SAN - Banco Santander

[PlanMaestro]

Spain's National Court said Tuesday that it has shelved an investigation into potential tax evasion against Banco Santander  Chairman Emilio Botín and members of his family without filing any charges.

 

The court had opened the probe into the finances of Mr. Botín and his family in June last year, after their names had appeared among leaked documents of thousands of clients from HSBC Holdings PLC's private bank in Switzerland. According to the court ruling, the Botíns correctly normalized their tax situation.

 

The Botíns' lawyers, Jesus Remon and Rafael Mateus de Ros of the Madrid law firm Uría Menéndez, said the dismissal confirms that the family "had voluntarily and completely regularized its tax obligations, which were and all are up to date."

 

When the probe was launched last year, the family said it had paid around €200 million ($356.4 million) in back taxes to Spanish tax authorities to normalize their situation.

[Shane]

So just to get back to Plan about his request for info from my meeting.  Unfortunately that is not something the analyst was allowed to comment on, so I wasn't able to get much information. 

[kmukul]

Dont know if people are still interested in std given the prices of banks in usa like bac etc. it seems ratings for spanish banks is cut but not for std..

http://www.microsofttranslator.com/bv.aspx?from=&to=en&a=http%3A%2F%2Fes.finance.yahoo.com%2Fnoticias%2Fs-p-rebaja-nota-bancos-191205605.html

[ERICOPOLY]

Observation:

Spanish subsidiary represents 15% of STD earnings.

 

Concern:

Spanish subsidiary may be forced to raise equity

 

Worst case:

They IPO shares in the Spanish subsidary, thus diluting their ownership of those 15% of earnings.  Potentially the dilution is so severe as to effectively write off 15% of STD's earnings.  STD escapes like a lizard that drops it's tail.

 

Am I understating the risk to STD shareholders that the Spanish subsidiary poses?

[PlanMaestro]

Observation:

Spanish subsidiary represents 15% of STD earnings.

 

Concern:

Spanish subsidiary may be forced to raise equity

 

Worst case:

They IPO shares in the Spanish subsidary, thus diluting their ownership of those 15% of earnings.  Potentially the dilution is so severe as to effectively write off 15% of STD's earnings.  STD escapes like a lizard that drops it's tail.

 

Am I understating the risk to STD shareholders that the Spanish subsidiary poses?

 

"I was thinking more along the second one, the Spanish government using Santander to navigate its own issues by pushing them to buy Spanish treasuries or distressed banks. Santander may be required to increase capital, but it has the capacity to increase it with its foreign assets. But the moment they are required to use their leverage, any action can jeopardize the whole group."

[ERICOPOLY]

Observation:

Spanish subsidiary represents 15% of STD earnings.

 

Concern:

Spanish subsidiary may be forced to raise equity

 

Worst case:

They IPO shares in the Spanish subsidary, thus diluting their ownership of those 15% of earnings.  Potentially the dilution is so severe as to effectively write off 15% of STD's earnings.  STD escapes like a lizard that drops it's tail.

 

Am I understating the risk to STD shareholders that the Spanish subsidiary poses?

 

"I was thinking more along the second one, the Spanish government using Santander to navigate its own issues by pushing them to buy Spanish treasuries or distressed banks. Santander may be required to increase capital, but it has the capacity to increase it with its foreign assets. But the moment they are required to use their leverage, any action can jeopardize the whole group."

 

Can the Spanish government force the non-Spanish subsidiaries to purchase Spanish debt?

 

I have been working off the assumption that the foreign subsidiaries are completely safe from Spanish influence.  This is why I suggested they could recapitalize the Spanish subsidiary via an IPO instead of using other assets -- why continue to throw their walled-off assets into the Spanish subsidiary if that's where all the risk of Spanish government coercion lies?

[PlanMaestro]

Can the Spanish government force the non-Spanish subsidiaries to purchase Spanish debt?

 

I have been working off the assumption that the foreign subsidiaries are completely safe from Spanish influence.  This is why I suggested they could recapitalize the Spanish subsidiary via an IPO instead of using other assets -- why continue to throw their walled-off assets into the Spanish subsidiary if that's where all the risk of Spanish government coercion lies?

