About Santander: Capital

2015/03/04. 10Y bonds issue, part of tier II capital (ES)
€1.5bi (as usual), 2.61% (reuters) (presentation)
2014/12/20. Santander UK issues GBP300mi coco to Santander group in preparation to 2015 local stress tests (EN) (BIS III leverage ratio framework)
2014/11/24. Difficult situation in subordinate debt market (reuters)
2014/06/30. Separate post consolidating the situation.
2014/05/08. Up to $2.5bi additional CoCo to be issued (EN) (ES) and (ES)
Considered in the stress tests; part of Additional Tier I capital; in addition of the €1.5bi of MarchDemand already at $10bi, pricing today! (EN)
End of the day communicate: $1.5bi, 6.375% (EN)
Official notice here (EN)
Bond will be traded in Irish stock exchange
2014/02/26. Convertible bonds to be issued (EN)
€1.5bi contingent perpetual preferred securities convertible into newly issued ordinary shares (EN - March 5th)
€17bi as demand, 6.25% coupon (EN)
2013/12/16. Added section "RWA recent evolution" and "DTA in Brazil"
2013/12/09. Checking the regulation, updating figures, not complete. Should reread. Much less optimistic.
2013/12/05. Information from CFO Alvarez for analysts, on Monday 2012/12/02 (ES).Impact of new regulation on fully loaded BIS III: between 50 and 70bpp, meaning a tierI core capital between 8.5-8.7%
More information in DTA post. I will wait for more information to update below.
2013/11/28. I have corrected the DTA figures based on slide 14 in the presentation the CFO Alvarez did on 2013/06/12 (EN)

History of capital increases

Source: Santander site here: (EN)

Date	Share in bi	Increase in mi	Reason
2015/01/29	14.06	262.6	scrip
2015-01-08	13.8	1213.6	capital increase
2014-11-04	12.58	225.4	scrip
2014-10-31	12.36	370.9	Santander Brasil 13.65%
2014-07-30	11.99	210	scrip
2014-04-29	11.78	217	scrip
2014-02-07	11.56	227.6	scrip
2013-10-31	11.33	241.3	scrip
2013-08-01	11.09	282.5	scrip
2013-05-02	10.81	270.9	scrip
2013-01-30	10.54	217.5	scrip
2012-11-05	10.32	222.1	scrip
2012-10-09	10.1	200.3	securities conversion
2012-09-07	9.9	14.3	securities conversion
2012-08-08	9.88	37.8	securities conversion
2012-08-01	9.85	218.4	scrip
2012-07-06	9.63	193.1	securities conversion
2012-06-08	9.44	73.9	bonds conversion
2012-05-03	9.36	284	scrip
2012-02-01	9.08	167.8	scrip
2011-12-30	8.91	341.8	preferred conversion
2011-11-03	8.57	125.7	scrip
2010-11-03	8.33	88.7	scrip
2010-10-07	8.24	11.6	Shares conversion
2009-11-02	8.23	7.3	scrip
2009-10-13	8.16	0.3	Shares conversion
2009-01-30	8.16	161.5	New shares (Sovereign)
2008-12-03	7.99	1598.8	New shares (ABN Amro)
2008-10-10	6.4	141	New shares (Alliance & Leicester)
2004-11-12	6.25	1485.9	New shares (Abbey)

There are 4 distinct periods:

Up to Jan 2009, new shares were issued to finance new acquisitions
Feb 2009 to Oct 2011 were very quite
From Nov 2011 to 2013, we are at the hart of the Spanish crisis and the company scrambled to improve its capital structure and increase capital through dividend scripts.
Ana Botin period started in January 2015

What can be expected till end of 2014?

The most interesting information will come during next AGM (in March 2014?). The main input will the new DTA regulations, Q4 2013 figures, and advance data for Q1 2014.

Probably management will set how many more dividend scripts (own guess: 3-4 including the Jan 2014 script), and clarify about the utilization of the capital surplus. The amount is not clear (This a strong correction, was 25bi. Only 50-70bpp kept due to Nov2013 DTA regulations). Fully loaded 2019 figures are only an easy partial view. As Earnings are generated in Spain, some categories of DTA can be utilized.

Basis

A readable overview is here (EN). And here is the FAQ document from the EU commission (EN)
The Basel Committee issued the BIS III regulations in Dec 2010.
The CRR (Capital Requirements Regulation) and CRD IV are the BIS III implementation in the EU, published on 2013/06/27. Application starts in Jan 2014 and must be fully implemented in Dec 2019.
CRD IV minimum capital :
- at least 8% (Tier I and Tier II) of Risk Weighted Assets (RWA),
- at least 6% of Tier I capital [the 6% are a subset of the 8%].
- at least 4.5% of Common Equity Tier I capital (CET1) [the 4.5% are a subset of the 6%].
Additionally there are supplementary capital buffers
- Global Systemic institution risk buffer, mandatory for Santander, 1% additional
- Capital conservation buffer: 2.5% of CET1, to build in good periods.
- Counter cyclical capital buffer: 0-2.5%, to build in period of excessive credit
Q3 2013: Santander claims a 10.53% BISII core capital ratio as of Q3 2013, and “always above 9% of tier I core capital under BISIII till 2019”. (9.2% in CFO presentation)

DTA

The Deferred Tax Assets (that rely on company future earnings to be realized) are excluded from Tier I core capital in BISIII, gradually from 2014 to 2019, and when at 100% loaded in 2019, will lower Santander core capital by 170-190bpp (depending on full evaluation of Nov 2013 Spanish DTA regulations). This is a strong impact and is a Spanish specificity due to unfavorable DTA regulation in comparison to other EZ countries.
As 2014 target approaches, so comes the target date to align Spanish DTA handling. Decision was taken on 2013/11/29. Preliminary discussions between CFO and analysts lets expect the effect on Santander will be reduced from 240bpp to 170-190bpp. Not by accident, the end date to submit bids for NCG bank privatization has been extended to Dec 13th. NCG has €4.5bi of DTA and its books, and its privatization value will be greatly increased with new DTA rules.
170-190bpp is a lot. But this is fully loaded at 2019. Since then, Santander Spain will have net earnings, allowed to deduct the excluded DTA from the income tax.

