Sovereign focuses on capital, operations

NEW YORK, Nov 7 (Reuters) - Sovereign Bancorp Inc SOV.N, the second-largest U.S. savings and loan, will spend the next year replenishing capital and improving day-to-day operations to boost profit and rebuild investor confidence after its stock fell by half, its chief executive said on Wednesday.

"If you look at what we've done in a very difficult year, we've raised reserves, we've raised our capital levels, we continue to build back to where we should be," Chief Executive Joseph Campanelli said at the Reuters Finance Summit. "Within the next 12 months, we're in a position to have more capital to have options for share repurchases and things like that."

Campanelli has led Philadelphia-based Sovereign since the October 2006 ouster of predecessor Jay Sidhu, but continues to live in Wellesley, Massachusetts, near Boston. He had previously led the company's New England operations.

Sovereign has $86.6 billion of assets and 750 branches in eight northeast U.S. states,

Critics had faulted Sidhu for growing too fast, spending too much, overpaying directors, lacking focus and being a drag on Sovereign's share price.

Since he left, Sovereign has emphasized clean-up, including a balance sheet restructuring and write-downs for home equity and auto loans.

Yet the shares continue to fall, dropping below $12 each on Wednesday for the first time since Oct. 2002.

The decline mirrors a slide at larger thrift Washington Mutual Inc (WM.N), as investors fret that rising loan losses will depress results at banks and thrifts nationwide.

Sovereign ended September with a Tier 1 leverage ratio of 6.03 percent, well above the 5 percent level that regulators consider sufficient for a bank to be "well capitalized," but Campanelli said he'd like to raise $1 billion of capital.

"We want to be in line with our peers. You have a lot of options then," he said.

The decline in the stock price also affects Ralph Whitworth, an activist investor whose campaign for change won him a seat on the board and led to Sidhu's ouster.

It also hits Spain's Banco Santander Central Hispano (SAN.MC), which last year paid $2.4 billion for a nearly 20 percent stake in Sovereign, and now holds nearly 25 percent. Sidhu used the money to buy Independence Community Bank Corp of Brooklyn, New York for $3.6 billion.

Santander has an option beginning next June to buy the rest of Sovereign, but at $40 per share. It also has a "last look" in case another suitor steps in, Campanelli said.

The share price decline has cut Sovereign's market value to about $6 billion, making it much harder to use stock as currency in an acquisition.

"I'm a big believer that you have to earn the right to be an acquirer," Campanelli said. "By earning that right, it means you grow faster than the market is growing in general. We've got to prove that.... We took our eye off the ball in the last couple of acquisitions. Now it's a matter of refocusing."

He added: "There's a lot of revenues here, and it's up to management to unleash the value, and if we don't, somebody else should.... Our best years are clearly ahead of us."