Banco Santader: Cast Fears Aside and Get Aggressive

Spain’s largest bank has been extremely active buying assets across Europe and in North and Central America over the last few weeks.  Banco Santander (STD) already has substantial exposure to both Continental Europe and Latin America, but it has voraciously closed deal after deal in an effort to further diversify itself.  Santander management has not been afraid to wheel and deal in the past and it has been a key reason for their growth to this point.  However, the onslaught of deal making amid concerns over all this European has been remarkable.

Just over two weeks ago Banco Santader bought out Bank of America’s (BAC) stake in Santander’s Mexican unit for $2.5 billion in cash.  With BofA’s 24.9% stake in the business in hand (a 56% return over 7 years for BAC), Banco Santander now has 100% ownership, and estimated that the purchase would raise earnings 1.3% in the first year after the acquisition, and one analysts claims it will add $375 million to earnings in 2012.  Furthermore, this was an important show of confidence in the Spanish bank that had been dragged down by lingering concerns over its country’s public finances.

Last week, we learned that Spanish banks Santader and Banco Bilbao (BBVA) were among the strongest in Europe according to EU stress testing.  Official results will not be released until mid-July but initial reports cast the Spanish banks the “winners”.  Earlier in the week, Santander was the sole bidder for assets in the UK owned by Royal Bank of Scotland for about 1.8GBP, expanding their presence in the UK.

Meanwhile, over the last few weeks there has been rampant speculation that Banco Santander will likely pursue an American bank, with talks centered on M&T Bank Corp (MTB) specifically.  The earlier proposed deal would have Santander buying the 22.5% stake in MTB that was put on the block by Allied Irish Banks (AIB), but STD wanted to have control over the new alliance.  Those talks broke down over the control issue, but Santander has tried to lure them back to the table.

Instead of slowing down from this breakneck pace, this week Santander appears to be hitting its stride.  On Tuesday reports claimed that STD was set to buy the German retail banking operations of Sweden’s SEB for about 500 million Euros ($671 million).  A deal is expected to be finalized within a month.

On Thursday, Santander announced two more deals: one large, one small.  The small deal was a $55.8 million tender offer to acquire the rest of their Puerto Rican subsidiary Santander BanCorp (SBP).  The larger deal was Santander Consumer USA will purchase $3.2 billion worth of auto loans from CitiFinancial Auto a Citigroup (C) property.  Banco Santander bought the loans at 99% of the value of gross receivables.  In addition, the two struck a deal to have Santander service a portfolio of about $7.2 billion in auto loans that will continue to be held by Citi.

Clearly, Banco Santander is taking a bullish outlook on global growth.  Their acquisitions, strategic as they may be, are spread throughout the world and cover a number of asset types.  Management is boldly acting on what it sees as an opportunity to pick up assets from cash strapped banks needing to bolster capital to meet regulatory requirements.  These deals have been coming in so fast and furious, it is difficult to forecast how they will collectively affect earnings going forward.  In general, we do like to see a strong player in the industry acting aggressively from its position of strength, but it is difficult to recall a more aggressive, condensed M&A warpath in recent memory.  At Ockham, we have a Fairly Valued or neutral rating on STD, and we would like to get more visibility into the earnings capacity of the expanding bank when the dust settles.

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