| MADRID, June 4
MADRID, June 4 Banco Santander's red
and white flame logo popped up around the world when Spain was
booming, but now the country's fortunes have turned, the global
bank is being scorched by the domestic blowback.
It has come a long way since it was founded in 1857 in the
northern Spanish port from which it takes its name, building a
strong presence in mature markets such as the UK, and growth
markets including Brazil, Mexico and Poland.
But it seems investors and depositors alike are struggling
to see past the turbulence in its home market.
Its shares have dropped about 40 percent in the last year as
the bank, along with Spanish rival BBVA, has been
lumped together with the rest of the country's domestic-focused
lenders, which are in urgent need of more capital after a
property boom abruptly turned to bust.
This was evident last month when British customers at
Santander's UK subsidiary took fright and withdrew about 200
million pounds ($308 million) in deposits, spooked by the
misfortune of Spanish lender Bankia, which the
government in Madrid was obliged to rescue.
"Santander and BBVA are in another league. Whatever they do
in Spain has a limited impact on their balance sheet, and it
(the share price fall) is unjustified collateral damage," a
senior Madrid-based financier said.
Dig into its profitability, and from Brazil to Boston,
Santander's presence in 10 major markets has kept it relatively
insulated from the worst of the Spanish real estate collapse and
the euro zone crisis.
Over the past five years, it has made 40.5 billion euros in
attributable profit and paid out 24 billion euros to
shareholders in dividends, while many of its rivals have cut or
stopped their pay-outs.
In its most recent quarterly figures, 56 percent of its
profits came from high-growth emerging countries such as Brazil
and Mexico, while only 13 percent came from Spain and Portugal.
That has not translated into the bank's price to book ratio
Of 0.53 - a measure of its shares against the value of its
assets - which lags behind "safe-haven" banks such as HSBC
, on 0.89, and JPMorgan, on 0.66, according to
Thomson Reuters data.
Even if Spain's downturn worsens - the economy is forecast
to shrink this year and next - the country accounted for only 26
percent of Santander's total assets at the end of March, about
the same as it has in Latin America and the United States, and
less than the 29 percent held in the UK.
While the bank is likely to set aside more for bad loans in
its home market after an external audit of Spanish banks
commissioned by the government, few expect it to have to raise
"Banks like Santander will have to provision more, but
Santander won't need more capital," one senior Madrid-based
investment banker said.
Although British depositors did pull out cash in May when
fears about Spanish banks mounted due to a rapidly worsening
situation at Bankia, this amounted to just 1 percent of customer
That was in part due to Santander's move last December to
mitigate the perceived risk of being owned by a Spanish bank.
The bank's British subsidiary decided to make any transfers out
of Britain subject to the consent of the UK regulator, the
Financial Services Authority (FSA).
"With the full cooperation of Santander UK, the FSA has in
place arrangements which require the FSA to give permission to
any transfer of funds out of the UK by Santander UK," an FSA
Santander Chairman Emilio Botin stressed in March at the
bank's annual meeting that subsidiaries such as the UK unit were
"autonomous in terms of capital and liquidity".
This structure has reassured some.
"You can't completely ignore the contagion from Spain and
the headline risk, but Santander UK should be able to operate as
a separate entity in a worst-case scenario," said Robert
Montague, Senior Investment Analyst, European Credit Management,
which manages $9.5 billion invested in European credit markets.
"In the case of Santander's business model, its subsidiaries
are fairly independent in terms of funding, and its UK
operations also report publicly on a standalone basis," Montague
That has not stopped some depositors, notably a handful of
local councils, from withdrawing their cash. But such moves are
illogical, says Ben Bennett, credit strategist at Legal &
General Investment Management, one of the UK's biggest
"It's not something that's specific to its balance sheet
that is putting it under pressure; it's just purely an
association with a Spanish parent company," said Bennett.
"When you start talking about the worst-case scenario, the
whole argument is a systemic one. That's an added reason why
it's illogical to target these banks in the UK which have
exposure to Spain because actually ... you're probably
questioning banks that have nothing to do with Spain," he added.
There has been no sign of a depositor flight from Santander
in Mexico, where the bank had customer deposits of 26.1 billion
euros at the end of the first quarter.
The Mexican banking and securities commission said it was in
continuous contact with Spain's central bank as well as with the
head offices of banks that have units in Mexico and is confident
Mexico's banking system insulates domestic subsidiaries from
distress at their foreign parents.
"In Mexico we have worked for more than 15 years to create a
regulatory framework for subsidiaries with clear rules on
capitalization and limited exposure to their parent banks, which
we believe is a strength of our banking system," a spokesman for
the regulator said.
It is a similar tale in Brazil, where there has been no sign
of any depositor flight. Santander has been overcapitalised in
Brazil since it listed publicly there in 2009. In the first
quarter, the Basel ratio of Santander Brasil was 24 percent,
well above the average of 14-15 pct of its main competitors as
well as the regulatory floor of 11 percent.
As such, regulators are not concerned about Santander
Brasil's capital position, despite occasional rumours that
Santander is repatriating capital to Spain.
Local Santander executives have repeatedly denied this, and
Santander Brasil CEO Marcial Portela recently said: "The only
way to send money to headquarters is through dividends."
Brazil remains a bright spot for Santander, representing 25
percent of the group's overall profit, surpassing headquarters
in Spain last year. The bank expects this number to rise to 30
percent in the next couple of years.