 

The international subsidiaries and its stockholders should be fine. There are some concerns about how their treasuries are being managed but it seems Santander is keeping them isolated. Local regulators should ensure their safety.

 

The problem is that we would be investing in the Holding. Not only we could have an AIG but  in all countries there is a close relationship between banks, regulators and politics where is nearly impossible to establish firewalls. Look at the LTRO program, that is increasing the tight relationship between sovereigns and its banks. Even in the USA, you have FIRREA that establish cross collateralization of bank holdings and its subsidiaries.

 

But even in places w/o this clear cut regulation banks have been seen to be left holding the bag. And it does not have to be many Spanish bonds between the holdco and the Spanish sub ... $200B and it might be the end. For example, National Bank of Greece has a large operation in Turkey but still took a large hit in Greek bonds that has impaired its future and it has not been able to raise more capital at a reasonable price.

 

[PlanMaestro]

Barry Eichengreen on the European banks issues and the vicious cycle with sovereigns (good part is after 28 min mark)

 

http://2012.festivaleconomia.tv/home/-/asset_publisher/7lC7CJhn2l9u/media/id/151153?redirect=http%3A%2F%2F2012.festivaleconomia.tv%2Fhome%3Fp_p_id%3D101_INSTANCE_7lC7CJhn2l9u%26p_p_lifecycle%3D0%26p_p_state%3Dnormal%26p_p_mode%3Dview%26p_p_col_id%3Dcolumn-2%26p_p_col_pos%3D1%26p_p_col_count%3D2

[PlanMaestro]

http://www.reuters.com/article/2012/06/04/santander-turbulence-idUSL5E8H46P720120604

 

SUBSIDIARY MODEL

 

Although British depositors did pull out cash in May when fears about Spanish banks mounted due to a rapidly worsening situation at Bankia, this amounted to just 1 percent of customer deposits.

 

That was in part due to Santander's move last December to mitigate the perceived risk of being owned by a Spanish bank. The bank's British subsidiary decided to make any transfers out of Britain subject to the consent of the UK regulator, the Financial Services Authority (FSA).

 

"With the full cooperation of Santander UK, the FSA has in place arrangements which require the FSA to give permission to any transfer of funds out of the UK by Santander UK," an FSA spokesman said.

 

Santander Chairman Emilio Botin stressed in March at the bank's annual meeting that subsidiaries such as the UK unit were "autonomous in terms of capital and liquidity".

This structure has reassured some.

 

"You can't completely ignore the contagion from Spain and the headline risk, but Santander UK should be able to operate as a separate entity in a worst-case scenario," said Robert Montague, Senior Investment Analyst, European Credit Management, which manages $9.5 billion invested in European credit markets.

 

"In the case of Santander's business model, its subsidiaries are fairly independent in terms of funding, and its UK operations also report publicly on a standalone basis," Montague added.

 

That has not stopped some depositors, notably a handful of local councils, from withdrawing their cash. But such moves are illogical, says Ben Bennett, credit strategist at Legal & General Investment Management, one of the UK's biggest investors.

 

"It's not something that's specific to its balance sheet that is putting it under pressure; it's just purely an association with a Spanish parent company," said Bennett.

 

"When you start talking about the worst-case scenario, the whole argument is a systemic one. That's an added reason why it's illogical to target these banks in the UK which have exposure to Spain because actually ... you're probably questioning banks that have nothing to do with Spain," he added.

 

MEXICAN WAVE

 

There has been no sign of a depositor flight from Santander in Mexico, where the bank had customer deposits of 26.1 billion euros at the end of the first quarter.

 

The Mexican banking and securities commission said it was in continuous contact with Spain's central bank as well as with the head offices of banks that have units in Mexico and is confident Mexico's banking system insulates domestic subsidiaries from distress at their foreign parents.

 

"In Mexico we have worked for more than 15 years to create a regulatory framework for subsidiaries with clear rules on capitalization and limited exposure to their parent banks, which we believe is a strength of our banking system," a spokesman for the regulator said.

 

It is a similar tale in Brazil, where there has been no sign of any depositor flight. Santander has been overcapitalised in Brazil since it listed publicly there in 2009. In the first quarter, the Basel ratio of Santander Brasil was 24 percent, well above the average of 14-15 pct of its main competitors as well as the regulatory floor of 11 percent. As such, regulators are not concerned about Santander Brasil's capital position, despite occasional rumours that Santander is repatriating capital to Spain.

