Santander, Deutsche Bank:
U.S. stress test repeat offenders
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[June 30, 2016]
By David Henry
New York (Reuters) - U.S. units of Deutsche Bank <DBKGN.DE> and
Santander <SAN.MC> suffered the ignominy of failing U.S. stress tests
yet again this year, less than a week after Britain's shocking vote to
leave the European Union sent their investors running for cover.
Santander's U.S. bank is the first to fail the test three years in a
Both banks failed because of poor risk management and financial
planning, not for lack of capital, the Fed said.
Santander's Chairman Ana Botin vowed in January to fix it within two
years, after which she would consider selling it.
Yet any disposal will be tough while the Fed's standards are unmet,
meaning Santander cannot access the capital to invest in its bigger
businesses in Spain, Brazil and Britain. And it cannot even draw a
dividend from the unit in the meantime because of Fed stipulations.
Santander's U.S. unit operates a retail and commercial bank with 670
branches and 9,800 employees in the northeast part of the country. It
also owns nearly 60 percent of publicly traded lender Santander Consumer
USA Holdings Inc <SC.N>.
Santander said it is fixing the problems and is already preparing for
next year's test when it expects the Fed to take a better view of the
quality of its management.
"We are well on our way to making the enhancements necessary to improve
our qualitative assessment,” Scott Powell, the chief executive of
Santander Holdings USA, said in a statement.
The Fed faulted Santander for, among other things, not using "reasonable
or appropriate" assumptions and analysis in its capital planning.
But the Fed also said Santander has made "progress in improving certain
approaches to loss and revenue projection." And, a senior Fed official
said bank supervisors "have noticed a difference" in the resources that
Santander has committed to correct the problems.
Santander hired Powell, a former JPMorgan banker, last year and is
investing about $170 million a year to reorganize a complex structure,
partly a hangover from the acquisition of Sovereign Bank in 2009. Powell
is one of more than half a dozen executives hired in the past 18 months
to fix the bank.
The Deutsche Bank unit that failed, Deutsche Bank Trust Corp, is one of
a handful of entities the company has in the U.S. and holds transaction
banking and wealth management business.
[to top of second column]
Spanish bank Santander chairman Ana
Patricia Botin attends a Let Girls Learn event, in Madrid, Spain,
June 30, 2016. REUTERS/Andrea Comas
unit is being consolidated into a holding company, DB USA Corp, on July 1 as
part of new rules that require large overseas lenders to organize themselves as
holding companies in the United States. Deutsche Bank Trust Corporation had not
asked for permission to return capital to its parent, a bank spokesman said.
The Fed said the Deutsche unit showed "some improvements in certain aspects of
capital planning," but that "the firm overall continues to have material
unresolved supervisory issues that critically undermine its capital planning
The trouble the two banks are having passing the tests come amid other problems.
Santander's capital ratio is lower than many of its large European peers, though
it had reported an improvement in April and forecast that its tier 1 capital
ratio under the strictest criteria would rise above 11 pct by 2018.
But since that forecast, Santander's large UK business was hit by that country's
decision to leave the European Union and the resulting fall in sterling.
Santander shares have dropped 18 percent since the vote and are down 24 percent
so far this year.
The economic malaise facing Brazil has also cast a cloud over Santander's Latin
American operations. Brazil is battling its deepest recession in decades.
Deutsche Bank, which has trailed its rivals in bouncing back from the 2008
financial crisis, is in the midst of a strategic overhaul.
Germany's largest lender, Deutsche has a large investment banking operation in
London. Like rivals it faces the risk of a loss in revenue should Britain's exit
from the EU deter companies in Europe from buying assets and issuing debt and
Deutsche may also have to spend and disrupt staff to shift some operations out
of the UK if Britain loses the right to sell financial services seamlessly
Shares of Deutsche have dropped 19 percent since the UK vote and are down 44
percent since the start of the year.
(Editing by Bernard Orr)
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