Analysis: Spanish cloud may mean discount for Santander Mexico listing

MEXICO CITY Fri Aug 31, 2012 2:03pm EDT

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MEXICO CITY (Reuters) - Banco Santander (SAN.MC) will make a splash with a multi-billion-dollar float of its Mexican operation next month, although investors will probably demand a discount to hedge against its links to crisis-ridden Spain.

The listing, which is due in Mexico and New York on September 25 and looks on track to become the biggest ever on the Mexican stock exchange, seeks to take advantage of investor optimism in Mexico.

Mexico's move out of Brazil's shadow has driven the benchmark IPC stock index .MXX to outperform the Bovespa .BVSP so far this year. The Santander listing could encourage other firms to follow suit.

Santander, whose rivals in Mexico are also mostly foreign-owned, hopes to raise $3 billion to $4 billion for a 25 percent stake in its Mexican unit, which has a healthy capital base, an expanding loan book and is No. 2 in Mexico's mortgage market.

Investors in Mexico seem hungry for a stock that will help diversify their holdings in a market dominated by giant telecom companies and retailers.

But as bank shares globally have demonstrated in the last several years, strong capital and a healthy balance sheet are not enough to sustain a stock price in the face of crisis. Santander Mexico may find it hard to shake off a perception it is exposed to its Spanish parent's woes.

"There could be some reputational risk effect, from the association with the Santander name," said Alejandro Garcia, an analyst with Fitch Ratings in Monterrey, Mexico.

Pricing for the deal has not been released, but will be gauged during roadshows in coming weeks in New York, London and Mexico City.

VALUATION

A price tag of up to $4 billion for a stake of 25 to 30 percent would imply a price-to-book ratio - that is, the ratio of Santander's implied share price to the value of its assets - of between 1.9 and 2.3, according to a Nomura report published earlier this month, before the size of the offer was fixed.

That range values Santander Mexico on par with or at a discount to its closest listed rival, Banorte (GFNORTEO.MX), Mexico's fourth-largest bank by assets. Its shares are currently trading at about 2.3 times its book value after soaring 60 percent in the last year, although they slipped slightly this month.

Banorte's stock gain reflected a stellar year, helped by the strengthening Mexican economy and a pick-up in demand for borrowing that helped the bank's loan book expand 24 percent in the 12 months through July.

Santander Mexico's loan book has increased 14 percent over the same period. It stands to benefit from the same stable interest-rate environment that has helped Banorte, and some investors are confident the local unit's strength will help it fend off pressure over its Spanish ties.

Banco Santander and Santander Mexico have "completely separate books, separate markets, separate loan portfolios," said Heiner Skaliks, portfolio manager at the Strategic Latin America Fund. "It would not be a justifiable discount because of the separation of books."

While the bank's Spanish parent is largely separate from its Mexican unit, concern about Spain will still affect the stock, analysts say. Some said Santander's valuation could fall even further below its outperforming peer Banorte if investors start to think that a Spanish banking crisis could spark contagion that would hurt even well-capitalized banks and their subsidiaries, as happened to U.S. financial institutions in 2008 and 2009.

"The multiple (to book) could be affected by investor risk aversion to the name and also to the banking sector in general," said Fitch's Garcia.

Another worry is that if the parent company in Spain should need extra capital, it could look to sell additional shares in the Mexican unit down the road, watering down the holding of investors who buy in with next month's offering.

"That would put an overhang (on the shares)," said Ed Kuczma, investment analyst for two emerging market funds with $240 million in net assets under management at Van Eck Global.

"The problems with Spain are well known right now, so I think investors will probably demand a larger discount than normal in terms of valuation due to these factors."

When Santander in Spain needed to raise 15.3 billion euros earlier this year to meet a new capital requirement, it did so in part by selling stakes in Brazil, Chile and elsewhere.

Those listed units' shares have suffered as the parent has been buffeted by bad news in Spain, particularly in July, when the country began to discuss a potential bailout.

Santander has said it plans to use the proceeds of the sale for general corporate purposes, and many in the market expect most of the money raised to be sent to Spain.

The listing will be the third this year on Mexico's stock exchange and even if it falls short of $3 billion to $4 billion, it is still likely to beat the $2.2 billion float of telephone firm Telmex, which has held the record for Mexico's biggest IPO since 1991, and may encourage other companies to follow suit.

"Any new issues, as long as they are priced appropriately - and the corporate governance of the company is good, they have got good prospects - are a positive thing for the local market," said fund manager Nick Morse, who oversees Schroders Investment Management's $740 million Latin America equity fund.

(Additional reporting by Tomas Sarmiento and Dave Graham in Mexico City and Carlos Ruano in Madrid; Editing by Simon Gardner, Kieran Murray and Dan Grebler)

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