FROM THE ECONOMIST INTELLIGENCE UNIT

Concerns about Spain’s
sovereign solvency overshadowed a strong set of fourth-quarter earnings
from Santander.
The resilience of the country’s largest bank in the face of major
headwinds is generating praise, but also scepticism.

If every rumour contains a grain of truth, what
should be made of murmurs about US and UK spin-offs
by Santander?

Defying the gloom cast over Spanish banks when
rival BBVA reported an unexpectedly
sharp decline in fourth-quarter profits, Santander met analysts’ estimates for
the quarter and the year. A 13% rise in net income in the fourth quarter
pushed Santander’s
full-year 2009 result, at €8.9bn, roughly equal to the previous year’s
result. By contrast, BBVA’s 2009 net profit, €4.2bn, slipped 16% from
the year before.

Much of Santander’s
resilience is down to astute dealmaking, namely the €1.5bn capital gain
it recorded by listing
a stake in its Brazilian subsidiary in October. Like other Spanish
lenders, Santander hiked
its bad-debt provisions and wrote down the value of foreclosed
properties over the course of 2009. In total, loan-loss provisions
jumped by 44% in 2009, not enough to keep pace with a 73% surge in
non-performing loans. Nonetheless, last year’s €2.5bn in extra
provisions, write-downs and the like were funded entirely by one-off
gains from the Brazil IPO, a debt exchange, the sale of a stake in
Moroccan lender Attijariwafa and sundry other transactions. The
acquisitions of Banco Real in Brazil (2007),
Bradford & Bingley and Alliance & Leicester in the UK (both 2008) and Sovereign Bank of the
US (2008) also
boosted Santander’s
bottom line by €1.5bn in 2009.

Saddled by sovereign risk

Perhaps because of its past success in dealmaking,
thinly-sourced rumours about possible listings of minority stakes in
Santander’s US and UK units
are generating debate among analysts and other market watchers. After
BBVA unexpectedly wiped out its fourth-quarter profits by reclassifying a
raft of loans as non-performing and sharply writing down the value of
acquired property assets, analysts expected something similar from Santander. But
instead of "coming clean" about the moribund state of the bank’s home
market—as the consensus believes was the motivation for BBVA’s
fourth-quarter actions—Santander reported a steady rise in profits and
expressed no extraordinary concern about a looming spike in loan losses.

Thus, the sceptics believe that, like the buffer
generated by the sale of its Brazilian unit, Santander should
release capital from its other foreign units to cover future losses in Spain.
Concerns about the fiscal state of countries in southern Europe have
reached "fever pitch", ratings agency Moody’s writes in a recent report,
with jittery investors marking down companies with any substantial
exposure to Spain, Portugal and (especially) Greece.
Despite its resilient results, Santander’s
perceived credit risk has surged in sympathy with Spain’s sovereign risk (see
chart).

Although Moody’s believes that Spain has been "unfairly compared with Greece",
which may need a bailout from other EU countries, the agency notes that
liquidity is "based on confidence and can therefore be
self-fulfilling". As long as concerns linger about the ability of
recession-wracked states to finance large budget deficits, doubts will
persist over Santander’s
ability to generate profits like those seen in recent quarters.

Exception to the rule?

The listing talk has been rebuffed by Santander’s
management, without much elaboration. Perhaps their best argument
against such a move is that the value to be realised from stakes in
British and American retail banks at this stage of the cycle can hardly
compete with what Santander achieved by
spinning off a large lender in Brazil, one of the world’s
fastest-growing banking markets.

Moreover, there are reasons to believe that Santander is not
in need of an urgent infusion of extra capital. Spain accounts for around a third of the
group’s earnings, roughly the same share as Brazil.
BBVA, by contrast, relies on Spain for around half of its
profits. Analysts at JPMorgan also note that Santander is more aggressive in
acquiring property than BBVA, with some €5bn in assets on its balance
sheet versus €1.4bn at BBVA. Provisioning requirements are higher for
"pure" non-performing loans than the impairments that lenders choose to
take on bank-owned assets, the analysts note. Even though JPMorgan
expects the value of properties on Santander’s books to fall by 45%, the
hit to the bank’s bottom line is manageable, especially if compared to
what the firm would face if it were exposed to the assets via loans.

Whatever the merits of these arguments, the reality is that Santander’s
shares have fallen nearly 15% year to date, versus a 10% slide for
European banks in aggregate. There is some solace in outperforming rival
BBVA, whose shares are down 20% to date, but for the foreseeable future
it seems that opinions about Santander’s prospects will be driven as
much by Spain’s fiscal account as the bank’s own balance sheet.

http://viewswire.eiu.com/index.asp?layout=ib3Article&article_id=35227388&pubtypeid=1132462498&country_id=1420000142&rf=0