Brazilian repurchase results 13.65%

Communicate


Banco Santander, S.A. (“Banco Santander”) informs of the termination of the
acceptance period of the exchange offer made for the shares of Banco Santander
(Brasil) S.A. (“Santander Brasil”) that are not held by Grupo Santander, which was
formally launched on September 18, 2014 (the “Offer”). Securities representing 13.65% 
of Santander Brasil’s share capital have been tendered in the Offer. Therefore, Grupo
Santander’s shareholding in Santander Brasil will increase to 88.30% of its share capital.
To satisfy the exchange Banco Santander will issue 370,937,066 shares, which
represent approximately 3.09% of Banco Santander’s share capital as of this date,
pursuant to the resolution passed by the extraordinary general shareholders’ meeting
held on September 15, 2014.
The percentage of shares tendered is below the threshold provided in the documentation
relating to the Offer published in Brazil and in the United States for the holders of
securities of Santander Brasil who have not tendered in the Offer to have the right to sell
them to Banco Santander during a 3-month subsequent offering period at the same
exchange ratio. Hence, such right shall not exist.
Boadilla del Monte (Madrid), October 31, 2014

Only 56% of Santander Brasil exchanged their shares. They took the short term 20% premium. Fair enough for the 44%, who like Santander group prefer long term gains.


For the fun coverage in Anglo-Saxon press

• reuters: full of bad understandings (value, 3.1%, ..., at the basis the value does not consider the ADR, and the 3.1% are the additional SAN shares)
• reuters: author could not resist: Brazil is faltering
• Bloomberg: Not bad except at the end: The +7% in net earnings and 3bpp in capital is in case all non controlled shares were exchanged. Roughly 50% were exchanged, so half the effects.

Stress tests results

• Communicate
• Detailed results of Santander
• Aggregate results. At page 10, list of the 25 banks with capital deficit, for a total of €24.62bi, going down to 11 banks and €9.47bi after considering the capital increases already done in 2014

The exercise has issued a mouse, with only significant problems in Greece, Cyprus and Italy.
In particular, compare with the news below (Jan 2014) where Bloomberg reports a €767bi capital shortfall to the net results: less than €10bi!
That Bloomberg article has no methodology description. The aggregate stress results document has extensive methodology description. Such a difference is a major disturbance. How could they write a €0.75tr capital shortfall???
There is a real problem there and I hope Bloomberg gets to justify previous  article.
But of course it will not occur.
Confirmation of boolshit information in the Anglo-Saxon financial press is the main output of the stress tests! 

Related news (to clean the News tab)

