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Santander may ease Spain impact with Banesto rejig

Source: Reuters - Fri 19th Nov 2010

Spain's Banco Santander could use the exit of the chairman of majority-owned Banesto as a catalyst to combine its domestic retail networks.

If Spain's biggest bank scrunches the two networks together, it could then sell part of the merged entity on public markets to raise capital, as it has done in other countries.

"The idea of putting Spain under one roof and increasing (the) free float at a new merged Banesto reduces the weight of its home market on Santander's balance sheet," one investment banker told Reuters.

Chairman Emilio Botin has stressed the importance of having two brands in Spain. But the promotion of his daughter Ana to lead Santander's UK unit gives him the perfect opportunity to review the way the bank's Spanish businesses are run.

"We believe that one of the main reasons why Banesto has not been bought out by Santander up to now is because of the visibility Ana Patricia Botin's good management provided," brokerage Mirabaud said in a research note. Santander could list 25-30 percent of the combined entity, in a structure similar to the one it has in Brazil and plans to implement in Britain next year. Banesto - which is valued at 4.75 billion euros - has a free float of about 12 percent.

Such a listing would provide a timely capital boost for Santander, as investors seek more clarity on its capital needs. Combining the two would also provide an opportunity to cut costs.

Banesto has weathered the impact of Spain's recession better than most of its mid-sized Spanish peers due to strict control of bad loans and a cautious provisioning policy. But costs are now key given a weak revenue outlook for Spanish banks, higher funding costs, a deposit war and ongoing loan loss provisions.

"Folding its retail network into Banesto would also allow Santander to extract costs and, theoretically, it could merge the retail business in Spain under the Banesto brand name," the investment banker said.

Santander warned last month that 2010 earnings will fall short of expectations, and stagnant net income over the past five quarters has reflected increasing problems in its home market.

Santander and Banesto have a combined 10.4 percent market share in domestic lending, compared with about 11 percent at closest rival BBVA. Banesto's brand strength is in loans to small and medium-sized businesses and retail financing.

Santander's retail bank network, including Banesto, accounts for 23 percent of group net profit, less than the 25 percent contribution from Britain, and 34 percent from Brazil.


Santander may instead buy out Banesto's minorities. That would enable it to lead consolidation among Spanish banks.

After a wave of government-driven mergers amongst the country's ailing savings banks before the summer, another round is on the cards, this time involving the listed retail banks.

"With the management changes at Banesto, Santander now has the perfect opportunity to buy out the remaining shares in the bank and participate in sector restructuring but on its own doorstep," Renta 4 bank analyst Nuria Alvarez said.

But while providing an opportunity to cut costs, a full buyout would be almost neutral for Santander's capital base.

"Delisting the bank would free up a very small amount of capital, but there is no significant incentive for buybacks under the new Basel III regulations," Banco Sabadell analysts said in a research note.

Santander insists that no capital increase is due. But just before the summer, Santander went on another buying spree, spending around 8 billion euros in Britain and Poland.

Some of any capital shortfall should be addressed by the IPO of its UK bank in 2011. But some, including analysts at JP Morgan, say the management change could put the brakes on this plan as investors get used to the new team.

That would, in turn, increase the likelihood of Santander raising capital closer to home.

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