UPDATE 1-Santander sells half of custody business

Thu Jun 19, 2014 6:32am EDT

* Sells 50 pct of Spain, Brazil, Mexico custody business

* Warburg Pincus, Temasek team up to partner with Santander

* Deal values business at $1.3 billion

* Echoes of previous Santander/Warburg Pincus deals (Adds background, details)

MADRID/LONDON, June 19 (Reuters) - The euro zone's biggest bank Santander said it is selling a 50 percent stake in its $1.3 billion securities custody business to a group led by Warburg Pincus, marking the third major deal between the bank and U.S. private equity firm.

The business has 738 billion euros in assets under custody in Spain, Mexico and Brazil, and Santander said on Thursday it would book a 410 million euro ($556 million) net capital gain on the sale, which values the business at 975 million euros ($1.3 billion). Santander will keep a 50 percent stake.

Singapore's sovereign wealth fund Temasek is also part of the group which will become a new partner of Santander in the business. Santander said the deal will allow the custody business to expand and it plans to increase investment in its technology.

Banks across Europe remain under pressure to shed assets and improve their capital.

Santander's core equity capital ratio should get a 12 basis point boost from the custody unit deal, Citigroup analysts said.

The deal, which allows it to make a capital gain but retain exposure to future profits and growth, has echoes of Santander's agreement to sell a 50 percent stake in its asset management business to Warburg Pincus and General Atlantic last April, allowing the bank to book a profit and bring in partners.

Warburg Pincus also led a $1 billion investment in Santander's U.S. automotive finance lending business in 2011, and still holds a stake following its flotation in January.

Warburg Pincus will take a bigger stake than Temasek in the Santander custody business, an industry source said. The two sides did not disclose how they will split the deal.

Warburg Pincus, with more than $40 billion of assets under management, has bought financial assets in Brazil, China and India, using a so-called partnership model, and is expanding in Europe.

Daniel Zilberman, its financial services managing director, told Reuters last year the reluctance of banks to sell 100 percent of assets at a knock-down price had encouraged him to pitch coming in as a partner instead.

($1 = 0.7368 Euros) (Reporting by Tracy Rucinski in Madrid and Steve Slater in London; Editing by Jason Neely and David Holmes)

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