DTA in Brazil

Santander in Brazil has around €4.0bi net DTA. (Total group net DTA end of 2012 = €16.9bi, of which €10.4bi in Spain and €4.0bi in Brazil).

In December 2013, the Basel Committee made an assessment of BIS III implementation in Brazil. The report is here (EN) and DTA situation is detailed at page 11.

Here is the relevant extract:

"Brazilian banks are required to make provisions for loan losses based on the initial credit standing of the borrower as soon as the loan is granted. During the lifetime of the loan, the level of provisions has to be adjusted if the credit standing of the borrower deteriorates. These provisions are not tax-deductible and will only be recognised for tax purposes once the borrower has actually defaulted on the loan. This means that Brazilian banks have a tendency to build up large amounts of deferred tax assets (DTAs). The Basel III framework requires banks to deduct DTAs from CET1 to the extent that those DTAs rely on the future profitability of the bank to be realised. However, Brazil’s Law 12,838, passed in July 2013, allows banks to convert DTAs relating to loan loss provisions into a tax credit when the bank reports a loss, is liquidated or becomes bankrupt. The team has compared this approach to the FAQ issued by the Basel Committee, and views the provision foreseen in Law 12,838 as essentially equivalent to the situation described in the related Basel Committee FAQ"

Conclusion: Law 12,838 passed in July 2013 allows Santander to keep the bulk of its Brazilian DTA in core capital. (I wrote bulk, because, could be DTA linked to other causes, not guaranteed by the state, and as such excluded from capital but should these DTA exist, they are probably a small amount - to check).

RWA regulation

The capital and what can be considered as tier I capital is the numerator for computing capital ratio. The denominator is RWA. Rules for computing RWA from the assets are regulated by each national regulator, and differ per EZ countries. However the EZ banking union will uniformize the rules. Four big Spanish banks, including Santander, asked to Oliver Wyman to make a comparative analysis between EZ countries plus UK about the subject. The result published in April 2013 can be found here Oliver Wyman report. The conclusion related to Santander is the following:
In case the ECB rules are aligned to the most conservative rules among existing EZ regulators, Santander core capital ratio will increase 0bpp-35bpp. In case the less conservative rules are imposed by ECB, the increase will be between 85bpp-145bpp. Both cases have low probability and let’s take the middle way to estimate the effect:
The ECB taking over the regulation of the main EZ banks will provide a level playing field and increase Santander core capital between 40bpp and 90bpp.

RWA recent evolution

Independently from the future 2014 RWA EU regulation, Santander has started a significant effort since Q2 2013 to lower its RWA. In the table below there are 2 lines from the balance sheet (assets side): "trading derivatives" and "customer loans". The RWA is also shown. Below each lines are the QoQ relative growth (or decrease) in percentage. All data come directly from Santander site and are in €mi.

	2013			2012				2011
	Q3	Q2	Q1	Q4	Q3	Q2	Q1	Q4
Trading derivatives	79669	91437	105391	110319	122472	112303	95495	102498
QoQ delta	-12.87%	-13.24%	0.76%	0.76%	9.05%	17.60%	-6.83%

Customer loans	664946	671984	696904	697384	716253	723364	719533	730296
QoQ delta	-1.05%	-3.58%	-0.07%	-2.63%	-0.98%	0.53%	-1.47%

Risk-weighted assets	502297	523272	568155	557030	562285	561525	570239	565958
QoQ RWA delta	-4.01%	-7.90%	2.00%	-0.93%	0.14%	-1.53%	0.76%

There are small variations QoQ (due to exchange differences, and other factors, like Poland or Colombia) up to Q1 2013. But the Q2 and Q3 2013 RWA evolution is very strong: -12% in 6 months. The main explication lies in customer loans. The totals are down but proportionally less than the RWA. The other part is a shift of the loan book to less risk. This is very active at least in Brazil, with as consequence lower Net Interest Margin, compensated by less capital needs and lower NPL. It will be interesting to check if the effort continues in Q4 2013.
The trading derivatives are also listed in the table. But there are corresponding trading derivatives on the liabilities. So not sure it has an impact.
Bloomberg has just this overview (EN) news about RWA evolution in EU and here is the original European Banking Authority information (EN). The 26 biggest EU (including UK) banks reduced RWA by €817bi since 2011. Santander alone reduced its RWA by €63bi or 7.7% of the total!
Finally I don't resist to write about the RWA forecasts that Jaime Becerril (the sioux-eyed analyst that covers (covered?) Santander for JPM) made in June 2013: €578bi (end of 2013), then €594bi (2014) and €611 (2015). 15% miss on the RWA (578 instead of 500) means 15% miss on capital ratio, and changes a capital surplus into a capital deficit.

In total

- Currently, without considering events out of control of the company (DTA and RWA computation regulations) Santander, including fully Basel III, has ?? bpp ((sorry for the ??, above my competences, hoping for information from the group, also the effective current requirements for 2 capital buffers are not clear) of Tier I capital surplus.
- The new DTA handling, decided this Nov 29^th could add between 50-70bpp to the capital surplus
- In 2014, RWA computation harmonization could add a further 100bpp
- Every 3 months, Santander makes a capital increase of around €1.5bi, mainly financed through retained earnings (the saldo is financed by conversion of reserves).

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