• 2014/10/28. 36 banks would have failed with BIS III full load (reuters)
  Stress tests results were too good. Full load perspective allows to write negative article. Difference between EZ countries related to the loading rate is also spam. BIS 3 itself  contains the loading rules. The bulk of the legislation is at EU level (CRD IV and CRR). Only CRD IV has local legislation implementation.
• 2014/10/24. An excellent stress test synthesis (ES)
  By Eduardo Segovia, probably providing the best information about Spanish banks
  Reuters also has an overview before Sunday.
  Finally Bloomberg saying 25 banks to fail
• 2014/10/23. More rumors on Sunday stress tests results (ES)
• 2014/10/22. At least 11 banks to fail stress tests (reuters)
  But previous rumors were also listing smaller German banks (not DB and Commerzbank)
  Most of the banks are named here (FR)
  In Belgium: Dexia, In Austria: Erste, In Portugal: Millenium MCP. None in Spain
  As SAN shareholder, I am not interested in Italy, Cyprus and Greece...
• 2014/10/15. Linde; BdE chief protests to BCE and EBA about the last minutes stress test changes (ES)
  The excluded rules are the same as those taken in other EZ countries, simply taken one month later.
• 2014/10/09. Stress test results will be communicated to the banks on Friday, Oct 24th (at 12:00 CET, by BdE, with confidentiality agreement (ES), publicly on Sunday Oct 26th, 12:00 CET (ES) (ES)
  Impact of the last hour changes is negative 30-40bpp, and were taken under the pressure of Germany/France.
• 2014/10/06. Last hour changes in stress tests rules (ES)
  Previous article was expressing the fear it would occur: "even too well". Another version is "the Spanish banks are doing too well, and that is worrying us", dixit one week ago the president of a Spanish bank.
  It happened on Sep 25th. As a result, Santander's tests will go from "excellent" to good or satisfactory. Differences between Spanish banks on one side and German, French, Italian banks on the other side will be less humiliating.
  The changes of tests rules is: legislation changes taken after 01/01/2014 but with application starting at that date are not considered: DTA in Portugal, goodwill, financial participations.
  This decision does not make sense (except on political grounds) as show the following scenario.
  With these new stress test rules, a Spanish bank goes under capital ratio requirements. Must recapitalize; How? Let's apply the excluded legislation rules. Done.
• 2014/09/24. ECB stress tests results comments about Spanish banks (ES)
  Officially for end end October, but look as the banks always know the results. Anonymous comment "the Spanish banks do very well, even too well".
• 2014/08/20. EBA publishes details about Oct stress tests data (ES)
• 2014/04/29. During stress tests, public debt in trading portfolio or AFS is to be valuated at market prices (following the stressed situation, 5.6% for 10Y against 3.1% now) and consumes capital  (ES)
  Germany prevailed on that point. However the general parameters are softer for Spain than for other EU countries (ES)
  And here is the information at its source (EN) in particular the document (EN) that details the parameters.
  Zerohedge article about the parameters: it is a farce because the adverse scenario does not consider deflation. The adverse scenario has low probability to realize. But test results are for sure to trigger some effects. Better to stay at what cannot be controlled.
  On Mai 6th: a clean overview of the effects (ES)
  On May 14th: Colleterals for loans related to real estate loans to companies considered (ES)
  And de Guindos comments: "Stress tests in 2012 by Oliver Wyman" were much tougher".
• 2014/04/21. Stress parameters to be communicated on April 29th. -1% GDP, 28% unemployment? (ES). Adverse scenario is 27.1% unemployment and recession to 2016 (ES)
• 2014/04/07. Stress tests parameters under discussion: Spain: GDP -6% on 3 years (ES) and unemployment at 32% (ES)? Pre-stress tests to be done by BdE by April 30th and discussions about parameters (ES). Pre-tests denied the day after (EN)
  Different parameters per country!
• 2014/03/05. ECB 128 big banks assessment has started (EN)
  That is the first link to spiegel.de I put in the blog. I read the international spiegel every day since beginning of 2012. Should I have started the blog earlier, then there would have been many more links in particular in 2012. Always well documented and investigated articles. The German view is a must to follow Europe.
  More specifically related to Santander, my feeling reading this article is that banks with excess capital will have many M&A possibilities due to the ECB current process.
• 2014/02/12. ECB to distribute the banks to the big 4 consultancy on Feb 17th for the stress tests (ES). Ernst & Young will handle Santander. (ES)
  Capital level as BISIII phased in, includes out of EU assets, must stay at 8% or higher.
• 2014/01/31. Stress tests and AQR (EN)
• 2014/01/18. European banks face a €767bi capital shortfall in AQR (EN)
  In this article, the major deficits are in (1) France [285bi] (2) Germany [199bi]
• 2014/01/16. Information about the stress tests (ES)
  With so much politics.
• 2014/01/15. BCE: Sovereign debt (not available for sale) valorized at face value for the stress tests (ES)
• 2013/11/24. War between Spain and Germany about stress tests (ES)
  1st salvo from Spain. Hard stress tests as last year in Spain
  2nd salvo from Germany (supported by France and Italy): Include sovereign debt
  3rd salvo from Spain. the market value of many bonds are higher than face value
  4th salvo from Germany. In stress tests, we need to simulate ... a stressed situation
• 2013/10/23. General description about what will be the ECB stress tests (ES)
• 2013/10/04. de Guindos defies Merkel to make the ECB stress tests as tough as those done for the Spanish banks (ES)

Q3 2014 and the tempest ahead

Q3 results
All presentations: EN
Net earnings of €1.605bi
EPS €0.131
(I compute 0.134: 1.605bi for 11.988bi shares...)

Excellent quarter across all subsidiaries and lines (except Santander bank US). 
But only one step to the return of normal results: improvement to continue at a rate of around €0.01 per quarter till end of 2016. It is the 3rd consecutive +0.009 quarterly EPS increase.

