Sovereign recovery boosting parent

PAYING DIVIDENDS? Pedestrians pass the entrance to a Banco Santander SA branch in Madrid. The European bank purchased Sovereign Bancorp four years ago, a move that analysts say could help the parent company in the near future. / BLOOMBERG PHOTO/ANGEL NAVARRETE
PAYING DIVIDENDS? Pedestrians pass the entrance to a Banco Santander SA branch in Madrid. The European bank purchased Sovereign Bancorp four years ago, a move that analysts say could help the parent company in the near future. / BLOOMBERG PHOTO/ANGEL NAVARRETE

Spain’s Banco Santander purchased Sovereign Bancorp four years ago when the United States banking industry was in crisis and Sovereign was deep in red ink.
How times have changed.
In 2012, Sovereign posted its third consecutive annual profit – with net income surging 38 percent from 2011 – as the American financial sector continued to rebound.
From having to be rescued by Santander four years ago, Sovereign is now one of the healthiest parts of the company.
But what does the reversal mean for Sovereign, now based in Boston and the third-largest bank in the Providence area (including Bristol County, Mass.) with $3.1 billion in 2012 deposits?
While having a global parent was an advantage with the American economy struggling, it could become a liability for Sovereign as domestic conditions improve and locally owned banks pursue growth.
In Spain, economic conditions aren’t favorable.
Last year, Santander was one of 16 Spanish banks to see its credit rating downgraded by Moody’s Investors Services as the country’s 2012 gross domestic product shrank an estimated 1.3 percent.
Unlike other Spanish banks, Santander remains in the black, bringing in 2.2 billion euros in 2012 profit.
But that profit was down from 5.4 billion euros in 2011 and Santander earnings missed analyst forecasts in the fourth quarter of last year, with revenue dropping 4 percent from the third quarter. Santander’s nonperforming-loan percentage rose .36 percentage points from the third quarter to fourth quarter.
“Our current recommendation on the stock is neutral and we don’t see much change to become more positive just now,” JPMorgan analyst Jaime Becerril wrote in a report on Santander issued last month.
Between 2012 and 2013, the nonperforming loan percentage in Santander’s U.S. unit, which includes Sovereign, dropped from 4.61 percent to 2.29 percent, while it rose for the group as a whole from 3.55 percent to 4.54 percent, according to the bank’s 2012 report.
“It is to Sovereign’s credit that it has been able to recover, but given global financial weakness, my guess is that Sovereign will be in a position of supporting its parents though a dividend, which could limit its reinvestment in its systems and people in the U.S,” said Merrill W. Sherman, former president of Bank Rhode Island. Santander has continued to issue dividends each year sitnce the recession.
The other major New England financial presence with foreign ownership is Citizens Bank, which is part of the Royal Bank of Scotland Group.
Unlike Santander, the Royal Bank of Scotland was bailed out by the British government during the financial crisis and has been under pressure to sell its American operation.
Last week, RBS announced plans to sell part of its stake in Citizens through an IPO.
“These banks are strong and it’s not a question of stability, but how much they get to reinvest in the future versus helping the parent,” Sherman said.
As the U.S. business has picked up, locally owned banks have made progress against not just Sovereign but other large, international banks in the region.
In 2012, The Washington Trust Co., Bank Rhode Island, BankNewport and Bristol County Savings Bank, each New England owned, all increased their Providence-area total deposits and market share, according to Federal Deposit Insurance Corporation figures.
The only one of the five-largest New England-banks not to increase Providence area market share from 2011 to 2012 was Webster Bank, which did increase its local deposits.
Over the same period Sovereign, the third-largest bank in the region, saw Providence-area market share dip from 6.2 percent to 5.9 percent, and total deposits edge down from $3.2 billion to $3.1 billion.
Citizens, still the largest bank presence in the region, saw year-over-year regional market share fall from 20.7 percent to 19.6 percent, while total deposits fell from $10.8 billion to $10.4 billion.
In general, larger banks in both the United States and Europe have faced greater pressure to add capital to their balance sheets, but Bank of America, the largest U.S. bank, saw its Providence-area market share and deposits climb in 2012. Steven Parente, director of retail baking for Bank Rhode Island, attributed the appeal of locally made lending and pricing decisions as one reason for his bank’s recent gains, but couldn’t discount the impact of European problems affecting competitors down the line.
“If it is an institution where their parent is not in the state or country, the earnings are going back to the larger corporate structure where ours are going back into the community with either lending or growth,” Parente said.
In 2012, Washington Trust moved ahead of Sovereign into third place in Rhode Island market share, according to FDIC figures.
Mark Gim, Washington Trust executive vice president and treasurer, said the local-versus-international dynamic can cut both ways, with Rhode Island’s economic problems an example, but could be playing against European-owned New England banks right now.
For local institutions, “we have to be committed to the local market we serve because it is where we do business, while in multinationals the challenges come from outside this area,” Gim said. “The bigger institutions, we respect their capabilities greatly, but right now in many cases their challenges are coming from outside this market, so their eye is not completely on the ball.”
Although Sovereign’s Providence market share may have slipped, it’s not clear that’s a result of the company diverting resources away from its U.S. operation.
Sovereign added 340 employees in 2012 and commercial-lending volume grew 23 percent, according to the company’s annual report.
Another question facing Sovereign is how local customers will react to the Santander brand, which has been gradually replacing the Sovereign name and identity over the past few months.
The Sovereign and Santander names now appear together on the bank’s website as the computer systems of the two entities have merged.
Calls to Sovereign for comment were not immediately returned. •

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