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WIKI ANALYSIS
Banco Santander Central Hispano, S.A. (or Santander), Spain's largest bank with 834 billion (US$1.1 trillion) in assets as of December 31, 2006, is the result of the 1999 merger between Banco Santander, S.A. and Banco Central Hispanoamericano, S.A. This comprehensive financial services provider has operations in other European countries and Latin America as well. Its activities are divided into three broad segments Retail Banking (contributing 84% of commercial revenue in 2006), Global Wholesale Banking (11%), and Asset Management and Insurance (5%). Retail Banking covers three major geographic areas: Continental Europe, Latin America, and the United Kingdom. The bank's European retail activities, including traditional retail banking, mortgage lending, bill discounting, leasing, factoring, insurance brokerage, asset management, and automobile financing, are extended to customers based in Spain, Portugal, Germany, Italy, Belgium, Poland, and Norway. The bank has a significant presence in Latin America, with 12 million individual customers, more than 500,000 SMEs (small-medium enterprises) and 4,000 branches. These operations are conducted primarily in South-Southeast Brazil (where Santander has a 10% market share), Chile (23%), Mexico (17%), Puerto Rico (11%), and Venezuela (15%). Santander is scaling back operations in Bolivia, Uruguay, Colombia, and Peru.
The U.K. retail operations comprise Abbey National, which Santander acquired in November 2004. Abbey National is one of the largest banks in the U.K., having a #2 market share, 196 billion in assets, over 700 branches, and 17.8 million customers. Banco Santander believes that it can generate pretax synergies of 670 million from the Abbey National acquisition, 450 million of which would come from cost savings and 220 million from revenue synergies. Through its asset management/insurance arm, Santander manages roughly 167 billion in assets at the end of 2006. Through global wholesale banking, the company offers services to major clients in Spain, Europe, and New York and is focusing on value-added products, such as investment banking and treasury. Geographically, net operating income in 2006 divided: continental Europe 51% Latin America 36% and United Kingdom 13%. Banco Santander's long-term credit ratings are AA by S&P (upgraded from AA- in March 2007), Aa1 by Moody's (upgraded from Aa3 in April 2007 due to a change in rating methodology), and AA by Fitch (upgraded from AA- in May 2006).
The struggle for control of ABN AMRO (ABN) between Barclays PLC (Barclays) and the RBS consortium, including Royal Bank of Scotland PLC (RBS), Spain's Banco Santander Central Hispano S.A. (Santander), and the Dutch-Belgian bank Fortis, N.V. (Fortis), has concluded. On October 5, 2007, the RBS consortium announced it had acquired 86% of outstanding ABN shares, and on October 10, announced the offer was unconditional, with the settlement of offers to occur on October 17. Following this, ABN CEO Rijkman Groenink tendered his resignation, and Mark Fisher, a member of the RBS Group Board and Group Executive Management Committee, was nominated as his replacement. On October 1, 2007, ABN AMRO completed the $21 billion sale of LaSalle to Bank of America.
Upon completion of the allocation of the ABN AMRO businesses, expected to occur in the first half of 2008, Santander will own ABN's Latin American operations, basically Banco Real in Brazil (the fourth largest bank in Brazil with a 12% market share), and Banco Antoniana Popolare Veneta (Antonveneta, with a 2-3% market share) in Italy. Banco Antonveneta will be sold, in turn, to Monte dei Paschi di Siena for 9.0 billion. The Latin American assets are particularly attractive, as they will increase Santander's exposure to high-growth markets with which Santander is already familiar. Santander believes that integration of this business will produce revenue and costs synergies of roughly 800 million by the end of the third year. Santander expects that this acquisition will add to EPS by 1% in 2008, 3% in 2009, and 5% in 2010. Initially, the acquisition will reduce Santander's capital base due to the deduction of goodwill. However, Santander plans to raise its core capital ratio to at least 6% in a short period of time. In this regard, Santander sold 7 billion of convertible bonds in October 2007 that will be converted into Santander shares after the acquisition of ABN AMRO is completed. Banco Santander cancelled a previously planned 4.0 billion share capital increase due to the 9.0 billion sale of Antonveneta to Monte dei Paschi di Siena.
