November 28, 2013 / 8:00 PM / in 4 years

UPDATE 1-Santander's Mexican unit to pay dividend of up to $1.3 billion

* Unit will pay dividend, issue subordinated debt

* Deal will strengthen, diversify capital, lender says

* No impact on parent company, lender says

MADRID, Nov 28 (Reuters) - Spain’s Santander said its Mexican unit would pay a special dividend and issue subordinated debt in an operation that would strengthen and diversify the Latin American bank’s capital.

The operation, similar to one carried out by Santander’s Brazilian unit in September, would not have an impact on the capital of the parent company, a Santander spokeswoman said on Thursday.

Spanish banks are looking to increase capital ahead of stricter international regulatory requirements as they battle to emerge from an economic downturn that pushed up loan defaults.

Although Santander, which earns the majority of its profits abroad, was less affected by Spain’s recession than most, some analysts believe it could still need to strengthen solvency ahead of stricter global requirements.

Banco Santander (Mexico) will pay out a special dividend of between $1 billion and $1.3 billion and issue subordinated debt worth around $1 billion euros, compatible with the Basel III international rules, the lender said.

“These operations aim to optimise the capital structure of the bank and improve profitability,” Santander said in a statement.

The spokeswoman could not confirm that Santander would use the cash from the dividend payment, as a 75 percent shareholder of the Mexican unit, to underwrite the subordinated debt issue.

In a similar operation in September, Santander used a one-off dividend payment at its Brazilian unit to buy dollar-denominated debt, shrinking equity and increasing debt to improve return on equity, a measure of profitability.

After the payment of the dividend, the unit will have a Tier 1 capital ratio - a measure of solvency - of 12 percent, much higher than regulatory requirements, the lender said. Its Tier 2 ratio would be around 2.5 percent, it said.

The parent company will subscribe to 75 percent of the subordinated debt emission, the lender said, in line with its holding in the Mexican subsidiary which floated on the stock exchange last year.

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