2012 Year in Review: Banco Santander


It's hard to be a bank operating in the financial morass that is Europe these days. And it's even harder to be one headquartered in Spain, one of the more ruinous economies on the continent. Even though it's not nearly as badly managed as its home country's finances, Banco Santander is still guilty by association. Not surprisingly, its shares look like they'll end basically at where they started at the beginning of the year. But that doesn't mean all of 2012's happenings were unpleasant for the bank.

The sick man of Europe
Spain's finances started out 2012 being wretched, and only got worse. By December, the public budget deficit was almost certain to exceed the government's target of 6.3% of GDP, unemployment was over 26%, and the highly leveraged housing market remained in the graveyard.With no one to lend to and record levels of non-performing loans, banks were among the hardest-hit sectors in a hard-hit economy.

In May, the government imposed strict new provisioning requirements for the country's lenders that had borrowed to fund those now-empty houses and apartments -- in other words, basically every bank in the nation. As a result, Santander has so far set aside 9.5 billion euros ($12.5 billion) for rotten loans ... or over 40% of its total global net interest income from January to September.

Santander was in good enough shape financially and operationally, but a 9.5 billion euro charge blows a big hole in profitability. So the bottom line cratered: The company posted relatively weak net profits of 104 million euros ($137 million) and 99 million euros ($130 million), respectively, in the two quarters reporting after the provisioning requirement was announced.

Adventures abroad
The reason all of the above hasn't completely obliterated Santander is that while it's unmistakably headquartered in Iberia -- that's where its top managers sit, and where more than a quarter of its total assets are located -- it's a big player in markets abroad.

The bank's 2012 performance in countries outside of its native land, though, was mixed. The rest of Europe wasn't as wretched as the Spanish market has been for the bank, but it was nothing to brag about either.

Of all the company's markets, in terms of asset allocation, the U.K. is the biggest. It holds around 30% of global assets for Santander, a higher percentage than that of Spain. The U.K. matters for Santander, which is tough because the country is struggling economically. Total net customer loans in the country saw a nice increase, at nearly 14% year over year to 271 billion euros ($357 billion) in the first nine months of 2012.

These aren't filtering down, though; attributable profit grew by less than 2%, to 823 million euros ($1 billion).

Latin America has been a bright spot for the bank in recent years, although it got a bit dimmer this year. Attributable profit in the region for 2012's first three quarters dropped by 6% to EUR 3.3 billion ($4.3 billion). This was due to a rise in non-performing loans, and the formerly hot Brazil market was a prime culprit. NPLs in that country have advanced notably, from 5.5% of total loans in September 2010 to 6.8% two years later.

But not every Latin market was sluggish. Mexico was quite a success story, with attributable profit rising nearly 14% on an annual basis in January-September 2012, as opposed to double-digit slides in Brazil and Chile. That country unit was also the best of the three in terms of customer deposit growth (23%) and NPL ratio -- it recorded a year-on-year drop, to end up at less than 1.7% of total loans.

South American sales
So Santander was clever enough to float a big chunk of Grupo Financiero Santander Mexico in a dual listing in the division's native land and in the United States. Selling pieces of country units is a Santander specialty; in 2011 it released stakes of Banco Santander-Chile and before that (in 2009), it debuted Banco Santander Brasil on the stock market.

That last issue was huge; a double listing of around 15% of the company in total, it was the largest IPO in Brazil's history, and the biggest on the New York exchange that year. It raised a breathtaking $8 billion for the parent company.

$4.2 billion or so was the take from the flotation of nearly 25% of the Mexico unit -- which, interestingly, is close in percentage terms to the stake Santander sold Bank of America The shares, meanwhile, rose 6% the day they hit the market, and have kept climbing.

Unloved parent
Santander stock has its believers, many of whom like the company's powerful dividend, with a yield of nearly 8%, and the fact that the heavy loan provisioning is more or less finished (for the moment, anyway). But Spain's economy doesn't look like it'll improve drastically anytime soon.

Perhaps this is why the Mexican version of the bank has notably outperformed its parent since its IPO. It's up more than 20% since launch, compared to less than 3% for Santander papa, and the negative 6.5% of Banco Santander Brasil.

Still, it's not enough for a global financial player to show good performance and wow investors in one of its numerous markets. Outside of its Mexican operations, 2012 wasn't all that kind Santander. It probably won't be sad to see the year end.

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