Santander Exposed By Barclays

Banks don’t usually slag each other off in public. They may make thinly veiled references to a competitor, but naming and shaming no way! Yet one of the major causes of the banking crisis which affected banks willingness to lend, was the fact that the interbank lending market froze up because the banks didn’t trust each other. Banks were afraid that their competitors had not made adequate provision for their bad debts and that they didn’t really have the capital they claimed.

Rohith Chandra-Rajan, a bank analyst at BarCap routinely comments on banking issues, but the timing of his note about Santander to coincide with the Santander results throws a spotlight on Santander while RBS, who have been marched up the hill and down again with the branch sale failure by Santander, have decided to keep quiet. They didn’t dispute that the failure to consummate the branch sale was said to be down to IT issues.

There were rumors that Santander’s IT system could not cope and that RBS was going to licence Santander it’s own system. Any criticism of the Santander IT system within Santander would be brave indeed because the software was developed by engineers working for Ana Botin’s IT company, before she started her meteoric rise through the ranks of her father’s bank. Today, of course, she is running Santander UK.

What Barclays have said is that Santander have been guilty of double counting.

This isn’t the first time that doubts about Santander counting ability have been held, but in the past the accounts have been too opaque and no one has dared question Botin senior about them. Barclays says that, in it’s reports to Bank of Spain, Santander is reporting 10% Tier 1 capital by counting capital it holds in subsidiary operations like the UK. Whilst that is not against the rules in Spain, regulators in the UK would take a dim view if Santander UK capital was used in a bailout for Spain. On it’s own Barclays say that the spanish operation only has 2% Tier 1 capital.

It’s hardly surprising that Santander dispute the Barclays analysis, but today Santander has reported a collapse in the profitability of not just it’s spanish business, where Q3 net income fell 94% to €100 million from the Q2 level, but in the UK net income is down 27% cumulatively this FY, down 14.4% in Brazil, and down 22.3% in Chile on the same basis. Botin managed to sell 24.9% of the Mexican business in an IPO last month for €3.2 billion, a feat he was unable to replicate in the UK.

The Mexican cash goes nowhere near repairing the €18 billion capital shortfall. Meanwhile because the bank has run out of money it can’t lend anything or buy anything significant. It has big payroll and overhead costs yet cannot drive new income because it’s staff are twiddling their thumbs, unable to be active in developing new business. This was Europe’s largest bank for a while and still is Spain’s largest. Getting a grip on it will be painful but essential.

Attached Images:
  •  License: Creative Commons image source

Carlo Rossi is a letting agent and finance graduate and blogs on finance and real estate for UK Business Property