Is Santander's Desire for Capital Unwise, or Just Ominous?

With the European debt crisis looming large and the likelihood of Greece defaulting growing by the day, the European Union in its recent summit asked banks across Europe to raise their core capital ratio to a minimum of 9% by June this year in order to safeguard themselves.

Spanish stalwart Banco Santander (NYS: STD) has reached the 9% mark six months ahead of schedule, and it now wants to go a step further and raise its ratio to 10% by June. But I wonder whether shoring up its capital by selling off assets around the world, especially in Latin America, is such a good move.

On cloud nine
After the latest round of stress tests performed by the European Banking Authority on European banks, Santander was asked to raise $19.1 billion. The bank sold stakes in its Latin American businesses and raked in the moola: A 7.8% stake sale in its Chilean business and a 4.4% stake sale in its Brazilian business helped the Madrid-based bank raise nearly $6.2 billion. It also went ahead and sold its stake in the U.S. consumer and auto finance business and became richer by $1 billion. These moves, in part, helped the Spanish giant reach the 9% mark.

At what cost?
In the first nine months of last year, Santander earned 10% of its profits from Spain, 25% from Brazil, and 6% from Chile. At the same time, it held 26% of its total assets in Spain, 13% in Brazil, and 3% in Chile. So, we can see that the Latin American business does provide good returns. But it has shed parts of its businesses in these countries since then, thus making it more dependent on Europe.

Its next target is reaching the 10% mark, but given the uncertain situation back home, will it be wise to sell off its more profitable assets around the globe? And if it's the right move, the fact that the bank feels to need to sell off these profitable assets is itself a bad sign for its outlook on Spain.

Spain spells pain
With Europe being encapsulated by a crisis, a major problem for Santander and its peers is the weak economic situation coupled with high unemployment, which further increases the risk factor on loans. Spain's high level of unemployment has contributed to the high rate of bad loans, which stood at 7.2% as of August last year. Santander said its bad loans to total lending ratio is likely to go up to 5.8% in the latter half of 2012 from 5.15% in September 2011. With 30% of Santander's overall customer loans held in Spain, things don't look too promising. The signs of Europe triumphing over the crisis in 2012 are not encouraging, either. Given the scenario back home, the bank would be better placed if it was to decrease exposure to the European market, rather than shrinking business elsewhere.

European banks have had a tough 2011, but will 2012 be tougher? We'll have to wait and watch. Stay up to date on Santander by simply clicking here and adding the stock to your own personalized Watchlist.

Fool contributor Shubh Datta doesn't own any shares in the companies listed above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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