Is there a transparency problem in Europe's banking system? What portion of their bank's balance sheets are truly transparent? How are these banks managed? Is the US Fed helping them? These are all questions that investors should be asking themselves. Late Friday evening, Seeking Alpha reported on a Financial Times story as follows:
17 May, 9:35 PM Of the €208.2B in non-performing loans Spanish banks have refinanced (in order to avoid recognizing them as NPLs), nearly half are treated as though they are not distressed, dubiously eliminating the need to take provisions against them, FT says. These banks have until September to reclassify restructured loans under tougher guidelines, a mandate that will likely necessitate fresh provisioning at some institutions. Between them, Santander (NYSE:SAN),BBVA, and Caixabank (OTCPK:CAIXY) had €76B in refinanced debt on their books at the end of last year.
Of the banks mentioned above, I will focus on Spain's Santander which others here on SA have written about as a buy. One tries to imply that Warren Buffet is buying SAN with this headline: "Why Warren Buffett Sees Opportunity In Europe" . The other's headline "Banco Santander Chile's Recent Sell Down Represents A Buying Opportunity For Investors" seems to blame Chile for the recent downward pressure on SAN shares:
Market Data SAN
|Below 52-Week High||-19.19%|
|50-Day Moving Average||7.13|
|200-Day Moving Average||7.54|
Maybe the Boston Globe has a better take on what is happening at SAN as explained in their conclusion of a recent article regarding Santander's former CEO Saenz's resignation :
"Tornabell, the banking professor, suggested that Botin was maneuvering like ''in a chess game,'' rejuvenating his leadership amid an earnings decline before probably still appointing his daughter to replace him.
Still, Tornabell suggested that some institutional investors had become worried about Botin running his bank as ''a monarchy dynasty,'' despite owning only about 2 percent of its equity."
My opinion is that investors actually want to see Botin out as well because he has had his problems with lawsuits according to Santander's Wikipedia page.
Botin's ways are probably not going to change much anytime soon according to an interview he gave Fortune magazine:
"He also says he'll stick by Santander's tried-and-true formula for plain-vanilla banking, a philosophy outlined by Botín's father, also known as Emilio, who was the bank's chairman until his son took over in 1986. When Santander was still a small regional bank, Botín recalled, his father would summon his branch managers each summer to his sprawling home called El Promontorio in the hills overlooking the port city of Santander (hence the name). There he would review every loan to local businessmen worth more than $2 million. Each executive had to explain to the chairman his reasoning for giving the loan and the likelihood that it would be repaid.
Botín says the bank still works pretty much in the same way. He still meets with his managers to hear about their loan portfolios, only now they fly in from around the world. And whether it's in Brazil or New England or Britain, Santander is still in the same rather staid business of giving mortgages and loans to consumers and small and medium-size companies. ... Anyway, Botín has had other things on his mind. Two years ago he was skewered in the press when it was revealed that a secret bank account had been opened in his father's name in Switzerland. Botín says he made a voluntary declaration after the account came to light and paid $274 million in back taxes."
Former shareholders of Sovereign Bank probably dread the day Botin took a stake in their bank, as the Fortune article described the deal dynamics:
"He decided to reenter the U.S. market in 2005 by buying 25% of Philadelphia-based Sovereign Bancorp for $2.4 billion. Sovereign also fits Botín's formula: a plain-vanilla bank, dealing primarily in mortgages and small-business loans. Botín says he scoured America looking for a target and rejected possible takeovers in Texas and Florida. "The Northeast is the most affluent part of America, where you have great universities," Botín says. "It is bigger than the economy of Spain, and we want to be a part of that.
While Santander paid $20 a share for a 19.8% stake in Sovereign in 2007, it bought the remainder of the bank two years later for a mere $3 a share."
Another Boston Globe article describes disturbing practice at SAN in the US:
"Sovereign Bank's only branch in Delaware has just one ATM, five employees, and no weekend hours. But in filings with federal regulators, Sovereign recently started calling this modest operation its "main office," instead of its corporate headquarters in Boston. The reason: to avoid usury laws in Massachusetts and other states. Massachusetts caps lending rates for banks at 18 percent. But Delaware effectively has no such cap, allowing Sovereign to charge as much as 30 percent interest per year"
Should SAN be borrowing from the Fed and FHLBB at very low interest rates? Are US investors selling the shares of SAN because its practices are coming under more regulator scrutiny? I think that the lack of transparency in SAN's other operating territories, as noted in the recent SA current above, is also scaring investors away from this high dividend yielding stock:
Is this unusually high dividend a signal of potential trouble? Some investors exiting the stock certainly must think so. The WSJ reported recently:
"Banco Santander SA, SAN.MC -0.74% the euro zone's largest bank by market value, Thursday said net profit dropped 26% in the first quarter as margins narrowed in a tough economic environment in several of its key markets, especially Spain and the U.K."
SAN is borrowing at close to and sometimes zero percent from US government subsidized entities like FHLB and the FED and not lending in the US where loans are most needed and seeking usurious rates on small consumer loans if possible. Do we really know where the money they are borrowing from the FED is going. Can it be going to Spain where they need liquidity?
Sheila Bair has commented that banks are not lending to small business. Senators Levin and Merkley have as well as others before have pointed here on SA. Maybe Sheila can call her ex Chief of Staff, Jesse Villarreal Jr., who is executive vice president and public policy director for Santander Holdings USA Inc. and the $48 billion-asset Sovereign Bank in Delaware, owned by Spain's Santander and get them to them to lend to small businesses that need it. Isn't there a better way to get US business moving other than leaving it to foreigners who have their own problems back home that is driving their decisions here in the US?
The economy is still slow as recent housing and employment figures released this week proved disappointing:
The Commerce Department said on Thursday that starts at building sites for homes fell 16.5 percent last month to a 853,000-unit annual rate. That was below analysts' expectations of a 945,000-unit rate. Initial claims for state unemployment benefits jumped by 32,000 to a seasonally adjusted 360,000, the Labor Department said on Thursday. That was the biggest jump since November and confounded analysts' expectations for a more modest increase.
How is our economy being helped by helping Santander?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.