|
 Lenders this week submitted their capital and risk management plans
to the central bank, which is due to publish results by the end of
June.
For Santander its underperforming U.S. business has been a long-time
embarrassment and its chairwoman 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 Fed standards are unmet,
meaning Santander can't access the capital to invest in its bigger
businesses in Spain, Brazil and Britain. And it can't even draw a
dividend from the unit in the meantime because of Fed stipulations.
The Spanish bank had in 2013 set itself the objective of doubling
U.S. profits to $2 billion by 2016, but last year it scaled down its
ambitions and no longer has any earnings target for the unit, which
booked a 678 million euro ($771 million) profit last year.
The bank has hired a new local chairman and is investing about $170
million a year to reorganize a complex structure, partly a hangover
from the acquisition of Sovereign in 2009, and address reporting
gaps.
The issues lie not in its capital levels themselves, which surpass
the minimum required by the Federal Reserve, but in the bank's
internal risk controls and the lack of integration of its multiple
U.S. activities under a single holding company.
Santander, which makes around 8 per cent of its profits in the
United States, acknowledges much remains to be done.
"For us what is important is to see the Fed recognizing that we are
making progress towards resolving our weaknesses," Santander Chief
Financial Officer Jose Garcia Cantera told Reuters in a phone
interview last month.
He declined to say whether the bank expects to pass the test this
year.
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DIVERGENT VIEWS
People familiar with the situation say the fact that Santander and
U.S. watchdogs have had recent diverging views on accounting issues
relating to provisions and charges passed by the bank bodes ill for
the stress tests.
Santander Consumer USA (SCUSA), the bank's U.S. consumer finance
business, last month delayed filing its annual report to the
Securities and Exchange Commission after being forced to revise the
way it accounts for some credit losses.
"The latest problems show that it will simply take them more time to
fix the bank in the U.S.," a banker familiar with Santander's U.S.
situation said.
Santander is not the only European lender which has found it hard to
meet U.S. regulatory standards, but peers like Deutsche Bank
<DBKGn.DE>, which failed the Fed's tests in 2015, seem better placed
to succeed this time around, analysts say.
Beyond the reputational damage of a third failure, not only would
Santander's U.S. units be unable to pay a dividend to their
Madrid-based parent, there is also an effect on its profitability,
with local costs growing at a faster pace than revenue last year.
"Santander has seen management changes in its U.S. subsidiary and
costs have risen owing to regulatory pressures," said Nomura
analysts in a note to clients. "The latest developments could lead
to concerns that such costs may continue to grow."
Santander expects regulatory costs to come down, but not in the
short term. "Once we have the confirmation that we are on the right
path, our goal is to gradually invest less money and adjust the cost
base in the U.S.," Garcia Cantera said.
($1 = 0.8791 euros)
(Editing by Julien Toyer and David Holmes)
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