 

Local Santander executives have repeatedly denied this, and Santander Brasil CEO Marcial Portela recently said: "The only way to send money to headquarters is through dividends."

 

Brazil remains a bright spot for Santander, representing 25 percent of the group's overall profit, surpassing headquarters in Spain last year. The bank expects this number to rise to 30 percent in the next couple of years.

[PlanMaestro]

Stress Test Results: http://www.eba.europa.eu/capitalexercise/2011/2011-EU-Capital-Exercise.aspx

Santander: http://stress-test.eba.europa.eu/capitalexercise/bank/ES059.pdf

BBVA: http://stress-test.eba.europa.eu/capitalexercise/bank/ES060.pdf

 

BBVA Gross Sovereign Debt Exposure

Total: 63.5

Spain: 56.0

 

Santander Gross Sovereign Debt Exposure

Total: 72.3

Spain: 47.9

[PlanMaestro]

Very good article about BBVA, comparing it against Santander and other banks:

 

http://seekingalpha.com/article/642071-spain-s-economic-turmoil-camouflages-bank-s-true-potential

[txlaw]

Plan, do you have any inkling why Banco Santander Brasil has been selling down?  Are there issues other than possible fire selling by SAN in order to raise capital?

 

I'm thinking about starting to look into this subsidiary of SAN.

[PlanMaestro]

Plan, do you have any inkling why Banco Santander Brasil has been selling down?  Are there issues other than possible fire selling by SAN in order to raise capital?

 

I'm thinking about starting to look into this subsidiary of SAN.

 

It is a good bank, profitable (14-15% ROAE) with a large capital cushion.

 

When I run the numbers I am getting a different P/B than US services (1.1 vs 0.8 ), maybe they are not adjusting for the exchange rate variations. The Brazilian real has depreciated a lot the last few weeks (25%). The reasons are several: Brazil was too hot with an overvalued currency, risk aversion, China, YPF, ... So I do not think the ADR weakness has anything to do with the bank (Bradesco and Itau have been weak too)

 

In normal times I would be a buyer, but the American banks are so cheap.

 

http://www.oanda.com/currency/historical-rates/

[JRH]

Short thesis on Banco Santander (among other stocks) from Jim Chanos:

 

http://www.marketfolly.com/2012/06/jim-chanos-presentation-on-global-value.html

 

Interesting points.  I personally feel it is a roll of the dice.  Probably achieves an attractive return from here, ASSUMING a decent outcome to various current global issues.

 

No position, I'd rather own BAC.

[PlanMaestro]

Once again I have this feeling that Chanos is superficial. It reads as throwing darts in the dark with the small chance that a few might be bullseye with the fame that comes with it. Despite so many public kill marks that might be one of reasons for the mediocre returns of his fund (the other is that shorting is tough).

 

So many non-issues about Santander (TBV, Brazil, RE Spain, ...) and does not mention what must be the main and only worry (pressures to increase Spanish sovereign position). Did he read Santander Brazil balance sheet ... most probably not. The funny part is that he might get lucky for the wrong reasons.

 

Thanks for posting. And yes, BAC and C seem like a better risk/reward proposition.

[JRH]

Getting lucky for the wrong reasons would just be equivalent to his goal as you stated it - people will forget 100 mediocre or failed ideas to remember a bulls-eye of that caliber.

 

I can see an unlikely but nonzero chance that Spain - through political/populist constraints or sheer incompetence - pummels itself (or lets itself be pummeled) into absolute economic disaster, a la Greece.  It's enough for me to avoid the name.  Anyway, any short thesis on a stock I've researched as a long candidate catches my attention.

[Eric50]

FWIW below is a copy of a Banco Santander slide from a recent Chanos presentation.

