Santander's Mexico plan to help reduce Spanish drag

Fri Aug 17, 2012 2:28pm EDT

* Santander to list part of Mexico unit

* Santander Mexico's IPO could range between $3-4 bln -IFR

* BBVA, Santander seen as a safe haven by Spaniards

* Retails inflows and stronger position lures investors

By Sarah White and Sonya Dowsett

LONDON/MADRID, August 17 (Reuters) - Santander's planned listing of its Mexican business is another step to rid itself of a "Spanish discount" which has blighted the bank and its rival BBVA.

Their shares have been damaged by their link to the problems of Spain's sovereign debt and both suffered corporate deposit outflows this year after several credit rating downgrades.

By selling off part of its Mexican unit in September, Santander will not only raise new capital, it will also help stress its significant international presence to investors and pave the way for it to do the same with an initial public offering of its British banking subsidiary next year.

An IPO of 25-30 percent of Santander Mexico could be worth between $3 and 4 billion, sources close to the trade have told Thomson Reuters IFR, although the bank has given no price range for the planned offering.

Of the 10 major markets in which it is present, Santander has already listed its Brazilian unit and has a strong presence in mature markets including Britain, as well as emerging markets such as Poland.

Santander and BBVA, which also has a big presence in Mexico via its Bancomer unit, have begun to benefit in the last month from their businesses outside Spain, with domestic retail clients flocking to those banks which are seen as able to avoid a rescue in Spain thanks to their capital strength.

Some investors are taking note too, hoping that an eventual improvement in Spain's fortunes will also lift the shares.

"In Spain, their position will only improve with the disappearance of other banks," said Luis Arenzana, managing partner at hedge fund Shelter Island Capital Management, which owns shares in both banks.

Arenzana said the two "healthy and diversified" lenders were a good investment opportunity, contrasting them with most other Spanish banks which are in need of a bailout.

A huge funding gap at Spanish lenders resulting from a 2008 property crash and worsened by a severe economic slowdown has forced the Spanish government to ask for up to 100 billion euros ($123 billion) in European aid to patch up its banking system.

BBVA and Santander are widely expected to be told they are not in need of aid in stress tests due in September, e ven before factoring in Santander's Mexican IPO.

"The timing could work out well for Santander. It would offset some very negative news around Spain with something positive," said one analyst in Spain, who declined to be named.

Spanish banks which do take aid may be forced to impose losses on some investors, or could even be told to shut down.

REVELLING IN RETAIL

BBVA and Santander shares have improved markedly in recent weeks, although in the year to date they have not rallied as much as French peers BNP Paribas or Societe Generale . On Friday, BBVA's shares were down nearly 9.5 percent on the year, while Santander's were up over 6 percent.

By contrast, the stock of Spanish rivals like the country's third ranked Caixabank, Popular or smaller lenders Banco Sabadell and Bankinter, are still down between 23 and 36 percent on the year.

Some of the gains for BBVA and Santander have been helped by a Spanish short-selling ban, one analyst said, but he too said BBVA and Santander's shares are likely to do better next year.

The two stocks also boast some attractions versus European peers. The dividend yield at Santander is more than 11 percent, while at BBVA it is 7.25 percent, compared to a sector median of 3.6 percent, according to Thomson Reuters data.

Meanwhile the two banks' price to book ratios are slightly below the European sector average, meaning it is cheaper than average for investors to get exposure to their book.

Santander is trading at 0.7 times book value, while Societe Generale trades at 0.34 times book value and Britain's bailed-out Royal Bank of Scotland trades at 0.18 times.

Still, even those who favour the stocks recognise that ultimately any big improvement is tied to the fate of the country as a whole, and with a potential full-scale bailout for Spain looming, and the economy forecast to shrink until well into 2013, that may mean their rebound will not be dramatic.

"Both share prices continue to be highly correlated with the Spanish sovereign and we expect this to continue for the foreseeable future," said Diego Franzin, a fund manager at Dublin-based Pioneer Investments, which holds BBVA shares.

That link to the sovereign has also brought pain in other ways. BBVA in July reported an overall 8.4 percent outflow in Spanish deposits in the first half because of a massive drop on wholesale accounts. Corporations are moving cash when lenders' credit ratings fall below a certain level.

Moody's downgraded the ratings of 28 of 33 rated banks, including Santander and BBVA, by one to four notches in June, following a cut to Spain's sovereign rating to just above junk status earlier in the month.

Both BBVA and Santander also reported first-half profits sharply lower after they wrote down losses related to bad real estate investments, demanded by the government.

Yet retail deposits are pouring in. Santander said deposits had grown 10 percent, or 8.1 billion euros, in the first half, while BBVA attracted 2.7 billion euros in the second quarter.

This phenomenon is also true at a lesser degree for other big lenders, CaixaBank and Popular.

One Santander local branch manager in the eastern region of Valencia, home to state-rescued banks Banco de Valencia and CAM, said he was getting up to 30 new accounts opened per week against a typical rate of five or six.

"We're seeing a lot of people coming into the branch, mostly bringing their accounts from competitor banks," he said, asking not to be named. "They come through the door, they bring their money and they don't even ask what rate of interest you pay."

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