Investors had increasingly perceived Santander as a rather profitable financial concern lacking enough solvency muscle. Its capital ratio was running at 8%, well below the level reached by its main competitors in other European countries. It also lagged behind its main Spanish rival-BBVA. With stringent requirements from Basel III waiting in the pipeline, a cloud of suspicion surrounded Santander’s position. The need to put the record straight undoubtedly influenced the decision.
Nowadays, no major bank can provide a safe haven unless its solvency ratio is anchored beyond the 10% threshold. Raising €7.5 billion will not achieve that result. Slashing the pay-out policy provides a further clue about the ultimate goal behind this bold move.
Santander´s business is due to face harsh times. Its key Brazilian subsidiary is faced with an unfavourable macro-economic scenario. Profits in the euro zone could suffer should the current gloomy mood entrench itself. Low interest rates hardly improve margins while potential losses could follow should recovery fail to materialise. Only the UK branch of the bank seems to bring good news.
Extra capital may not entirely dispel all the worries over future solvency, but it will bolster Santander’s resilience should things go wrong. Even if the timetable for implementing the cash injection may seem questionable, its overall rationale is sound.