Is This European Bank Ready to Crawl Out From Under the Financial Crisis?


It just isn't a good time to be a European bank, particularly one headquartered in the dreary economic mess that is Spain. The country's Banco Santander (NYS: SAN) has been pounded for this lately, posting 3Q results that represent a big plunge from year-ago figures. Santander is an active bank that has had success and seems to be well managed, but can it survive the near-intractable difficulties in its homeland?

Nobody home
Santander's quarter was ugly, no doubt about it. On a year-over-year basis, net profit got a big chop of around $1.7 billion euros ($2.2 billion), leaving a sliver of 100 million euros ($128 million) in 3Q. Without putting too fine a point on it, that was... eh... just a smidgen below the 1.23 billion euros ($1.6 billion) analysts had been expecting.

They might have been the only ones surprised by the news. The company's NYSE-traded American Depositary Receipts barely reacted, dropping only a few token cents after the results hit the market. It seems that those hardy souls who remain long on Spain are getting used to dives like Santander's.

Also, they're probably accustomed to Spain's banks getting squeezed by the nation's dead economy and its ever-increasing costs of borrowing. Both factors crunched Santander, as they have every other Spanish lender.

A particular burden this quarter was the steep increase in real estate loss provisions mandated for the nation's banks by the government. The domestic property boom long ago turned to bust, and there are scores of freshly built homes standing empty. The new regulations forced Santander to crank up its property-loss provisioning in 3Q, to the tune of 1.1 billion euros ($1.4 billion). No wonder its profitability was so heavily leeched.

And the draining isn't over. Santander put an optimistic spin on the situation, saying that (as of the end of the quarter) it had met 90% of the steep new provisioning requirements. That amounts to -- whew! -- a little over 5 billion euros ($6.4 billion), meaning that it's got something like 500 million euros ($640 million) left to go before the end of the year. So at the very least, 4Q net is going to take a nasty hit of half a billion euros.

The sunny side of the calle
That's the bad news. The good is that Santander as a group has still, crisis aside, managed to grow in some of its key metrics. All told, its loans and deposits have climbed over the past year. Okay, maybe "climbed" is a strong word to use here; those figures gained 3% and 4%, respectively.Still, they did grow, which is saying something for a lender fighting to stay afloat in the quicksand of its native economy.

What helps is Santander's relentless drive to diversify its business across as much of the globe as possible. These days, it takes in around half of its revenues and profits from Latin America. Even though it could be doing a better job of it -- profit in that part of the world dropped 1% on an annual basis in 3Q -- at least it's got a presence in a region that's growing and will need to borrow more capital.

Once the broader European market climbs out of the economic sludge and starts growing in a meaningful way, Santander should benefit from the uptick. Over the years, the bank has made a string of acquisitions on the continent, including a clever swap in 2008 with GE's (NYS: GE) financial arm to land a set of consumer lending assets in Germany, Finland, Austria, and the U.K.

The bank has, admirably, tried to plow ahead with acquisitions even with the Spanish crisis raging around it. Santander was set to buy a big, distressed asset from drowning U.K. rival Royal Bank of Scotland (NYS: RBS) , namely 300-plus of its branches for 1.65 billion pounds ($2.6 billion). Although the deal fell through, it's a positive sign that the company is keeping its eyes open for a bargain and for meaty chances to expand its network.

Getting over it
Santander's results aren't going to suddenly blast into the billions anytime soon. It still has to swim in the quicksand that is Spain these days, an economy that's dragging every domestic lender down with it -- witness BBVA's (NYS: BBVA) more than 80% year-over-year drop in net profit in its 3Q.

But sooner rather than later, those heavy provisioning requirements will lighten. After all, the government is well aware that the stranglehold on the country's lenders will have to be loosened somewhat. Also, new building activity is so light as to be anemic; there's little new housing stock on the market, and no one's in a buying mood anyway, so it doesn't look like the mortgage nightmare will get much uglier.

Besides, a new round of European financial aid is coming for the nation's banks. A recent audit found that Santander and BBVA didn't require extra capital, but at this point, any new money in the domestic banking system will benefit all concerned and help restore confidence in their ability to recover.

So life is painful for Santander at the moment, but at least it's muddling through. It's not easy to eke out even a token profit in the middle of such a situation. The bank continues to do so, which bodes well for its future, and its ability to survive the bad times.

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