* 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 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."