08 January 2015

Capital increase. Dividend cut. Guidance Q4

- Accelerated €7.5bi capital increase. (communicate - ES)
- Proposal to reduce 2015 dividend to €0.20 in 4 installments (1 scrip, 3 all cash)
- Shares quotation suspended in Spanish stock exchanges (communicate - EN) to restart tomorrow 08:30 (Communicate - EN)
- Guidance for Q4 2014 (communicate - EN)
€5.8bi for full 2014, less 4.36 to September gives the puny €1.44bi for Q4 (€0.114 EPS, awful)

--- Presentation (ES), (EN)
This presentation summarizes best the earthquake

Additional information

- The CEO (Alvarez) discards utilization of the capital increase for a major acquisition (ES)
No Espirito Santo, Monte dei Pasci, or Postbank. Belfius? Carige?

- Minimum price for capital increase is €5.72, 16.5% discount on last quotation in Madrid (ES)
We will know this Friday morning.

- New shares have been issued at €6.18, a discount of 9.78% (ES)

- Press release about the capital increase (EN)
Success! in 4 hours 11bi, from 235 privileged institutionals (79% from US/UK). 9.64% new shares. Shame and disgust. Long term confidence break. 

- Big unknown is who are the buyers!
At least one is known: George Soros with €500mi (ES)

- A good coverage from reuters
- Outstanding article on SeekingAlpha (EN)

- Analysts moves:
ES and ES:
Société Générale: 7.3 to 7
RBC Capital Markets: 7.4 to 6.9
Oddo: 8.4 to 7.6
Nmas 1:7.65 to 6.8
Barclays: 5.8 unchanged
Citigroup: 7.1 to 6.7
CS: 7.1 to 6.6

- Shares.
Small investors dumped shares in Madrid on Friday, with volume in the range of 400mi (60mi is a normal day before the operations) and prices down 14%
This Monday (Jan 12th) situation is already much quieter. volume at 180mi, up 2.7% in a market down. Tuesday same.
This Wednesday is much quieter. Shares went ex-div (€0.146). And if you add that value to quotation (€6.03, around 10:30 CET), we are back to capital increase value €6.18!
The situation has basically changed. Expect favorable news in US/UK financial press, with support from institutionals

Reasons

This article from Segovia details the motivations for the operation.
No acquisition, no financing of organic growth (the official reason), not the consequence of market pressure.
Reason is the pressure from ECB to reach at least 10% tierI capital fully loaded now.
As additional comments, he states:
Professionals are very happy, small investors are not, and have been prejudiced in the operation.

On Jan10th, there is another article from Segovia. It details the dynamics of the operations (dividend cut and capital increase), and asks the question about the strategy, but without answering it

Cold comments

- Strategy. (ES)
In 4 months, Ana Botin changed the board, the CEO, the dividend policy, and the way to get capital.
Organic growth. But probably more to come, especially the business mix and commercial policy.

- Discount.
Increasing number of shares by 9.64% (Communicate - ES) with a discount of 9.78% against €7.5bi, is in fact no discount at all. Simply at same value of equity in each share. 

Heated comments

- We know now the real reason about CEO and members of the board changes.
They were opposing the operation. €7.5bi capital increase reserved to instutionals is inconsistent with the message: "Santander has very comfortable capital levels" (even the above presentation in slide 7 reiterates that message on the numbers before the capital increase). But 10% new shares is just what is needed to change to controlling structure.

- Santander under Ana Botin is a different bank than under her father.
Why making the present to the institutionals (discount for new shares)?
Keeping scrip for FY 2015 and Q1 2016 would have had the same effect on capital with all its advantages for existing shareholders!
I wrongly evaluated Ana Botin. She is not going in the same direction as her father. She just transformed SAN to a common bank by handling control to institutionals . The 10% reserved for them is enough to switch the voting power.  It is only the first step of a long series of moves.  SAN will be moving to much shorter term. Ana Botin will stay chairman as long as  the new controlling majority is pleased.
I HATE the new situation, because whilst I trusted Emilio Botin, I don't trust US/UK institutionals. Perhaps I am wrong on that, and that with them with more money in the game, SAN price will behave better. But they will want a biggest part of the shares first. So first a period of weak share prices, till they are happy with their holdings.
One word to resume:
Treason.
Treason to existing shareholders, and the end of Santander as it was since 1857.
Perhaps in 2-3 years shares will double value. But I prefer the previous situation.
There is now a basically different situation through a new controlling structure and new bank.


