Santander stronger after buyout but toxic assets threaten

Santander, the eurozone’s largest bank, is expected to come out stronger from its rescue of smaller Spanish rival Banco Popular, though job cuts, “toxic” assets and legal challenges by disgruntled shareholders may make the process bumpy, analysts say.

By paying just a symbolic euro for Popular, Santander becomes “Spain’s biggest bank” in terms of market share, said its president Ana Botin on Wednesday.

That day, the European Central Bank (ECB) announced Banco Popular was “failing or likely to fail” and would be sold to Santander — the first time such a decision has been taken since the ECB took over the role of Europe’s banking supervisory authority in 2014.

Santander may have been the eurozone’s first bank in market capitalisation and may have made a six-billion-euro ($6.7-billion) profit last year, but it was still only the third lender in its own country in terms of market share.

Its main markets are Brazil and the United Kingdom.

But the buyout of Popular allows Santander to gain close to 20 percent of the loan and deposit market in Spain. It also becomes the biggest private bank in Portugal, where its rival was established.

Popular is also liked by small and medium-sized companies, which means Santander will now control a quarter of a market that is just lifting off again after the financial crisis, with three percent growth expected in Spain this year.

That is why Botin promised her shareholders that the buyout would be “good” for them, suggesting a 13 to 14 percent return on investment from 2020 and confirming other, previously-announced financial targets in the coming years.

For now, investors appear to be convinced.

Shares in Santander rose more than five percent late Thursday afternoon on Spain’s main Ibex 35 index, all but ignoring the fact that the bank will have to issue seven billion euros worth of new shares to finance the operation.

While Santander is only paying one euro for Popular, it will need billions to clean up the failed bank’s balance sheet.

“It’s a good operation financially and strategically” for Santander, according to analysts at Link Securities.

But they warned against the challenges involved in the absorption process, including “keeping the clients” of Popular, whose brand will eventually disappear entirely.

To keep its promises to shareholders, Santander is banking on “economies of scale” and the “optimisation of the network of (bank) branches.” (AFP)