WSJ: For Santander, Links Aren't Plain

The Wall Street MARKETS OCTOBER 21, 2011
For Bank in Spain, Links Aren't Plain
LONDON--Spanish banking giant Banco Santander SA frequently says that it doesn't shuttle money among its far-flung units, a declaration meant to assure investors that its parent won't raid those units for cash in a pinch.
The bank has "a model of subsidiaries which are autonomous in funding and capital," Chairman Emilio Botín said in a speech here last month. The same day, Santander's chief executive delivered a slide presentation that said "Each subsidiary is responsible for its own capitalization and funding needs... no cross border funding."
But an examination of the financial relationship between Santander and its British unit, Santander U.K. PLC, shows that billions of euros have moved between the parent and its subsidiary in recent years. Much of the activity has been routed through a little-known unit of Santander U.K. called Abbey National Treasury Services PLC.
Regulatory filings show the U.K. subsidiary today provides a total of more than GBP 2 billion ($3.15 billion) in funds to its Madrid-based parent company. The parent company houses its Spanish business, which has suffered losses tied to the country's economic downturn.
There are also funding arrangements between the parent bank and its Brazilian and U.S. subsidiaries.
The amounts are small for a bank like Santander, which has a 1.23 trillion euro balance sheet. It also isn't unusual for a global bank to move funds around, as long as local capital buffers remain adequate and it is done in a transparent manner.
Still, when informed of the transactions, some analysts said they appear to contradict Santander's frequent statements about its units' independence. And the analysts say the transactions raise questions about how Santander will be affected by proposed British regulations that would restrict the movement of funds between different businesses.
"There's been a significant amount of free movement of funding around the Santander group in the recent past," said Alastair Ryan, an analyst at UBS AG., when made aware of the transactions. As a result of that movement, the pending U.K. regulations "would be a significant issue" for the bank, he said.
The mobility of banks' funds is taking on greater importance amid Europe's burgeoning financial crisis. Many investors and regulators are anxious about the ability of banks in Spain and other countries to line up the funds they need to finance their daily operations. Regulators worry about banks taking funds out of foreign subsidiaries, leaving them strapped for cash.
In the U.K., Financial Services Authority officials have expressed concerns to Santander U.K. about its funding relationship with the parent, according to people familiar with the matter. The regulators want to ensure that if the Spanish parent encounters trouble, it won't drag down the British subsidiary as well, these people say.
Partly as a result of such concerns, the British regulator over the past 18 months has required Santander U.K. to beef up its pool of liquidity and to move forward with plans to transform Santander U.K. into a fully independent, publicly-traded company, these people say.
Santander executives say that all British banks are being forced to stockpile liquidity and said FSA officials haven't confronted the company about its funding patterns. "U.K. regulators have not raised concerns with us about this," said the bank's chief financial officer, Jose Antonio Alvarez. An FSA spokeswoman declined to comment.
Santander has repeatedly emphasized its units' independence. The bank's 2010 annual report says Santander's subsidiary-based business model avoids "any complex interconnections." A senior Santander spokesman said, "Santander U.K. does not fund any other group units."
However, executives later acknowledged that Santander U.K. and its subsidiaries have engaged in a series of financial transactions with their parent company.
A bank spokesman said the transactions at issue don't meet the traditional definition of funding and therefore don't contradict the bank's previous statements. He said, when capital is moved, it is done in a transparent manner, with regulators' blessings and when it "makes business or strategic sense."
But some analysts were surprised to learn of the transactions. "These are very small amounts . . . but it's not totally consistent with what the group has said about its subsidiaries being independently funded," said an analyst at a major global investment bank.
The structures of the transactions vary. In 2008, Santander U.K. acquired British lender Alliance & Leicester and the deposit base of another, Bradford & Bingley. That left Santander U.K. overflowing with deposits. On the heels of those transactions, public documents show, Abbey National Treasury Services, or ANTS, loaned GBP 8.35 billion to the Madrid-based parent.
At the end of last year, GBP 643 million, a third of which is unsecured cash, was still outstanding, according to ANTS documents and Santander executives.
More recently, Santander U.K. and ANTS also have helped their parent boost its liquidity through a series of so-called "reverse repo" transactions, according to documents and executives. In such transactions, one party transfers assets to another for cash, with the understanding that it will be reversed down the road. It is a traditional liquidity-management technique, and it is classified as a loan.
Banco Santander initiated the reverse-repo program last year, shifting highly rated European government bonds from the Madrid parent to its British units in exchange for cash, the executives said. The use of such transactions has more than doubled since it started. As of June 30, GBP 1.54 billion of those reverse-repo transactions were outstanding, listed on Santander U.K.'s balance sheet as a "credit risk exposure" to Spain.
Santander executives say the transactions were negotiated on commercial terms and just as easily could have taken place with unaffiliated companies, although they say Santander U.K. offered the best price.
They say the transactions involved a "trivial" amount for a bank of Santander's size.
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