- I was so wrong. Most of opinions in the blog are so wrong that it makes low sense to go on with it. Simply maintaining notices

Own conclusion

- SAN.is no more an outstanding investment. Suddenly, by changing the long term plans, Ana Botin made SAN a plain fair(probably more good than fair, but all need to be reevaluated) banking investment.
What will I do with my long position in SAN?
As told above, I expect shares to be weak, till institutionals succeed to increase the ownership to a higher level. In particular, Q4 figures will be bad. Guidance exists to help manipulation. That is the way to look at the coming financial statements. At longer term (2016 but not before), much better prospects. So I intend no big moves and close my ass.
Probably will sell 1% (of current position) every month, to reach 0 after 8 years.

It exists much better investment opportunities than the new Santander

17 comments:

  1. Hi Vincent, I beieve you are overreacting. While I enjoyed past dividends I see the recapitalization move, including the sharp dividend reduction, as a conservative and beneficial strategy aimed at improving the long term health of the bank. Many analysts and commentators repeatedly vopiced the opinion that these huge dividends were unsustainable, and Ana Botin agreed.

    I am not selling a single share and will now view my investment as a "strong growth" investment rather a much higher risk, "income plus growth" investment that could crash as occurred in 2008-9 when it went from EUR 15 to EUR 4!!!

    Under Ana Botin the bank will stop being Father Christmas to shareholders and will be run on a more solid footing.

    ReplyDelete
    Replies
    1. The dividend was high (maybe to high) so a reduction was an option, but the capital increase with a low price didn't seem necessary to me.
      I agree with Vincent that this is a present for institutionals which I (and the other shareholders) have to pay for.
      Switching to cash-dividend is not tax efficient for me. I will wait till the share-price rebounds (it usualy does after falling following a capital increase) and then start to sell. Hopefully I don't have to wait too long.

      Delete
    2. The best reason is can think about this capital increase operation is that Ana Botin pays institutionals to ensure her reelection. Perhaps even a retribution for her initial election,

      Ana Botin in this operation was even more generoous father christmas than through high dividend, but this concentrated on only some shareholders.

      Now the reason Alvarez gave for not using the money for an acquisition is non sense. Either Santander is still eyeing a big acquisition, ,either it is the consequence of a shaky BIS III load together with the suppression of the scrips

      Delete
    3. Hi Strike,

      You are right that I am probably overreacting.
      In case ECB pushed Santander to reach 10% now, there were no other possibilities.


      Delete
  2. Vincent,

    You are being totally unfair to YOURSELF.
    You have not been wrong with your past analysis of the "present and the future" for Banco Santander. That analysis by you was based on the numbers and conditions that were available THEN.

    The dividend cut and the capital increase (at discount), both announced yesterday, are game changers. It is important to note that the messages given until yesterday by Banco Santander management have always suggested that the capital structure was satisfactory and the dividend would be maintained.The stock price today, and the future outlook today are both based on the news (facts) this morning that the dividend has been cut and the capital has been increased, both abruptly, yesterday evening.

    You could not have known or predicted either one when the management was saying all was fine.

    I am hoping that the changes yesterday will be used to improve the bank, and not for a stupid acquisition that would waste the bank's resources.

    PLEASE KEEP THE BLOG ALIVE AND CONTINUE WITH YOUR ANALYSIS as long as you hold a meaningful amount invested in Banco Santander. We need your analysis and opinion more on "down days" like these than on "up days".

    Ciao.

    ReplyDelete
    Replies
    1. I also agree that this blog should continue, best source period of good data & predictions on SAN.

      The price will not stay this low for too long.

      Delete
    2. SAN is still my biggest long position.
      I haven't sold anything.
      Certainly not in the shock of the capital increase/dividend cut

      The rules of the game around SAN have basically changed.
      As investor: more capital increase gains, less dividends.
      But it is a solid bank, clean, geographical diversified, wonderfully organized, and a real information black hole now related to what will happen.

      SAN is to stay my biggest position for several (at least 5) years, and intend to keep blog as it is.

      Objectives of this blog are:
      - Collect/organize information (for own utilization)
      - Expose opinions in public and get criticisms
      - Utilize: Pubic statements force more own discipline.

