Articles at that high quality level about Santander are a rarity. As such it deserves its own post. The article gives a framework to understand recent moves, and lower surprises for future news.
Here is a summary
- Bank of Shangai purchase is significant and part of a global strategy.
- Botin objective is to reach top 10 bank level.
- The completion of cleanup work in Spain and close of legal problems (Botin's hidden account in Switzerland and Arenz's indictment) allow to go on
- What is missing is growth in Asia, wholesale bank, asset managment
- Asset management: the recent AM deal with Warburg Pincus and General Atlantic has been misinterpreted. The objective is to grow that part and the 50-50 deal (Santander keeps 50%) is setting up a JV with specialized partners. The move of all AM subsidiaries to London is a prerequisite to do efficient AM business.
- Asia. We are at the 3rd move in China this year: 2 in consumer finances, and now the Bank of Shangai. That one is significant and a 1st step for further growth.
- Wholesale bank: Santander is insignificant in that business.
Seems to be at the stage of evaluation to mitigate the risks, and define the general strategy
Banks for growth need capital (not cash). Article's author only mentioned capital in clever way: "still has a questioned capital situation" . Usage of "questioned" and not "questionable" is neutral statement. It is such a big subject that better to leave it out.
Related to that there are 4 missing subjects in the "Capital tab"
- The current push Santander is making to lower its RWA, independently of new RWA regulations that will come with the EZ banking union .
- The DTA in Brazil. The Company has €4bi DTA in Brazil. 24% of the total. The only information I have is that the country passed (very) favorable regulation during spring 2013. Source is a priori not trustable (JPM), but as it is positive for the Company it is probably true.
- An evaluation of the DTA utilization in Spain using sensible net earnings projections. Spain has around 65% of the group DTA totals. Even if only 50-70bpp are kept in core capital from the Nov 2013 new Spanish DTA regulations, is -a priori- a disappointment, it could be positive in the following way: Kept in the capital are the pensions related DTA, which can be used only at very long term. What is out are the provisions/past losses DTA, which are easy to use as soon as the Spanish subsidiary make benefits. And this comes together with the progressive DTA exclusion from core capital on 5 years (2014-2019). But all that need to be checked.
- Dividend as script as a way to raise capital in a situation where new rights issues option is closed due to undervaluated shares.
What is also missing in the article is the organic growth. Santander is very aggressive in the US and UK. In UK they have negative fees since beginning of 2012 with very good results. In the US, together with the rebranding, they introduced the extra20 account: Same story: negative fees!.
Finally there is Spain. the 300bpp deposit share growth, and 87% liquidity level is a promise for significant growth as soon a credit is reopened in the country.
Vincent,
ReplyDeleteRe.: The final lines in your article above "Dividend as script as a way to raise capital in a situation where new rights issues option is closed due to undervalued shares"
I am guessing that you are mentioning it (end of the SCRIP) as a probability (for the year 2014 or maybe in 2015?), rather than a decision or an imminent action by Banco Santander.
I'll appreciate if you confirm or correct my understanding of your input.
Thanks in advance.
There are many ways to see the dividend script. My preferred one is the following:
ReplyDeleteWith current undervaluated shares, it is the most shareholder friendly way to increase capital at a rate of €7bi a year. It is shareholder friendly because the shareholders are given the tax free money to participate. Seen in that way, the shareholders agrees to participate at the cost of cash dividend against the promise to keep furure €0.6 dividend on more shares and this made possible by growth.
That way of seeing dividend as script means that Santander can keep the script, even after EPS supports an all cash dividend, and this till the shares value goes significantly up.
As already said, for me, the best signal to lower my long exposure to Santander will be when the Company makes a new rights issue to finance an acquisition.
€7bi is a little bit too high, say €6bi to count the 10-15% of shareholders that take the dividend as cash.
DeleteOK! Thank you for clarifying it for me by confirming that there has been no decision taken by Banco Santander regarding a discontinuation of the SCRIP, my favorite way (tax-free) of receiving my SAN dividends.
DeleteI am very exited about 2014 and Santander as I believe it will bring a lot a aquisitions and transformations for Santander. If they succeed Santander will be much closer to world top 10. But as Santander=Botin is very cautios it can take a while to get there.
ReplyDeleteI have the same feeling as you about 2014 acquisitions.
ReplyDeleteAlso hope to get clarifications about BIS III capital end of Jan together with Q4 results, and during next general assembly visibility about future dividends (mainly script or not and how long)
"Source is a priori not trustable (JPM), but as it is positive for the Company it is probably true."
ReplyDeleteYou haven't lost your sense of humour, Vincent!
On a more serious note: I cannot imagine why SAN would undertake a Rights issue to finance acquisitions when they announced (QIII Management statements) a EUR 25 billion capital surplus. That's why I believe a continuation of SCRIP dividends is virtually guaranteed and there is no need to go to the market even if juicy acquisition opportunities present themselves. They can also raise money through IPOs (Sovereign Bank, as you mentioned some months ago).
Thanks Strike
DeleteI first missed your statement about QIII management statements about the €25bi capital surplus. I cannot wait for the Q4 statements end of Jan 2014. I intend to make a commented transcript of these management statements.
