Santander UK parent bank plunges 10% on capital hike plans

Trading in Santander was suspended on Thursday by the Spanish market regulator CNMV with its shares rising 3.3%.

New Banco Santander chairman Ana Botin then announced the bank had decided to increase capital by €7.5bn (£5.9bn) equivalent to a 9.9% share in the bank, selling approximately 1.2bn shares at a price of €6.18, in order to exploit "exciting growth opportunities".

Additionally, the bank announced that it planned to “reorient the policy on dividends” in order to distribute three cash payouts and one stock dividend during 2015 that it estimated would be each separately be equivalent to €0.05. The €0.20 total dividend is 66% lower than the prior year's €0.60 pay-out.

"There are strange goings-on at Banco Santander," said IG market analyst Alastair McCaig, who wondered why the company was raising €7.5bn from shareholders even last year the company planed to pay out €2bn to those very same shareholders in the form of dividends.

Deutsche Bank saw the fundraising as positive, in a note released to clients. "We believe management actions today solve for the perceived capital shortfall in one go, rather than waiting for scrip dividend equity issuances over the next 2 years."

It added that the company’s new management "appears to be addressing head-on" the main negatives that institutional investors and analysts have had with the company, namely its low Core Tier 1 capital ratio of 8.7% versus a wider European banking average of nearer 11% and, secondly, its scrip dividend policy whose 85% take-up participation rate has resulted in quarterly share increases.

Deutsche also suggested that the equity raising news should increase Santander’s options for mergers and acquisitions "at an
interesting time for European banking", having "arguably missed out on a number of low priced acquisitions in Spain in the last couple of years, as well as sold off businesses it maybe could have kept hold of".

However, analysts at Berenberg said, while they welcomed the new management team’s attempt to "make a clean break with the past" they said "major concerns remain".

Principally, "capital is still inadequate" as the new funds will still leave CET1 below peers, with a continuing shortfall of €5bn or €0.35 per share on a pro forma basis.

Furthermore, Berenberg wonders if the update has not raised more strategic questions: "Given new growth aspirations, does the bank remain committed to its cost cutting? Will growth be organic or inorganic [after Botin said the bank had] no acquisition plans in “near or medium term” yet CEO later admitted to looking at Novo Banco? Is Santander’s scale and structure fit for a “post-too-big-to-fail” world made up of TLAC [total loss absorption capacity] regulations, etc?"

At 10:45 London time, shares in Santander had plunged 10.06% to settle just below the stock issue price at €6.16.

The Spanish Ibex benchmark index suffered from the drop in one of its blue chips and led the losses in Europe with a 2.3% decline.

Meanwhile, shares in Italy's Monte dei Paschi gave up some of the gains it had made on Thursday when speculation that Santander might be raising the cash to make acquisitions had pumped the shares higher.