Santander starts selling its Brazilian jewel

July 29, 2009
selling 25% of its Mexican subsidiary, Santander Serfin, to Bank of America. Now history is repeating itself, this time in Brazil.

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2002 was a bad year for Banco Santander: in the wake of economic crises in Argentina, Uruguay, and Brazil, the bank found itself with large Latin American losses and a desperate need for capital. So it ended up selling 25% of its Mexican subsidiary, Santander Serfin, to Bank of America. Now history is repeating itself, this time in Brazil.

Santander was the big winner in the acquisition of ABN Amro, largely because of Brazil. It’s now cashing in those winnings, saying that it intends to float 15% of its Brazilian subsidiary on the Brazilian stock exchange — but isn’t really making a profit on the deal. Santander paid $15.6 billion for ABN Amro’s Banco Real, which was roughly the same size as Santander’s own Banespa in Brazil. If the combination is now worth $30 billion, there hasn’t been much in the way of appreciation. Of course, in the world of emerging market banking, staying flat over the course of the past two years is no mean achievement.

By all accounts, Emilio Botin, Santander’s chairman, has been ruing the Mexico deal pretty much since the day the ink dried on the sale. It’s not just that he sold the stake cheap, it’s also that it’s always nice to have 100% control of your subsidiaries, especially when you have a pan-regional presence. Santander is by far the largest bank in Latin America, and many of its corporate clients have operations in more than one Latin country. When dealing with those clients, it’s a bureaucratic nightmare to have to attribute a certain percentage of all transactions to the Mexican subsidiary so that Bank of America can get its fair share of the profits. What’s more, there’s always a risk in Latin America of governments imposing high new taxes on their banks — and when that happens, the big multinationals love having the ability to book profits in some other country. Again, that ability is severely constrained when you have to share one country’s profits with outside investors.
The news out of Brazil, then, is odd, since it would seem to create all those problems all over again.

My colleague Alex Smith likes the deal — it “could raise $4.5 billion of scarce capital while giving Botin another currency for shopping in South America”, he says. But Santander already has a monopoly in Chile, has a dominant position in Argentina, Uruguay, Venezuela, and Brazil, and it has no real chance of gaining market share in Mexico, where the top two players are deeply entrenched. Might there be an Andean bank or two that Botin is interested in? Maybe, but nothing nearly as important as 15% of his hugely valuable Brazilian franchise.

One can only conclude that Santander needs this money to shore up its own capital base, and that, much like the Mexican sale, it’s being done more out of desperation than out of any kind of strategic vision. And if Santander — one of the world’s strongest banks — is desperate for capital, one can only imagine what kind of state our weaker banks are in.

Update: Santander spokesman Peter Greiff responds:

“Starts selling”? What makes you think Santander would continue?

Just to be clear, CEO Alfredo Sáenz yesterday said the bank is weighing floating up to 15% of the bank in Brazil through the issue of new shares, not existing ones. So it isn’t really “cashing in” anything. The capital would be used to strengthen the bank in Brazil, he said.

As for the accounting issues involving Mexico, I vaguely remembering you mentioning those once before and, frankly, have never heard them mentioned in-house. If there are questions about how to attribute revenue, they would be normal ones among subsidiaries, not complicated by the BofA stake in Mexico. Keep in mind that 22% of Chile is in free float and Puerto Rico is listed too, not to mention Banesto in Spain. The banks are organized as independent subsidiaries, with their own accounts, regulated and supervised locally. So a floatation wouldn’t necessarily add that much bureaucratic hassle.


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