Santander Gets Capital Boost on Accounting Change at Brazil Unit

  • ECB-appproved move accounts for impact of high interest rates
  • Calculation cuts bank's risk-weighted assets by $8.5 billion

Banco Santander SA boosted its regulatory capital by changing the way it calculates operational risk at its Brazilian unit, a move approved by the European Central Bank.

The accounting move cut Santander’s risk-weighted assets by 7.8 billion euros ($8.5 billion), the lender said in its 2015 consolidated financial statement. That’s about a quarter of the bank’s reduction target, and raises its common equity Tier 1 capital ratio by about 14 basis points, a spokesman said.

The ECB allowed Spain’s largest lender to apply the “alternative standardized approach” to Banco Santander (Brasil) SA, which contributes 19 percent of net profit to the group. Under rules set by the Basel Committee on Banking Supervision, banks with “high interest margins” can use a fixed percentage of their loans and advances, instead of gross income, to calculate operational-risk capital requirements.

Investors are overestimating Santander’s capital needs and the threat that Brazil’s economic downturn poses to profit, executive Chairman Ana Botin said in a letter to shareholders earlier this month. The bank’s shares have slumped 45 percent in the past year, making it one of the worst performers tracked by the STOXX Europe 600 Banks Index.

The bank plans to reduce RWAs by about 30 billion euros, equivalent to capital generation of about 3 billion euros, Chief Financial officer Jose Garcia Cantera said in September. Santander had 584 billion euros in risk-weighted assets as of December.

Santander increased its fully loaded common equity Tier 1 capital ratio to 10.05 percent of RWAs last year. Botin has pledged to increase the measure to more than 11 percent by the end of 2018.

Operational risk describes the potential for losses from inadequate or failed internal processes, people and systems -- including legal risks -- or from external events, according to the European Banking Authority. Banks must set aside funds to protect against the risk of such losses.

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