Getting into the UK reworked Santander, however now the deal weighs heavy

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When Santander entered the UK in 2004 with the acquisition of former constructing society Abbey Nationwide, the transfer accomplished the group’s transformation from a family-run regional mortgage lender right into a multinational large.

On the time Europe’s largest cross-border banking deal, the acquisition marked the end result of a string of acquisitions beneath its swashbuckling “presidente” Emilio Botín, whose household have managed Banco Santander because the early 20th century.

At this time, nevertheless, the UK enterprise is trying more and more like an albatross round its Spanish proprietor’s neck.

The British financial institution acted as a profitable proving floor for Mr Botín’s daughter Ana earlier than she took over as group chairman in 2014 following her father’s demise. However after years of falling earnings, Santander UK this week drove its guardian firm to the primary loss in its 163-year historical past as the results of a €6bn goodwill writedown. That leaves a enterprise valued at €8.4bn in 2017 price about €1bn in goodwill now.

Ana Botín took over as group chair of Santander in 2014, following her father’s demise © Bloomberg

The group blamed the impression of coronavirus on the worldwide financial outlook, and different subsidiaries in Poland and the USA additionally suffered. Nevertheless, the extent of the UK writedown — price 85 per cent of its complete worth — renewed questions over the financial institution’s dedication to this market.

“I’m certain they’d have been resisting the writedown for a very long time,” mentioned former Santander UK chief monetary officer Stephen Jones. “[But] the optimism that underpinned that goodwill worth will need to have change into unsustainable.

“Retail banking is a really extremely regulated and aggressive market within the UK and the returns are in no way engaging. This doesn’t seem like bettering any time quickly.”

Santander executives dismissed solutions that the group’s technique was a mistake or that the UK enlargement had been poorly executed. They identified that Santander UK, which is run by chief govt Nathan Bostock, has paid €8bn in dividends to its guardian because the acquisition of Abbey Nationwide in 2004. 

Santander chief monetary officer Jose Garcia Cantera mentioned: “the share costs of UK banks have dropped considerably this yr and since we purchased the corporate . . . [but] in occasions of uncertainty I don’t suppose it’s an excellent reflection of worth. We consider our steadiness sheet may be very sturdy and has quite a lot of worth”.

Santander’s means to show around the fortunes of the UK enterprise shall be key to each Ms Botín’s legacy and to its hopes of attaining bold midterm targets that it has caught to regardless of the coronavirus disaster. Underlying group earnings climbed considerably beneath Ms Botín till the pandemic hit, however she has struggled to persuade public markets. Shares had been languishing effectively beneath their 2014 ranges even earlier than the beginning of this yr.

Ms Botín has shrugged off criticisms about particular person markets throughout her tenure, arguing that its diversified mannequin — it operates in 10 “core markets” and a complete of 20 international locations — offers stability. This defence has been weakened by the worldwide nature of the coronavirus pandemic.

Iacopo Dalu, a finance specialist at $337bn asset supervisor Janus Henderson, which has a small holding in Santander, mentioned: “There isn’t any diversification profit in a pandemic and when central banks comply with a ‘beggar thy neighbour’ strategy to charges and currencies . . . They want to consider extra radical strategic selections.”

Santander repeatedly pressured on Wednesday that the goodwill writedowns had no impression on its underlying enterprise, however the modifications had been greater than a technical accounting tweak. Even unexpectedly optimistic information on capital ranges — usually an obsession amongst Santander traders and analysts — was not sufficient to distract from the writedowns. Shares within the financial institution fell 5 per cent.

The writedown “says they count on fairly weak earnings within the UK sooner or later”, mentioned a senior govt at a rival UK financial institution.

Santander’s challenges within the UK usually are not distinctive, however the historical past of its empire constructing has made the present surroundings notably tough. To Abbey Nationwide it added two extra former constructing societies in 2008 — Alliance & Leicester and the stays of Bradford & Bingley. The acquisitions gave it a considerable presence within the mortgage sector however left it overexposed to a latest value battle available in the market.

Line chart of Share price (€) showing Santander slides on business writedowns

At this time three-quarters of Santander UK’s steadiness sheet is made up of mortgages. Revenue margins have tumbled as regulatory modifications left bigger rivals with billions of extra capital to deploy in Britain, driving intense competitors for brand new residence loans.

The identical components, nevertheless, imply Santander UK’s steadiness sheet may be very low threat. Within the Financial institution of England’s most up-to-date stress assessments, it had the strongest post-stress capital ratio. Of the 5 main British lenders to report second-quarter outcomes, solely Barclays and Santander recorded a revenue, as anticipated default charges on its mortgages remained low.

“Within the brief time period we’re going to be making much less cash, however that doesn’t imply in the long run it’s unattractive,” Mr Cantera added.

In the meantime Santander has made a collection of senior appointments to overtake its European enterprise. António Simões, HSBC’s former head of personal banking, will take part September with a mission of bringing its varied European companies — together with banks in Spain, Portugal, Poland and the UK — nearer collectively. 

“The UK in itself is a powerful piece of enterprise, however it additionally provides scale — and if you put this along with the remainder of Europe, we will do many extra issues,” Mr Cantera mentioned.

Later this yr, ex-Nationwide deputy chief Tony Prestedge will be part of as deputy chief govt of Santander UK. He’s seen as a possible successor to Mr Bostock.

Column chart of Profit after tax (€bn) showing Santander slumps on deteriorating economic outlook

Mr Simões will embark on an effectivity drive involving shared know-how and funding to assist particular person subsidiaries compete with native market leaders like Lloyds Financial institution. However it would additionally contain substantial cost-cutting, notably within the UK and Spain, which can result in department closures and job losses.

Regardless of the long-term optimism, nevertheless, even supporters of the financial institution’s technique acknowledge that some challenges will stay out of its management — notably a possible arduous Brexit. 

Davide Serra, founding father of London-based funding agency and Santander shareholder Algebris, mentioned Ms Botín had completed an excellent job of reworking “three subpar constructing societies” right into a strong UK retail financial institution. 

Nevertheless, he added: “If the federal government is true and Brexit delivers a affluent tradition, it would generate profits. If the federal government is improper and it turns into an financial nightmare with coronavirus on high, it would undergo . . . it’s tied to the UK’s destiny.”

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