The Eurozone's largest bank, Banco Santander, S.A. (NYSE ADR: STD) of Spain, showed the European debt crisis has not hurt its prospects by announcing today (Wednesday) it would buy Bank of America Corp.'s (NYSE: BAC) stake in its Mexico unit. The $2.5 billion purchase increases Santander's exposure to the high growth opportunities of Mexico's banking sector.
Despite Eurozone debt concerns and rocky markets, Santander's move to expand into Mexico shows a healthy balance sheet that has stood strong against the debt problems plaguing other European banks. Santander has managed to keep solid footing among Spain's unstable banking sector, where the nation's debt has hurt financing conditions and smaller unlisted savings banks have been suffering losses on property and housing loans.
"Santander is showing that it can still make decisions and go on with its business plan despite the liquidity problems in the markets," Venture Finanzas analyst Ignacio Mendez told Reuters.
The all-cash deal gives Santander Bank of America's 24.9% piece of Santander Mexico, giving it almost 100% ownership of the unit. The deal will increase earnings per share by 1.3% in the first quarter and provide a 15% return on capital from the third year.
Many analysts, including Goldman Sachs Group, Inc. (NYSE: GS), list the bank with a "buy" rating, citing its wide gross operating margins and capital buffers. The deal will take 31 basis points off Santander's core capital, which was a strong 8.8% in March. The capital amount lost can be made up from one-quarter's profit, according to analysts.
"If they have the wherewithal at Santander to make this kind of move, it does show some kind of confidence that they are not in the kind of difficulty that the price of their shares implies at the moment," Kevin Lilley, a fund manager at Royal London Asset Management, told Bloomberg.
Santander's shares have fallen almost 40% this year, but analysts support the move to the "underbanked" markets of Latin America. The bank's shares in the Spanish market closed up 3.86% Wednesday and 0.45% in the U.S. market.
"This is a good move for Santander, although not a surprise. Buying out Bank of America's stake in Santander Mexico was probably the only way it could significantly expand in the country," a leading Spanish bank analyst – requesting anonymity – told Reuters. "It is now well positioned to take advantage of expected opportunities in credit growth and pension and investment funds expansion."
Santander Mexico is the country's third largest bank with 15% of deposits and 13% of loans. Mexico's economy is slated to grow 4.1% this year based on an exports increase, and will now constitute 7% of Santander's earnings, up from 5%.
"This acquisition reinforces Santander's commitment to Mexico, a country with a very positive outlook for growth, and furthers the geographic diversification of our group," Emilio Botín, Santander's chairman, said in a statement. Botín is known for deal making and has executed well-timed previous deals with Brazil, Italy and Britain.
Mexico isn't the only market Santander has been eyeing. It's entering exclusive talks to buy branches from Royal Bank of Scotland Group Plc (NYSE ADR: RBS) to boost its profile in Britain, negotiating to buy Skandinaviska Enskilda Banken's branches in Germany, and looking to grow its U.S. bank Sovereign.
Santander's Brazil business increased its first-quarter profit by 38%; Mexico was up 32% and Chile 15%. Developing foreign business has been a strongpoint of the company and is a much-needed boost now as Spain presents an unreliable home market.
Bank of America's shares fell 32 cents, or 2.09%, in trading today to close at $15.01. The bank bought its Santander Mexico stake in 2003 for $1.6 billion when Santander unloaded $7 billion in assets after its first profit decline in 15 years. Now BofA wants to preserve capital after the industry's billion-dollar government bailouts. The bank announced last month it would sell its stake in Brazil's Itau Unibanco Holding SA (NYSE ADR: ITUB) for up to $4.4 billion in an effort to boost reserves.
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