Santander is in a comfortable position.
Like HSBC, it is cushioned by a huge consumer banking business. Like HSBC, Santander has avoided painful writedowns on the back of forced deleveraging at the higher-ends of the structured finance foodchain. Like HSBC, Santander’s subprime hit has been taken right at the base.
For HSBC it was subprime mortgage lending in the US. For Santander, it will be the Spanish property bubble.
Like HSBC too, Santander is well diversified across the globe. Better than HSBC though, Santander is diversified in comfortable growth areas like South America, and unlike HSBC, less prone to damage from a potential China slump.
Santander’s results are good. Attributable profit rose 22 per cent in the first quarter of this year. There are signs of weakness, but relative even to commercial banking peers, nevermind IBs, the bank is in an enviously strong position.
And out of the ABN takeover too - which has so burdened RBS and Fortis - Santander has perhaps done best: scooping up European consumer businesses and South American asset management operations which fit well with the group’s modus operandi. The ABN operations, reports Santander, will be accretive right from the start.
Santander will, of course, suffer in the coming months. As the credit crisis spreads and develops into a more generalised economic slowdown, with consumers and corporates suffering, commercial banks will start to feel pain they have hitherto been spared. Only yesterday, Spain saw its largest ever corporate bankruptcy in Martinsa Fadesa. Santander has accordingly seen its loan-loss provisions increase nearly 70% since Q1 07. It will be a tough couple of years.
Santander though, is big. It is one of the best capitalised banks in Europe, with a BIS ratio of 12.15% and core capital of 6.10%. It has plenty of cash and powerfully strong liquidity position - with the discount capacity at the ECB as yet “unused”. Consider also its margins:
differential of 13.4 p.p. between the growth in gross operating income and in costs (11.7 p.p. without ABN).
In short, buying A&L was probably a very sensible move. A coup, even.
What it certainly wasn’t - pace the BBC last night - was a vote of confidence, or anything of the sort, in the UK banking sector. A&L will be shrunk, stripped down and slimlined - with tens of billions of assets sold off - so that Santander gets only the bits it wants. Aside from the cost-synergies, A&L will boost Santander’s share of the UK mortgage market to 13 per cent. It is, in other words, a way of augmenting Abbey.
Santander was too, of course, believed to be looking for opportunities in Germany - eyeing both Dresdner and Deutsche Postbank, according to chatter. A&L won’t stop that. Further acquisitions from Santander are very much on the cards.
Related links
Santander chief offers lessons in banking - FT
Expanding Santander - Market Movers