      Delete
    3. To be clearer I still intend to sell SAN at 1% monthly rate.

      I prefer dividend on capital gain.

      SAN has positioned itself to go out of the beaten companies category, and 1% monthly rate is slow enough to get most of the capital gains.

      On the other side they are other crying high yielding beaten companies

      Delete
  3. I added just now, in a small amount, at 6.11 EUR.
    I will be adding at lower prices if they present themselves.

    Then, only after the dust (and the stock price) will have settled I will decide what to do with my investments in SAN.

    I will not sell because Jim and Jane are selling theirs in panic. I will only sell to invest in a more attractive stock, which is yet to be identified.

    ReplyDelete
  4. The situation has basically changed.
    Not than Santander is now a bad investment.
    At long term, it is a good investment.

    Capital increase has been forced by ECB which dismissed the progressive capital increases through scrips and own capital generation. 10% fully loaded asap.

    That organic capital generation is still significant for the coming years.
    But tax free dividends are gone.

    The way the capital increase occurred is a shame, in particular reserved to institutionals and with significant discount.

    In my opinion, there are no more interesting investment possibilities.
    Will progressively switch most of my money in SAN, only keeping a few 10k shares.
    Does not make sense to dump..

    ReplyDelete
    Replies
    1. Correcting:
      "In my opinion, there are no more interesting investment possibilities"
      to
      "In my opinion, there are more interesting investment possibilities"

      Delete
  5. It is a good LT investment.
    But management has set a precedent to give favors to institutionals.
    Private investors cannot trust current management to defend their interests.

    ReplyDelete
  6. By giving a favour to big investment banks SAN my get something back in form of a good aquisition. Thats how I would like to think about that.
    I also like that new managment is making a big push to modernise the bank. If we would compare SAN with SWEDBANK, I believe there are huge possbilities for improvement for SAN, which could unlock value for small shareholders as well as for big ones.
    I think of SAN as an sleepy giant, which when fully awake can move mountains.
    But I always like to think optimistic.

    ReplyDelete
    Replies
    1. Hi Raivis,

      However the CEO discarded utilization of that money for major new acquisition. I believe him but there it does not stop there:

      This 10% capital increase has on capital ratio the same effect as 5 €0.15 scrip dividends.
      The last 2 dividends (one under way, the last one in April) of FY 2014 will still be 0.15. Then for FY 2015 the cash out ratio will stay at 20%. That means that at same earnings during 2015 will have by 2 0.15 scrips and then 0.05. Around an additional 5bi extra capital.

      Additionally, the post I made in June 2014 about Santander's capital is still valid. And net recurring earnings in 2015 will be more than 8bi.

      So in 2015 alone, group will have own capital generation say around 7.5bi! and this not excluded to be utilized for acquisition.

      Intended use is organic growth, and in case all is utilized that way, that is a growth rate of 10%. Seems to much. I wonder where Ana will deploy. New strategy is a black box for me.

      Delete
  7. I am getting concerned that ECB will want even higher capital ratio in future, because US, Sweden and UK are harder on their banks and ECB will need to follow. That could explain why there wont be any big M&A. It seams also that regulators don't want banks getting too big. I even worry if SAN can get capital ratio un fast enough to satisfy ECB:(

    ReplyDelete
    Replies
    1. Capital ratios between jurisdictions are not comparable.
      How capital ratio is computed is always capital / RWA

      Capital is in the process to become comparable with BIS 3 implementation.

      But the denominator (RWA) is not

      (1) Rules to net assets against liabilities (http://www.bloomberg.com/news/articles/2013-02-20/u-s-banks-bigger-than-gdp-as-accounting-rift-masks-risk). For example in case European rules are applied to JPM, BAC, and WFC, their assets will be twice as big and capital half of the reported value.)

      (2) factor to apply to compute RWA from (included) assets. Even in Europe, the banks supervised by ECB are still applying the old local rules. (and uniformizing them would be positive for Santander, something between 50 and 90 bpp)

      The desire by US to require higher capital ratios is cinema.
      They just have relaxed the way to compute RWA
      http://www.zerohedge.com/news/2015-02-24/us-governments-new-rule-allows-banks-completely-make-sht.
      It is manipulation to give publicity to higher capital ratio requirements and at the same time relaxing RWA without publicity

      Delete
  8. many thanks for detailed explanation.

    ReplyDelete