Highlights:

• Efficiency plan: 2014 target (€750mi) reached in September. Upped to €1bi for 2014 and €2bi to 2016
• Net earnings at €1.605bi, up 8.5%. YTD is up 44.7% against 2013 (constant €)
• 5 net capital gains for 2014 for a total of €2bi. They do not hit the P&L but are put in the balance sheet (Q1: Altmira 385, Q1: SCUSA 730, Q2: UK pensions 220, Q4: Custody: 410, Q4: Insurance: 250)
  With Q4 estimate at €1.75bi (easy to reach, only the Brazilian repurchase will contribute €75mi in net earnings per quarter through lower minority interests), and capital gains in the P&L (will not occur) total net earnings for 2014 will be around €8.1bi! That amount is however the 2014 value creation for shareholders.
• Capital up 52bpp, 50% from Coco, 50% through scrip.
• Spain.
  Cost of new deposits at 0.55%, was 1.41% a year ago
  New NPL entries for companies w/o real estate purpose at level 141, was 179 in Q1 and Q2. Mortgages and other loans to people continuing to improve.
• UK
  Demand deposits up 54% YoY after a rise of 71% of Q3 2013 against 2012. Oustanding success of 1|2|3 accounts to lower the cost of deposits.
• US
  New SCUSA: loans +33% YoY, not yet impacting earnings as initial provisions put the NPL coverage ratio at 296% 
• Brazil
  Cost of credit at 5.1% (6.7% in Q3 2013). Continuous improvement for 2 years

Motley: "Interestingly, Santander’s biggest profit growth came in Spain"
Beginning of the year Santander gave as guidance €1.1bi 2014 net earnings in Spain alone. Real numbers will be slightly higher (50mi more) . For 2016, guidance (Spain only) is €3bi

News:

• 2014/11/03. Bloomberg consensus for Q3: €1.546bi. (€1.055bi in Q3 2013) (ES)
  That is €0.129 EPS, really doable, with Spain on focus. The article put the focus on Latam. I respect elconfidencial opinions.
• 2014/10/31: Banco Popular: +1.7% but through exceptionals as provisions at +97% (ES)
• 2014/10/30. Sabadell: YTD +42.5% (ES)
• 2014/10/29. BBVA YTD -37.3% against 2013, but w/o exceptionals +43.2% (ES)
• 2014/10/24. Q3 Bankia (ES) and Caixabank (ES) (ES) (reuters)
• 2014/10/23: Bankinter is the first Spanish bank to report Q3 (ES):
  Net earnings YTD at +31.6%, NIM: +17.9% (interests down, but costs of deposits down quicker)

Santander reports Q3 on Nov 4th

Aside from Emilio Botin's death, quarter was quite.

EPS at €0.13
Spain and UK continuing to improve at slow rate
Brazil neutral
US positive because SCUSA growth less torrid (less advance provisions) and €/$ movements

M&A activity was in the same way as previous quarters, to change in Q4:
- Selling CF insurance with €250mi capital gain (for Q4, but will be parked in a reserve balance sheet account). Selling 51% insurance in Portugal.
- JV in Brazil, $205mi investment
- Ongoing CF expansion in Canada ($201mi), one more country ready to switch to commercial bank (triggered during next financial crisis).
- Exclusive discussion with Unicredit to double the size of AM

Next quarters will not be quite: tempest weather is coming (in general not negative)
- Oct 26th: stress test results and Assets Quality Review
- Nov 4th: ECB takes supervision of 130 biggest EZ banks. When will the RWA rules be uniformized across EZ countries?
- Oct 30th: deadline for exchange offer in Brazil

There are also very active geopolitics without specific impact on Santander:
- Incredible mess in Syria, Iraq, Lybia
- Active new cold war centered in Ukraine, USD, oil, with China scoring and Iran favorably impacted
- Ebola
- Winter in Northern hemisphere coming. Together with the stunning defeat of Ukrainian central forces, this is why the situation is so quite in Ukraine (Ukraine has no global offensive capabilities left, and Russia can let winter work)

There are also several significant local events with direct potential impact on Santander
- Oct 26th: 2nd turn for Brazilian presidential elections (R$/€ exchange rate is the direct impact)
- Weak numbers from Germany (I think one of the main SAN's strategic objective is to start a commercial bank in Germany, and this is a facilitating factor)

As last remark. Weakness from SAN in Madrid came just in time to get the best ratio for the dividend scrip: Ratio is computed with the share prices average the 5 days before Oct 16th (9, 10, 13, 14 and 15 Oct)