Santander has its work cut out for it...
Banco Santander's move on Sovereign Bancorp in the U.S. looks almost as shrewd as its acquisitions of Alliance & Leicester and parts of Bradford & Bingley in the U.K.
The Spanish bank is forecasting returns on investment between 15% and 20% from the three-bank cut-price international asset grab by 2011. By paying for A&L and Sovereign in its own stock, it's gained roughly $137 billion in customer deposits from the three deals but at a cost of a mere $700 million of its own cash.
Impressive as that looks, making a judgment about M&A activity in the banking sector today is more about incremental risk and less about price.
Santander has paid not much more than 0.5 times tangible book value for Sovereign. But the Pennsylvania-based bank has a large concentration of commercial property, home equity, and auto-related loans on its books, equivalent to 5.6 times that tangible equity at Sept. 30. The quality of these loans is likely to deteriorate as U.S. economic growth slows in the months ahead. Santander has beefed up allowances for credit losses at Sovereign by 21% to over $1 billion.
Santander faces a funding gap in the U.K. with the A&L purchase, though B&B's 20 billion pounds in liabilities has narrowed it substantially. The Spanish bank has still injected one billion pounds of its own capital into its enlarged U.K. operations.
Santander has the headroom to do that without tapping its own shareholders or turning to government for help because it's emerged unscathed from the credit crunch, with no direct exposure to the U.S. subprime property sector.
But Santander is integrating these businesses in far less benign conditions than the ones it faced when it bought Abbey, its first major European purchase, in 2004. The U.S. may escape with only a mild recession, but Spain and the U.K. are facing severe economic slowdowns, with housing markets in a slump. The government-backed bailouts of banks in Europe and the U.S. leaves many of Santander's rivals better capitalized, at least on paper.
At the very least, Santander may have to pump more capital into the U.S. and U.K. where it has little room for error when it comes to absorbing the banks into its broader network.
