Santander Falls as Slump at U.K. Business Weighs on Earnings

(Bloomberg) -- Banco Santander SA fell in Madrid trading as a slump at its U.K. business and concerns about its capital levels overshadowed a jump in first-quarter profit.

Earnings at the U.K. business declined 23 percent as fees and income from lending fell while expenses jumped, sending the shares down the most in six months. Those woes added to headwinds from currencies in the otherwise strong Latin American markets, where the outlook is further clouded by the prospect of populist election victories.

“The U.K. poses the biggest threat to Santander’s goal of achieving double-digit EPS growth in 2018,” Bloomberg Intelligence analysts Arjun Bowry and Scott Mc Evatt wrote in a note. Spending on digital projects and regulation will push up expenses at the business, while variable-rate mortgage attrition will pressure income, the said.

The problems in the U.K. overshadowed a 26 percent jump in profit in Spain, where Santander last year acquired Banco Popular Espanol SA in a forced sale, and a 10 percent increase in overall earnings. Some analysts also signaled concern about headwinds to a measure of capital strength. The lender’s insistence on running its retail banking-based business on lower capital levels than its peers means analysts pore over its earnings for signs of weakness.

“It may be that for some people, the trends on capital were disappointing,” said Gonzalo Lopez, an analyst at Mirabaud & Cie in Madrid.

Capital Headwinds

Santander reported a CET1 capital ratio of 11 percent for the first quarter, but that measure doesn’t take full account of new rules and potential obstacles the bank flagged Tuesday. Santander’s Chief Executive Officer Jose Antonio Alvarez insisted that concerns about capital weren’t a major issue for investors and confirmed the bank’s year-end capital target.

“In the conversations we’ve had with investors, capital ratio is not a relevant issue at this moment,” he said in a news conference.

Santander fell 3.6 percent at 3:09 p.m. in Madrid, the biggest declined since Oct. 4.

Earnings in Brazil, Santander’s largest market, rose 7 percent in the quarter, as the real’s depreciation against the euro eroded much of the gains in that market. Mexico showed a similar trend, with just 7 percent growth after taking into account the peso’s decline.

Brazil’s real weakened more than 18 percent against the euro in the first quarter from a year ago. In Mexico, the peso declined about 11 percent. A weaker local currency reduces earnings when converted in euros.

Elections Loom

Upcoming elections are also hanging over the Latin American markets. The prospect of July elections in Mexico, which populist firebrand Andres Manuel Lopez Obrador may win, and an unpredictable presidential race in Brazil in October may prove to be a test of investor confidence in Santander.

“Brazil is the most important asset they have,” said Mauro Guillen, a professor of management and international relations at the University of Pennsylvania’s Wharton School who has published a history of Banco Santander.

While there’s optimism that Mexico will soon wrap up a revised trade deal with the U.S., the outcome of the election poses risks for investors. AMLO, as Lopez Obrador is known in Mexico, has unsettled the nation’s business world by railing against “neoliberalism” and corruption and building up a sizable lead in opinion polls.

The wide-open presidential race in Brazil also represents a risk for Santander. Jair Bolsonaro, a front-runner, is a former army captain who is facing accusations of racism and inciting hatred.

Other earnings highlights:

  • 1Q CET1 fully-loaded 11% compared with 10.84% in December
    • CET1 ratio expected to fall again to 10.91% this year on future operations, including Santander Consumer USA minority interests and restructuring of Popular
    • CET1 fully loaded ratio would be 10.8% if IFRS9 regulation requirements included
  • 1Q net interest income rose 0.6% to 8.45 billion
  • Bad loans ratio 4%
  • Net income rises 10% to EU2.05B
  • Spanish 1Q net profit rose 26% to EU455M
  • U.K. profit fell 23% to EU320M

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