Santander’s Capital in Focus as Spain Property Purge Ends

Banco Santander SA’s completion of a 7 billion-euro ($9.4 billion) real estate cleanup is shifting the spotlight to how it will address investor concerns about capital and fix businesses in the U.K. and Brazil.

Spain’s biggest bank probably reported net income rebounding to 952 million euros ($1.3 billion) in the fourth quarter compared with a profit of 47 million euros in the same period a year earlier, when it took a 1.8 billion-euro provisioning charge, according to the average estimate in a Bloomberg survey of 10 analysts. The Santander, Spain-based bank will publish earnings tomorrow.

Shares in Santander have surged almost 60 percent since July, when European Central Bank President Mario Draghi pledged to defend the euro and buy the bonds of Spain if the government agreed on accepting a bailout package. Declining profit at businesses in Brazil and the U.K., which had previously helped buoy Santander’s earnings, and doubts over the bank’s capital levels are still a concern for investors.

“Capital is the single biggest issue for Santander,” Matthew Williams, an analyst at Carmignac Gestion, which has 54 billion euros under management including the Spanish bank’s shares and bonds, said by telephone from Paris two days ago.

Santander has already booked almost 7 billion euros in provisions to cover 90 percent of charges for real estate losses ordered by the government after Spain’s property bubble turned to bust. It pledged to complete the property cleanup in 2012.

The bank fell 1.5 percent to 6.40 euros at close in Madrid, paring gains this year to 4.9 percent and valuing the company at 68 billion euros.

Draghi Effect

Easier funding conditions for Spanish banks such as Santander after Draghi’s pledge to do “whatever it takes” to defend the euro led Carmignac to take the decision to invest in Santander stock last August after buying its bonds in June, Williams said in a phone interview.

Carmignac bought 39 million shares, or a 0.4 percent stake, data compiled by Bloomberg shows.

“Spain is looking better today than it did in June,” he said. “Mr. Draghi has spoken but there have also been credible steps taken by the regulators and the government.”

‘Constructive View’

While Santander still faces rising defaults for other types of credit such as loans to small firms, the real estate purge will allow Chairman Emilio Botin to be more upbeat about the bank’s Spanish business, said Antonio Ramirez, an analyst at Keefe, Bruyette & Woods Ltd. in London. Botin, 78, has said Spain will be one of the biggest “positive surprises” for investors.

“They will have a more constructive view on Spain although they will continue to be cautious,” Ramirez, who has a “market perform” recommendation on Santander, said by telephone.

Investors remain focused on the bank’s capital position, said Williams of Carmignac.

Santander may have a capital shortfall of as much as 18 billion euros at its Spanish unit based on what it has “actually available” to absorb losses, Barclays Plc said in an October report. Santander dismissed the report as wrong.

Capital Shortfall

The need to generate capital has also forced Santander to sacrifice future earnings by selling off profitable businesses abroad such as a stake in Mexican bank Grupo Financiero Santander Mexico SAB in September, Benjie Creelan-Sandford, an analyst at Macquarie Bank Ltd, said in a phone interview from London two days ago.

Santander may have a capital shortfall of 7 billion euros, based on a target of achieving a 10 percent core Tier 1 capital ratio under Basel III criteria, a measure of financial strength, by 2014, Creelan-Sandford said. Contributing to the concerns are the weaknesses of businesses in Brazil and the U.K., he said.

Profit at Santander’s unit in Brazil, which contributed 28 percent of 2011 earnings, may have dropped 20 percent in the fourth quarter from a year ago as net interest income fell and provisions jumped, according to estimates from Banco BPI SA of Portugal.

Risks of further losses from loans “remain on the upside” as Brazil’s economy weakens, Berenberg Bank analyst Nick Anderson wrote in a Jan. 28 report.

Earnings from the U.K., which contributed 12 percent of Santander’s profit in 2011, may drop an annual 31 percent in the quarter, hit by a 19 percent decline in net interest income, according to Banco BPI.

“People are watching Brazil and what’s happening in the U.K. and a lot of people have questions about their structure and capital,” John Raymond, an analyst at CreditSights Inc., said by telephone from London. “They are going to have a harder time than they did in the past explaining everything.”

Before it's here, it's on the Bloomberg Terminal.