeds” from the $1 billion sale, with all the funds going to “the selling shareholder.”

The Mexican offering would probably come with a lock-up period, meaning Santander couldn’t sell additional shares for a six-month period, said Rudman.

Joanne Irvine, a fund manager who heads the emerging markets team, excluding Asia, at Aberdeen Asset Management, said concerns about Santander’s capital position wouldn’t necessarily affect the decision to invest in the Mexican unit.

Not ‘Showstopper’

“As long as the local subsidiary is well-capitalized, this wouldn’t be a showstopper for us,” said Irvine, who holds stock in Santander’s Chilean bank.

Not all Santander units performed well following share sales. The Brazilian unit fell 31 percent since its initial public offering in 2009, compared with a decline of about 10 percent for Brazil’s Itau Unibanco Holding SA and a 16 percent gain for Banco Bradesco SA.

Investors in Santander’s Madrid-listed stock may take a dim view of the Mexican sale because the bank will be selling off future earnings from a high-growth market, as it did with Brazil, said Creelan-Sandford. Santander has also said it wants to sell shares in its U.K. and Argentine units.

Santander rose 0.4 percent to 5.70 euros in Madrid trading, bringing its gain in the past 12 months to 6.2 percent. That compare with a 6.8 percent gain in the 38-company Bloomberg Europe Banks and Financial Services Index.

“They are selling off more profitable parts of the business to backfill the holes they have elsewhere,” Creelan-Sandford said. “While you don’t get the direct dilution that would come from a rights issue, you are giving up earnings from the group going forward.”

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