By Sarah White, Jesús Aguado and Guillermo Parra-Bernal
MADRID/SAO PAULO (Reuters) - Banco SANTANDER (SAN.MC)SA
Santander, which for the past years has struggled with Europe's worst economic crisis in decades and a disappointing Brazilian economy, offered minority shareholders of Banco Santander Brasil SA
Shares of Santander Brasil soared more than 20 percent on the news, underscoring the potential success of the deal, investors said. The move, announced the same day the Madrid-based bank reported a rise in first-quarter profit, marks an exception to its strategy of recent years of floating foreign divisions whenever possible to bring in minority shareholders.
"It's a take-it-or-leave-it offer to gain exposure to Santander's recovery in Europe as we recognize that much heavy-lifting has to be done in Brazil," said Mohamed Mourabet, who oversees $900 million for Victoire Asset Brazil in São Paulo.
The Brazil deal comes during a shift in Santander's revenue mix, heavily reliant on Latin America in recent years as many European countries suffered economic downturns. The buyout would not change its approach to other listed divisions, adding a long-mooted public offering of its U.K. unit would still take place, in the "mid-term," Chief Executive Javier Marin told investors at a conference call.
The buyout also reflects Santander's confidence in its finances as its first quarter profits rose 8 percent ahead of Europe's toughest banking stress tests yet, which the region hopes will help it draw a line under the financial crisis. The deal is also financially attractive for the parent company.
Santander is committed to Brazil in the long run even as slowing economic growth dampened earnings last year and pushed bad debts up, Marin added.
Shares of Santander Brasil have lost nearly half their value since they were listed at 23.5 reais ($10.5) in October 2009. They closed on Monday at 12.74 reais.
"The offer price seems reasonable given that it is well above what we consider to be Santander Brasil's stand alone fair value," said Saúl Martínez, a senior banking industry analyst with JPMorgan Securities in New York.
The deal gives management more room to execute a successful turnaround in Santander Brasil, enhancing cost efficiency, boosting returns and attracting more clients, Santander Brasil CEO Jesús Zabalza noted. The buyout is also financially attractive for the parent company.
"Market participants are indeed failing to assign a fair value to our businesses in Brazil," said Zabalza on a conference call with investors.
The buyout may have very little impact on the bank's capital levels, which have long been under scrutiny. Analysts and investors have highlighted the parent group lagged some European peers in terms of solvency levels.
The plan would help group profits grow 7 percent in 2015 and in 2016, equivalent to a boost of 560 million euros in 2016.
EARNINGS MIX
Shares of Santander, which have risen over 13 percent this year, were up 0.8 percent at 7.10 euros in Madrid.
Chairman Emilio Botin, a shrewd dealmaker who at 79 is still the lender's main strategist, has driven it through global expansion. But the bank has faced its share of woes in recent years.
Losses on property loans in Spain, which led some peers into state bailouts following a real estate crash, have dragged on earnings.
In the first quarter, Europe provided just over half Santander's net income, which rose to 1.3 billion euros. Profits in continental Europe rose 64 percent quarter on quarter and 53 percent on the year.
Its U.K. unit - where revenues in pounds rose 13 percent from the first quarter of 2013 on a sharp rise in margins and an improving economy - was now on par with Brazil in providing a fifth of total profits, it said.
In Brazil, Santander's profit dropped 27 percent from a year ago, and rose 20.9 percent from the fourth quarter of 2013 taking into account currency fluctuations.
Santander said its core capital ratio was 10.6 percent under Basel III criteria at end-March, above minimum requirements. The bank expects to have core capital ratio of 9 percent by year-end under Basel III 'fully-loaded' criteria, which takes into account changes that need to be made by 2019.
Its net interest income at group level, or earnings on loans minus deposit costs, fell 3 percent in the first quarter from a year ago to 6.9 billion euros. This was above the 6.6 billion euros forecast by analysts in a Reuters poll.
Profits missed forecasts slightly. Non-performing loans in Spain and Brazil edged up slightly at the end of March compared to end December, even if at a group level the ratio dipped to 5.52 percent from 6.61 percent.
Santander said it had not booked the more than 1 billion euros in one-off gains from the sale of several units to help profits in the first quarter, adding it was setting these aside, though it did not detail for what.
($1 = 2.24 Brazilian reals)
(Additional reporting by Tomas Cobos and Julien Toyer and Steve Slater in London, Editing by Julien Toyer, Sophie Walker, John Stonestreet and Chizu Nomiyama)
