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Best Regional Strategy: Santander

Nov 1, 2012

Much talk has been made of European, and particularly Spanish, banks' troubles in recent years. But the effects of the European crisis have yet to have any major impact on their Latin assets.

For international banks such as BBVA and Santander, these regional operations represent their crown jewels. The name of the game has been monetizing assets without pulling out of the region completely.

Santander found itself needing to address a €6.47 billion ($10.08 billion) capital shortfall to meet new requirements imposed by European regulators last year. Its profits were sagging as well, falling from €8.18 billion in 2010 to €5.35 billion in 2011. Profits at the Latin American units have held up well, declining only from €4.73 billion to €4.66 billion.

Santander has raised a large chunk of capital through the sale of parts of its best operating assets in the region. The strategy is still underway, and, when complete, should have resulted in the IPOs of all of its units in the region that have not yet gone public.

In December 2011, the bank raised $949 million by floating an additional 7.8% of its Chilean bank. The sale drew more than $1.95 billion in orders, and was buoyed by a decision to extend the lock-up period for the shares to one year. About 70% of the buyers were international, up from the one-third foreign participation often seen in Chilean equity deals. The bank, considered one of Chile's two strongest along with Banco de Chile, has a 33% free float.

On the same day of the flotation, Santander made perhaps a bolder move, exiting completely from Colombia.

The Spanish bank was unlikely to do anything in the Colombian market, with its unit there holding $4 billion in total assets, and representing a 2.7% market share in loans and 4.7% in deposits. Financial assets in Colombia have been going for pricey multiples in the past year, so Santander was able to raise $1.23 billion by selling the bank to Chile's Corpbanca - itself a growing regional player through Andean acquisitions.

These transactions were followed this year by the much anticipated IPO of its Mexican unit, perhaps the most highly regarded of its Latin operations in an economy that has become an investor favorite. The $4.1 billion sale represents Mexico's largest-ever IPO and analysts expect it to prove a boost for equity activity in the country.

With investors putting in for more than three times demand, the issuer could have priced at the top of the range, but left some breathing room and came at the midpoint. The sale represents a 25% float, valued the bank at $17 billion, and stands out in what has been a poor year for ECM. The shares have gained more than 20% since the IPO as of late October.

The asset sales should continue. An IPO for Santander Rio, the largest bank in Argentina, is reportedly also on the card. Santander has a shelf allowing it to sell an additional 8.2% of its Brazilian unit, which could bring in about $2 billion. Struggles in the Brazilian new issuance market may have compelled the bank to wait.

The outlook for Europe remains uncertain, but Santander has managed to boost its capital while still retaining a dominant hold on its successful operations. BBVA, already putting pension businesses up for sale, is expected to follow suit with a flotation of its Latin American business. LF



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“The crisis has been a setback for reserve diversification."

Jan Dehn, Ashmore Investment Management