Botin faces Santander’s capital doubts amid profit squeeze

MADRID – In the year since she became chairman, Banco Santander SA’s Ana Botin has cut the dividend, tapped shareholders for funds and replaced management in the U.S., Brazil and the bank’s home market of Spain.

And still the stock price has foundered. Ahead of a two-day meeting with Botin and her team this week, some of Santander’s biggest investors say they’re concerned that profit pressures in key markets mean Spain’s largest bank will struggle to build capital ratios to match peers and meet regulators’ escalating demands.

“Banco Santander needs to cope with two main issues: the current capital ratio and profitability,” said Christian Sole, senior equity analyst at Candriam Investors Group in Brussels, which oversees about 90 billion euros ($102 billion) in assets and holds Santander shares. The bank’s 2015 target for a 10 percent common equity Tier 1 ratio “was considered a huge number years ago but is not enough for a bank like Santander that has a large exposure to emerging markets.”

Santander’s challenge to bolster its capital buffers is complicated by a profit squeeze in two of its biggest markets. Record-low interest rates in the euro zone are limiting Santander’s growth at home, putting pressure on margins. The geographic diversification that helped the bank weather the financial crisis is no longer a boon as Brazil’s economy slumps into recession and a political crisis cripples the country. The Brazilian business makes up 20 percent of the lender’s profit.

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The bank’s 7.5 billion-euro stock sale in January wasn’t enough to get the capital ratio to where investors want it to be, taking into account regulatory demands, said a top-20 shareholder, who asked not to be named because the asset manager isn’t authorized to speak about individual companies. While the bank is unlikely to sell more stock in the short term it should still aim to boost its CET1 ratio to 11 percent by the end of 2016, the investor said.

JPMorgan Chase & Co. analysts led by Kian Abouhossein estimate the bank needs as much as 5.5 billion euros in new equity to reach that goal by 2018 and may have to cut its dividend again to close the gap. “If nothing materially positive comes out of this Investor Day, our thesis on Santander will need to be revisited,” they said in a note Monday. Abouhossein has an overweight recommendation on the lender.

With a 9.8 percent CET1 ratio as of June, Banco Santander has the lowest such measure among the 24 largest publicly traded European banks, according to data compiled by Bloomberg. Deutsche Bank AG has an 11.4 percent ratio while UniCredit Spa and Banco Bilbao Vizcaya Argentaria SA stand at 10.4 percent.

“They don’t need to be the best in town in terms of capital, but compared with some other European players they are still somewhat weak,” said Karim Bertoni, who helps manage more than $6 billion at Bellevue Asset Management AG in Switzerland.

CEO Jose Antonio Alvarez said in a March presentation the bank would be “stricter” in allocating capital to businesses with higher potential returns.

An official for Santander declined to comment for this article.

Net income in the second quarter rose to 2.54 billion euros from 1.45 billion euros a year earlier after a favorable tax ruling in Brazil allowed the lender to free up provisions. Excluding the one-time gain, net income would have been 1.71 billion euros.

Under Botin’s late father, Chairman Emilio Botin, Santander spent more than $70 billion transforming itself from a provincial lender into Europe’s second-biggest bank by market value with a string of acquisitions, including Banco Real in Brazil and Abbey National in the U.K. Now the bank is focusing on expanding consumer banking in its 10 largest markets.

“Santander has done lots of things right and is one of the banks that has come out of the crisis stronger,” said Marco Troiano, a credit analyst at Scope Ratings in London who plans to attend Santander’s investor day. “I would be quite happy to see continuity on their strategy.”

Botin has made winning over customer loyalty one of the bank’s top priorities as a way to boost profitability. To do so, the lender in May started the “1/2/3” account in Spain, modeled on a similar product it introduced in the U.K. in 2012 that helped it win clients in that market.

In Brazil it named a new CEO on Sept. 9, and a reorganization should follow, according to Kepler Cheuvreux analyst Alfredo Alonso.

“The appointment demonstrates the need for further changes at the Brazilian unit, which, despite some improvements lately, lags behind peers in terms of growth and profitability,” Alonso said in a note to clients.

Last month, Santander lost out on a bid for HSBC Holdings PLC’s Brazilian unit to Banco Bradesco SA. The purchase would have helped Santander bolster its 598 billion reais ($154.6 billion) in assets in the country by adding the nation’s seventh-biggest bank with 145.7 billion reais in assets. Santander is the nation’s third-largest non-government-owned lender, according to central bank data.

Concerns about Brazil’s economic contraction contributed to Santander’s share-price decline. The stock dropped 28 percent this year, making it the second-worst performer in the benchmark STOXX Europe 600 Banks Index, which tracks 46 of the region’s banks. Only National Bank of Greece SA is down more.

Santander has targeted a return on tangible equity ranging between 12 percent to 14 percent in 2017. The measure of profitability stood at 11.4 percent at the end of the second quarter.

“Profitability at Santander isn’t sufficient,” Sole said. “I am not sure they will be able to reach this minimum target.”

The bank could boost profitability by reducing costs, the top-20 shareholder said. While the bank reaching its goals for 2017 would be positive, the low interest rate environment means Santander will probably find it difficult to top those plans in coming years, the investor said.

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