I just re-checked the August Presentation, in which (following the successful stress tests) the bank forecasted a EUR 25.3 billion Capital Surplus in 2014. It's in Section 4.4 (page 23) of the Presentation:
Deletehttp://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CC0QFjAA&url=http%3A%2F%2Fwww.santander.com%2Fcsgs%2FStaticBS%3Fssbinary%3Dtrue%26blobkey%3Did%26blobcol%3Durldata%26SSURIsscontext%3DSatellite%2BServer%26blobheadervalue1%3Dapplication%252Fpdf%26blobwhere%3D1278695710018%26SSURIsession%3Dfalse%26blobheadervalue2%3Dinline%253B%2Bfilename%253D245%255C752%255CRentaFijaEnglishQ213.pdf%26SSURIapptype%3DBlobServer%26blobtable%3DMungoBlobs%26SSURIcontainer%3DDefault%26blobheadername1%3Dcontent-type%26blobheadername2%3DContent-Disposition&ei=7Ay8UqXHM4Ojhgfys4GoDA&usg=AFQjCNG1TRyj8cg692xwVS_7sLKiImddBQ&sig2=dMJWOWqoTm4UkiLxC1IsbQ
I had never read that presentation...Wonderful
DeleteBut still want confirmation after the new DTA rules in Spain
Not sure how to interpret
BIS III core capital
(A) "Phase-in: always above 11% throughout the period "
(B) "Fully-Loaded: always above 9%"
(A) Phase-in is 2014-2019. Each year 20% of some DTA are excluded but the DTA total amount is eaten from Spanish earnings -> 11% till 2019
(B) At any time during 2014-2019, in case all DTA are excluded (w/o being eaten by earnings), the lowest capital ratio is 9%
What do you think?
I think a problem is that there have been conflicting figures given out by SAN itself, maybe because of reallocation of assets and risks. The best is to wait for the full FY.
DeleteI get the feeling that Santander will acquire some Italian Bank as they now face big problems and there will be banking consolidation in Italy as medium sized banks will be aquired by bigger ones. Greece also might be interesting. But I think any major moves will come after ECB provides details on their tests in January.
ReplyDeletein 2008, Santander had the right entry in Italy with Antonveneta. They sold it 3 months after acquisition with a €3bi gain. Perhaps Antonveneta + Banco Real was a too big jump in one shot. Another possibility is that Italy market has too many specificities. Related to Greece, my personal opinion is that I hope Santander will never enter that market!
DeleteBIS III + EZ banking union can provide a lot of opportunities for the banks that have the capital.
Even the Italians may get lost in the labyrinths of the Italian banking system.
DeleteBanco Santander already did the smartest thing ever with an Italian bank: They sold it (Antonveneta)!
What acquisition strategy or targets do you see? Or would like to see?
DeleteRaivis, I am not sure if your question is to me or to Vincent, but I'll try to give you my answer anyway.
DeleteAs I've already stated above, I wouldn't want any of "my companies" to have big stakes in Italy where you never know who you are in bed with or what will hit you and when!
For two reasons I didn't weep when the NCG in Spain went to Banesco: 1) I do not want Banco Santander, a truly international bank wrongly perceived in the USA as being a "Spanish one", to look more Spanish than it is; 2) I know that with an acquisition history as solid and successful as theirs, SAN would have acquired NCG if they really wanted to.
Many acquisition projects in numerous sectors and countries have ended in tears (read: losses) simply because those moves were based on the top guy's personal ego, rather than realistic business plans. SAN is known to make smart acquisitions with prudence and strong business plans, without biting more than it can chew.
I am quite happy with SAN's latest move in the Chinese market, as I believe that the Chinese and the German markets (although with entirely different shapes,sizes,and conditions) have a lot to offer to SAN.
Personally, the 2 countries I would love Santander to make acquisitions in retail banking are Germany and the US.
ReplyDeleteGermany is already is huge business, but only in consumer finances.
US is big market, SAN has only retail banking in the North East, that they try to grow organically. Probably they need acquisitions to start other regions.
However in both countries, the prices are high. Let's hope BIS III and EZ banking union will provide opportunities at good price.
After that I would like retail banking acquisition in any EU country to the North and East of Belgium (included). For Consumer business, any country (except Greece and Italy)
About Asia, I have no personal opinion: don't know these countries and their culture. But I have confidence about the company management. If they think it is good to enter China, wonderful.
- Asset management, let's see how the JV in London will behave,
- Insurance. This is where SAN sold most of the assets. As an anecdote, I am customer in Brazil of a bank with a big insurance business. I could not talk to the people in the agency without being "offered" to buy an insurance. It was really irritating me. Insurance is another business.
-wholesale banking: basically the same ignorance as about Asia, and same opinion
About acquisitions: When something gets a lot of visibility, like NCG or Radobank subsidiary in Poland, SAN does not get it.
The deals concluded this year: 51% of Cortes Ingles consumer finances and 8% of Bank of Shangai had zero rumors around them.
Vincent, the final paragraph in your latest post (above) confirms my thinking. Banco Santander acquires companies at the price that Banco Santander believes is right for the business. Unlike some other acquirers, Banco Santander does not chase target companies whose acquisition prices have been inflated by other bidders.
DeleteAs a SAN shareholder I am happy with the management's approach so far and I hope that it stays this way in future acquisitions,too.
Vincent, insurance business is highly profitable. I am a huge admirer of the German Allianz Group, well run, honest, low Management salaries, ultra conservative business strategy (no derivatives or sub-prime, only the top top top global locations), and Munich Re and Swiss Re. Their profits are guaranteed.
DeleteMaybe SAN sold its rotten insurance assets, but I would highly encourage them to re-acquire or JV with a well run insurance or reinsurance group. It's a no-brainer.
Thanks for a lot of feedback regarding acquisitions. I guess than that we will see Santander making smaller strategic acquisitions and stepping up organic growth in markets where it is already active to increase market share and have a higher ROE. This also corresponds well with recent presentations where Santander speaks about the need to increase ROE dur to low interest environment.
ReplyDeleteOnly band thing with such a strategy is that it is dead boring :) But what can you expect from an 79 year old guy :)