Santander's risky business
News Article Date: Thursday 05th of February 2009
The bank posts a strong profit but its big stakes in the British and Spanish mortgage markets may come back to bite.
Banco Santander S.A.
Spain's Banco Santander might have made a successful push into the British mortgage market, but this could prove a risky strategy for the bank whose annual results showed a sharp increase in loan loss charges on Thursday.
Shares of the Spanish bank fell 2.0%, or 12 euro cents (15 cents), to 6.03 euros ($7.73) in Madrid as it announced that loans in arrears as a percentage of its total lending climbed to 2.04% at the end of December, from 0.95% a year ago, revealing that the economic downturn in Spain and Britain was hitting Santander hard. In Spain, the rate of bad loans rose to 2.58%, costing the bank 3.6 billion euros ($4.6 billlion).
The scale of loan losses for Santander (nyse: STD - news - people ) are crucial, as analysts await the impact of a recession in Britain and Spain (which have both suffered from property market bubbles) and a slowdown in South America, the Spanish bank's three main markets. Santander managed to avoid losses on subprime mortgage securities thanks to tough banking regulations in Spain, so it has been taking advantage of its relatively strong balance sheet to expand its lending business, particularly in the United Kingdom.
At Abbey National, the British mortgage business Santander bought in 2004, net mortgage lending rose 28.0% to 11.1 billion pounds ($14.3 billion) during 2008, taking its share of the total British mortgage market to 28.9% from 8.0%, benefiting as its rivals with weaker balance sheets were less reluctant to lend.
Yet while this push could position Santander in prime position at the end of the downturn, it is still a risky strategy, particularly given the increasingly dismal outlook for the British economy
The bank is putting a brave face on the situation, keeping its annual dividend for 2008 at the same level as the previous year.
Santander had pre-announced its headline results last week, saying net profit for the fourth quarter fell 24.0% to 1.9 billion euros ($2.4 billion), while annual profits fell 2.0% to 8.9 billion euros ($11.4 billion). This is in stark contrast to Deutsche Bank (nyse: DB - news - people ), which reported a $5.0 billion loss for 2008.
Santander was forced to set aside 500.0 million euros ($641.3 million) to cover compensation for clients of its Optimal Investment Fund, which was exposed to Bernard Madoff's $50.0 billion alleged fraud.
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