History of ABN Takeover Battle
In April 2007, ABN became the subject of a bidding war between Barclays PLC (Barclays), and a consortium of banks (the RBS consortium), which includes Royal Bank of Scotland PLC (RBS), Spain's Banco Santander Central Hispano SA (Santander), and Dutch-Belgian bank Fortis NV (Fortis). Under the terms of the original Barclays' offer, ABN AMRO shareholders would have received 3.225 shares in Barclays for each existing ABN AMRO share, or 28.75 (about US$40.50) per share. This came to a total value of roughly 53 billion (US$75 billion), and was concurrent with the sale of ABN AMRO North America Holding Company, which principally consists of the retail and commercial banking activities of LaSalle Bank Corporation (LaSalle), to Bank of America for US$21 billion in cash.
The RBS consortium originally said it would offer 30.40 cash plus 0.844 RBS share, or 36.85 (US$51.90) per share, with a total value of 68 billion (US$96 billion). While Fortis wanted ABN's operations in the Netherlands and Santander sought ABN's fast-growing Brazilian and Italian operations, RBS was interested in acquiring LaSalle, as well as the wholesale operations and international retail businesses of ABN AMRO.
In connection with the disposition of LaSalle, a lawsuit arose challenging ABN's deal with Bank of America. On May 3, 2006, the Dutch courts ruled that ABN AMRO would need to get shareholder approval to sell LaSalle. However, this ruling was appealed to the Dutch Supreme court, which issued an opinion on July 13, 2007, stating that ABN AMRO did not need shareholder approval to sell LaSalle to Bank of America.
Following this ruling, both Barclays and the RBS consortium increased their purchase offers for ABN AMRO. Barclays' new offer consisted of 2.13 Barclays' shares and 13.15 in cash for every ABN AMRO ordinary share, or roughly 32.15 (US$45.30) per share, with a total value of 60 billion (US$84 billion). The RBS consortium's new offer consisted of 0.296 RBS share plus 35.60 in cash or roughly 37.85 (US$53.30) per share, with a total value of 70 billion (US$99 billion). While the board of directors at ABN AMRO originally favored the Barclays' bid, the board dropped its support on July 30, 2007, though it did not endorse the RBS consortium bid either.
Other positives for Santander include steady market share gains in both Europe and Latin America, the acquisition of Abbey National in the attractive U.K. market, the strong retail banking environment in Spain, and a disciplined cost structure are the driving forces behind Santander's growth. In addition, the bank is strengthening its foothold in the highly profitable automobile finance market. This is evident from its purchase of several leading automobile finance companies Dallas, Texas-based Drive Financial, Poland-based Polskie Towarzyswo, the ELCON Finans AS unit from Norway-based DnB NOR ASA, and Abfin, the Dutch auto financing company. We believe these steps are in line with the bank's strategy of broadening its reach in the consumer finance segment. Moreover, recent acquisitions in asset and wealth management, including $149 million in Puerto Rican mutual funds from Legg Mason, Inc. and $3.5 billion in selected Latin American wealth management assets from Bank of America, are bolstering Santander's money management operations.
In addition, the bank is emphasizing highly profitable retail expansion in many Latin American countries, as demonstrated by its Plan America 2010, which expects the investment of US$2 billion over three years (2007-2009) in opening 1,000 branches, installing 5,000 ATMs, and expanding the bank's technological and operating capabilities. Furthermore, economic indicators in Latin America have been generally favorable, with this region growing at a solid pace, accompanied by generally benign inflation. This has led to strong loan growth (up 20% year over year in the first nine months of 2007, as well as full year 2006) and a related gain in net interest income.
The bank's asset quality continues strong as is evident from its low level of nonperforming assets, with the nonperforming loan ratio (nonperforming loans to total loans) at 0.89% at September 30, 2007, (up 6 basis points from a year ago) and reserve coverage of nonperformers decreasing to a still-solid 158% from 186%. In addition, Banco Santander has managed to improve its efficiency ratio, by reducing it to 46.9% from 48.1% in the year-ago period, largely due to strict cost control and strong revenue growth.
Finally, Santander continues to increase its annual dividend. For 2007, the interim dividend was raised to 0.12294 (US$0.18), providing an annual dividend at a 0.56873 (US$0.84) indicated rate. For 2006, Santander raised its dividend by 25% to 0.5206 (US$0.65) from 0.4165 (US$0.52).
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