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Santander’s Capital Pledge Stirs Fresh Debate

Santander Capital Pledge Stirs Fresh Debate as Bank Trails Peers
A vehicle passes a sign outside the offices of Banco Santander SA in Madrid. Photographer: Angel Navarrete/Bloomberg

Banco Santander SA Chairman Emilio Botin’s pledge to boost capital has stirred the debate over the financial strength of Spain’s largest bank instead of ending it.

Santander would have a core Tier 1 capital ratio, a measure of financial strength, of 8 percent at the end of this year if Basel III rules were fully imposed, Botin told the annual general meeting on March 22. That’s a lower ratio than all eight European banks, such as HSBC Holdings Plc, Santander considers to be its peers when setting executive pay.

“Santander’s management has consistently held a more optimistic view of their core capital than most of the market,” said Matthew Williams, a Paris-based analyst at Carmignac Gestion, which manages Santander bonds and stock. “Would we be happy if they had 5 to 10 billion euros of additional capital? Of course we would.”

The need to raise capital buffers has already forced Santander to sacrifice future earnings by selling profitable businesses such as a stake in a Mexican bank last year. It also sold its Colombian bank in 2011 for more than $1 billion in a deal that followed sales of stakes in its Brazilian bank and its U.S. auto-loans business.

An official for Santander near Madrid, who asked not to be identified by name, declined to comment by telephone.

Selling Assets

Carlos Berastain, an analyst at Deutsche Bank AG in Madrid, wrote in a report dated March 21 the bank may have already run out of options to bolster capital.

“They’ve said they can get to 8 percent in 2013 and in the European context that looks quite weak,” said Benjie Creelan-Sandford, a London-based analyst at Macquarie Bank Ltd., with an underperform rating. “Up to now, they’ve taken the approach of selling off assets to raise capital and perhaps they are running out of big ticket items that they can sell.”

Santander closed at 5.24 euros in Madrid, up 0.2 percent on the day. The shares have dropped 14 percent this year, giving the company a market value of 55.2 billion euros.

Santander Chief Financial Officer Jose Antonio Alvarez has signaled confidence in the capital position, saying in a presentation to analysts last week that the bank has a “comfortable” position under Basel III rules.

“What we’re talking about is a theoretical number if Basel III were fully implemented,” said Carlos Joaquim Peixoto, an analyst at Banco BPI SA in Oporto, Portugal, with a buy rating. “I don’t tend to think it’s a major concern.”

Capital Rules

The capital rules -- scheduled to be fully implemented globally by 2019 -- will set the minimum core capital for banks at 4.5 percent of their assets, weighted for risk. So-called systemically important banks must maintain capital ratios of between 8.5 percent and 10 percent.

Santander’s estimate for a core capital ratio under Basel III compares with more than 15 percent for Swedbank AB, more than 10 percent for HSBC and BNP Paribas SA and more than 9 percent for Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest bank, according to estimates for 2013 by Nomura Holdings Inc. Germany’s Deutsche Bank is targeting a core Tier 1 ratio of 8.5 percent by the end of this month.

The banks are all part of a comparison group of eight European financial institutions used to set pay.

Deutsche Bank

“By saying your capital ratio is 8 percent under Basel III, you are basically putting yourself on par with Deutsche,” said Simon Maughan, a financial strategist at Olivetree Securities Ltd. in London. “In terms of comparison, maybe that’s not really where you want to be.”

The Spanish lender is trailing European competitors in raising capital buffers after the country’s real estate collapse sparked an economic slump and pushed up loan losses. Santander allocated 18.8 billion euros to cover provisions and writedowns across its whole business in 2012.

“Basel III has wrongly shifted the priorities of banks to the amount of capital they hold,” said Cato Stonex, a partner at Taube Hodson Stonex Partners LLP in London, which holds Santander shares. “It’s much more important for banks to focus on the quality of assets.”

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