 

The “value” story

- Trading at P/TBV of 0.9x, P/E of 8.2x

- Attractive exposure to Brazil

Significant real estate exposure in Spain

- Equates to 166% of TBV as of 1Q12

- 33% of commercial real estate loans are classified as NPLs

- Residential mortgage NPLs at 2.6% of portfolio

 

Brazil exposure a headwind, not a panacea

- Increased lending as NPLs rise

- Provisions not keeping pace

 

Capital remains an issue

- Core Tier 1 capital ratio of 10% doesn’t reflect leverage of 27x TBV

- Listed local bank structure traps capital

 

[PlanMaestro]

From a Seeking Alpha comment, interesting story of Santander Mexico:

 

* 2003: Santander sold 24.9% of Santander Mexico to BAC for $1.6 billion.

* 2010: BAC sold 24.9% of Santander Mexico to Santander for $2.5 billion.

* 2012: with the 24.9% Santander Mexico IPO, Santander is expecting $4.0 billion.

 

 

 

[FrankArabia]

I have been long in SAN since May 2010 (9.00, 8.50, 6.25 - entry prices).

 

I think Chanos is wrong. Firstly, lots of the "leverage" he supposes is due to Goodwill which can't bankrupt a company and is reflected in their core capital.

 

Having a local  listing doesn't "trap" capital, as capital is not suppose to move beyond borders in any case if the subsidiary is truly independent. Having local listing is actually a plus as each subsidiary is valued on its own merit and has access to capital independent of the parent (this is helping).

 

To me, this is one of the world's top bank trading as if it is a mediocre bank like bank of america or citigroup.

 

People against this company usually don't see pass their exposure to Spain (30% of portfolio) and doesn't recognize that by the time the bridge burns near SAN, other competitors would have been bailed out already (as has happened). People short this bank to short Spain.

 

Returns wise, i have been dead wrong as I'm still down on my overall position.

[berkshiremystery]

I have been long in SAN since May 2010 (9.00, 8.50, 6.25 - entry prices).

 

I think Chanos is wrong. Firstly, lots of the "leverage" he supposes is due to Goodwill which can't bankrupt a company and is reflected in their core capital.

 

Having a local  listing doesn't "trap" capital, as capital is not suppose to move beyond borders in any case if the subsidiary is truly independent. Having local listing is actually a plus as each subsidiary is valued on its own merit and has access to capital independent of the parent (this is helping).

 

To me, this is one of the world's top bank trading as if it is a mediocre bank like bank of america or citigroup.

 

People against this company usually don't see pass their exposure to Spain (30% of portfolio) and doesn't recognize that by the time the bridge burns near SAN, other competitors would have been bailed out already (as has happened). People short this bank to short Spain.

 

Returns wise, i have been dead wrong as I'm still down on my overall position.

 

Nope,... you aren't wrong, this bank is one of the few European banks that I would consider myself to have a closer look next to Bank of Ireland,... and your 3rd purchase at 6.25 (way below BV) seemed as some good entry point. Only, I still believe that in the U.S. -- banks are still cheaper (specially BV wise) and better positioned. Anyway, any bank shareholder which thinks he/she currently has found some good value should sit calm and watch his fruits grow. Be patient. Cheers!

[FrankArabia]

I would have bought at $5 but its above my position limits (this is >10% of my portfolio) by that time. I learned my lesson of not blowing your load too early. When I initially bought at $9, the thing went up a few bucks ($12+), then when it came to $8.5 i thought "wow, what a deal". that cost me.

 

I agree with you on the US banks. I got in on JPM at $34.50+ a few months back. the trading scandal being blown wide open right now is the best time as I think things like this make the company better due to self reassessment. JPM is an average to above average bank selling at crappy company prices.

[FrankArabia]

SAN seems to get no love from any "value" guys out there.....I don't notice any gurus with positions in this stock. Any thoughts on why?

[PlanMaestro]

SAN seems to get no love from any "value" guys out there.....I don't notice any gurus with positions in this stock. Any thoughts on why?

 

Check how banks have historically performed in countries with balance of payments crisis with sudden devaluations.

[FrankArabia]

they go to zero if Spain defaults or leaves the Euro......but that is likely going to unravel the rest of the banking system in Europe as well....

[PlanMaestro]

they go to zero if Spain defaults or leaves the Euro......but that is likely going to unravel the rest of the banking system in Europe as well....

 

The other large European countries have options. For example, a good case study is what happened with Citibank, Chase Manhattan, and Bank of America, during the Latin American crisis of 1982.