Santander and Crédit Agricole create a global competitor in securities custody

Banco Santander key markets

Bankinter | Credit Agricole (CA) and Banco Santander (SAN) will merge their securities management and custody activities: CACEIS for CA and Santander Securities Services(S3) for SAN (it will contribute 100% of S3 in Spain and 49.99% of its business in Latin America).

CA will have 69.5% and SAN the remaining 30.5% of the resulting company, which will have approximately 3.34 billion euros in assets in custody and 700 million euros of assets under management. SAN estimates a surplus of approximately 700 million euros which it will dedicate to compensating for extraordinary costs in the 2019 accounts, a gain of 3 b.p. in its capital base (CET1, now at 11.3%, or 11.03% post IFRS9) and with limited impact on EPS (without quantifying). We understand that the objective of the operation is to create a global competitor in this type of activities, which are ever more globalised.

Neutral impact on stock market price in the short term for three reasons:

(i) The surpluses will be neutralised in the net annual profits in 2019 given that they will be applied to countering extraordinary costs (perhaps the job cuts following the purchase of Popular).

(ii) The contribution to capital base is positive but small.

(iii) Strategically it appears a defensive operation aimed at gaining scale in a business ever more globalised and competitive (with tight profit margins), in which its is very difficult to differentiate oneself (and, therefore, manage prices).

In short, probably a sensible operation from a strategic perspective, but strategically defensive, and therefore does not alter our valuation of SAN, which we reiterate at 5.70€/share (potential +24.7%).