Ana Botin. Picture: SUPPLIED
Ana Botin. Picture: SUPPLIED

Madrid — Spanish bank Banco Santander slumped to the first loss in its 163-year history after the Covid-19 health crisis forced it to write down the value of its businesses across the globe.

The bank is paying the price for rapid expansion into areas hit hard by the pandemic — such as UK consumer finance and low-quality US loans — with a $14.8bn writedown on assets to reflect the worsening economic outlook. The charges sent Santander spiralling to a €11bn quarterly loss, the biggest since UniCredit’s €13.6bn  loss in late 2016.

Already contending with anaemic growth and interest rates dipping further into negative territory, Europe’s banks are confronting the prospect of increasing corporate and individual defaults as government aid programmes expire. Santander already had the highest provisions of any bank before the crisis after its push into emerging markets such as Brazil and Mexico.

While Santander managed to navigate the previous crisis thanks to global diversity that made up for losses in Spain, the charges illustrate the global reach of the Covid-19 pandemic, said Santiago Carbo, a professor in economics and finance at Cunef business school in Madrid.

“This time, there’s nowhere to hide,” Carbo said by phone. “They’re recognising that there are lots of risks and that’s something the market needs to come to understand.”

The writedown is a further blow to chairman Ana Botin, who is seeking to move past missteps including the botched hiring of a new CEO in 2019. At the same time, she will try to guide investors past the eye-watering losses to underlying second quarter results that came in ahead of estimates. The bank’s capital ratio unexpectedly strengthened, as did its non-performing loan ratio, while both profit and core revenue did better than analysts forecast.

The bulk of the charges were due to expectations that the global economy will stall, putting further pressure on the bank’s ability to generate profit as central banks respond by lowering interest rates, CEO  Jose Antonio Alvarez said in an earnings call. The bank was also forced to raise its discount rate due to market volatility, he said. Santander does not  expect any further impairments as a result of the pandemic, Alvarez said.

Currency woe

Weakening emerging-market currencies also ate into the lender’s profits. The average exchange rate for Brazil’s real depreciated 17% in the second quarter from the first. In Mexico, the peso lost 15% in the same period. Elsewhere, the British pound fell by almost 3%.

The bank took a charge of €2.5bn related to the recoverability of tax deferred assets. The bank’s non-performing loan ratio also declined. Still, despite the size of the loss and impairments, the charges won’t hurt capital levels or cash flow.

Santander shares fell as much as 5.8% in Madrid and were trading 3.3% lower before the close. The bank has seen a 45% drop in its market value in 2020, making it among the continent’s worse-performing financial institutions.

The full impact of the deteriorating economy is set to hit consumers and companies only later in 2020, once government aid programmes come to an end. More than a third of Santander’s impairment charges are coming at the UK business, which the bank built through acquisitions of Abbey National and Alliance and Leicester. In the US, its vehicle finance business typically lends to consumers with poor or incomplete credit histories and who are especially vulnerable to joblessness.

“The past six months have been among the most challenging in our history,” Botin said in the statement. “The impact of the pandemic has tested us all.”

The unprecedented impairment charges break a winning earnings history for a bank that was built into a global powerhouse and gained a reputation as a voracious dealmaker under former head Emilio Botin, the father of Ana Botin. From its humble beginnings in Spain’s northwestern port town of Santander — where it was formed in 1857 — the bank has gathered up assets across the globe, forming a banking empire stretching from Buenos Aires to London.

The lender held back €3.1bn for loan losses in the quarter, following a record €3.9bn in the previous three months as it anticipates a flurry of defaults from the pandemic. Santander expects costs for bad loans to keep rising this year, reiterating expectations they’ll reach between 1.4% and 1.5% of its total loan book by year-end.

Despite the huge second-quarter loss, Santander said that it expects to move to an all-scrip dividend payment until conditions normalise. The European Central Bank, the region’s main banking supervisor, this week asked lenders to hold off on paying cash dividends and share buybacks until at least January.

Bloomberg

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