Santander starts selling its Brazilian jewel

By Felix Salmon
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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that is an interesting point of view and comment.
I always see business in a Yin and Yang metaphor .
Is banco santander strong ? yes, no shadow of a doubt. But why ?

Well, one reason is Spain. Bear in mind that BS and BBVA nearly have a duopoly in Spain. They are capable of charging fees for almost anything, from a 5 Euros monthly to keep your money to anything else.
yes they have some real estate troubles, but why panic when the fees your charges keep growing andkind of balance the losses in other parts of the business.

That, my friend is smart strategy . But Botin and Co did well so far.


Posted by chris | Report as abusive

Keep in mind that Santander sold Banco de Venezuela to the Venezuelan Government almost a month ago for little more than USD 1bn, also allowing the bank to claim unpaid dividends around USD 304 MM (see ws/idESMAE5620W120090703?rpc=444).

Granted, this money was supposed (as per Santander) to pay Sovereign Bancorp, but this points to two things: (i) isn’t it a better use of the money from Banvenez to shore up capital for Santander, instead of buying a questionable asset?; and (ii) why buy a giant headache, such as Sovereign, with money from Brazil’s Santander assets?

Posted by Lgg | Report as abusive

The prospectus published by Santander when they diluted carried the specific warning that the financial results from the purchase of ABN-Amro assets in Brazil might not be as good as previously thought at the time of purchase. No surprise if they need capital. But probably a good moment to be going to the market.

SAN/BTO and BBVA, btw, form nowhere near a duopoly in Spanish banking. They are dominant in the 50% of the national business that is not transacted through the cajas de ahorros. Santander, however, is particularly expert at various retail strategies that approach bait-and-switch.

Santander is not a strong bank. It is a bank that refuses to recognize losses, even as unemployment in Spain passes 20% and real estate prices plummet.

Posted by Matthew Greenfield | Report as abusive