Santander: diversified thesis requires better proofs

Santander has always had an international outlook, as befits a great trading port. The same applies to the bank of that name. Subsidiaries in Portugal, Chile, Mexico and the US helped the lender raise its full-year return on tangible equity to almost 13 per cent.

Unfortunately for Santander’s executive chair Ana Patricia Botín, focus is in fashion rather than reach. Nor does the bank have a flawless record of achieving its targets. A more recent embarrassment was a messy dispute with would-be chief executive Andrea Orcel. This has triggered a settlement reportedly worth € 51mn to the banker, who now runs UniCredit.

Shares have serially underperformed the eurozone’s debilitated banking sector, falling 18 per cent over 10 years. Recent efforts to clear the air, including asset tidy-ups and share buybacks, have done little to close the gap. Though Santander is hitting its 12 per cent target for core equity tier one capital, which is well below key peers.

Comparison of total returns of Santander and the Euro Stoxx Banks index

Santander’s commitment to the US market looks increasingly contrarian as other European lenders beat a retreat. Santander has reinforced its position by buying out minority shareholders in its motor finance lending business Santander Consumer. Booming used-car sales helped push reported ROTE to 25 per cent in the US.

Santander plans to combine the unit with the rest of its US retail business. Critics say this will mask the underperformance in the latter, where fee revenues lag behind US peers.

The retail division of Banamex could create a further smokescreen. Citigroup plans to sell this at a mooted price of about $ 6.5bn. Santander, which bought in minorities of its own Mexican subsidiary last year, is a potential bidder. The takeover would cost Santander 140bp of capital, Berenberg thinks. An equity raise might be necessary.

That would go down badly with shareholders, who would prefer buybacks. A blunt rule applies to diversified businesses: they have to demonstrate that their components are worth more together than apart. It is a small mercy for Santander that European banks, as quasi-public utilities, are relatively safe from officers baying for break-ups.

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