Why is Santander considering a flotation of its operations in the UK? According to the spin in the weekend press, it is so that the Spanish bank can buy the 318-strong branch network that RBS is being forced to sell as a condition of the state aid it has received.
But can that really be the case? Surely, a bank as big as Santander could fund that from its internal resources?
The cynical view in the City is that Santander needs to book some more capital gains for deteriorating Spanish real estate loans. After all, wasn’t this why Santander spun off a chunk of its fast growing Brazilian operations?
Broker Matrix certainly thinks so:
This brings us back to our thoughts on the IPO of Santander’s Brazilian subsidiary – we wondered why on earth would the bank want to dilute the main growth story of the group? Role forward a few months, and with our cynical hat on, we can say that “Well, obviously so that they could book €2.5bn in capital gains to provisions for deteriorating Spanish loans and real estate!”. We see a similar story here. The premise for floating the UK business is ostensibly to raise funds to purchase the 318-strong branch network of RBS that has to be sold as a condition of it receiving state aid.
Again, we wonder if this is Santander’s true intention, and that the real reason is to book capital gains as quickly as possible to offset the large Spanish loan losses due in forthcoming quarters and, now added to that, to try and alleviate higher funding costs as Santander management watch the bank’s CDS spreads rise in tandem with the rise in Spanish CDS spreads. This a particular concern as Santander actually has 17% of its debt outstanding coming up for refinancing in 2010.
Indeed, Santander’s CDS has been rising, as the following two charts show:
As for the mooted £15bn valuation of Santander’s UK operations, analysts think it’s about right given that it makes £1.5bn of net profit.
Here’s Banc of America Merrill Lynch’s take:
The £15bn total valuation for Abbey is what we do have in our SOTP for Santander. Such valuation implies 9x 2010E earnings and 8x 2011 earnings, and would imply that Santander ex-Abbey would be trading at 6.5x 2010E earnings. The negative impact for the minorities at a Group level net of the reinvestments proceeds would be an estimated 3% but Santander would benefit its core Tier I by c.50bp (currently 8.6%).
Worth noting that Merrill is buying into the line that at Santander every operating unit must be autonomous, and has to be perceived by each market as a pure local player etc…
In our opinion the eventual listing fits perfectly well in Santander’ group strategy that every operating unit must be autonomous and has to be perceived by each market as a pure local player (see Chile, Brazil, Banesto). We do think this is the rationale behind and not capital needs as Santander closed 2009 with a core Tier I of 8.6% after a 55% payout and higher generic provisions than in the prior-year period.
In any event, the whole idea might be academic if new bank capital rules are as punitive as feared.
From Monday’s FT:
…the Spanish bank began discussing the possibility of a 2010 flotation of its UK business soon after the Brazil IPO, which raised $7bn in October, and was looking ahead to a possible flotation of its Sovereign Bancorp subsidiary in the US in 2011 or 2012.
New global capital rules for subsidiaries proposed by the Basel committee on banking supervision, however, are expected to make the IPO route financially less attractive than in the past and have damped the initial enthusiasm of Santander executives.
But the fact that Santander is even considering such a move suggests it sees much tougher times ahead, whatever the spin.
Related links:
Santander’s prudent provisioning, or not? – FT Alphaville
Santander’s deteriorating ratio – FT Alphaville