(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Rob Cox
NEW YORK, Sept 10 (Reuters Breakingviews) - With Spain’s
banking system in full-blown crisis, it’s hard to imagine any of
the world’s biggest financial institutions taking lessons from
their Iberian cousins. Yet Banco Santander’s (SAN.MC) methodical
spin-offs of various operating subsidiaries around the world,
the latest due soon in Mexico, present a reasonable model for an
undervalued colossus like Citigroup (C.N) to consider.
Santander is not Spain’s biggest banking problem, but it is
the country’s largest bank. One way the Madrid-based group run
by Emilio Botin has stayed out of the worst of the domestic
banking mire has been by raising capital through initial public
offerings of foreign operating divisions. For instance, it
raised $8 billion selling 16 percent of its Brazilian arm a few
Next up is a 24.9 percent stake in its Mexican business. At
the top of the indicated price range, the unit will be valued at
$17.2 billion, or just over two times book value, or assets
minus liabilities. The offering could bring in $4 billion of
capital for the Spanish parent’s coffers. It would also join
listed foreign subsidiaries including Brazil, Chile, Argentina
and Poland, as well as its Spanish retail network Banesto
BTO.MC. Listings of the company’s UK bank and U.S. consumer
finance arm are also on the horizon.
The lesson for Citi and other global banks is how this
approach in effect sets a floor under Santander’s overall market
worth. Combine the Spanish bank’s stakes in just its three
largest Latin American units – Mexico at the top of the IPO
range, Brazil and Chile – and the total valuation comes to some
$49 billion. That’s 67 percent of the parent’s $73 billion
capitalization accounted for by unarguable public market prices.
Apply the concept to Citi. For starters, take the New
York-based bank’s Mexican operations. At the same multiple
Santander Mexico would fetch at the top of the IPO range, Citi’s
Banamex arm would be worth over $20 billion – though the unit’s
lower return on equity probably warrants something less. Still,
that’s more than a fifth of Citi’s $94 billion market cap. And
it’s by no means Citi’s only valuable foreign operation. Credit
Suisse estimates that Citi’s Asian businesses are worth almost
$40 billion on a standalone basis.
There are other ways Citi could showcase its assets. While
Santander has chosen to list geographic entities, Citi could opt
for a combination of regional and global listed subsidiaries.
Citi’s transaction services division, known as GTS – a
world-leading financial plumbing business – will generate $4
billion of net income next year, Nomura estimates. At 12 times
earnings, around where Bank of New York Mellon (BK.N) trades,
GTS would be worth some $48 billion. At Citi’s current
valuation, that would imply that its institutional securities
and wholesale banking arm plus the global consumer banking
empire is only worth just over three times earnings.
There may be some overlap and double-counting in these
back-of-the-envelope calculations. And Citi’s current global
model has some benefits. Banamex, for example, might bring in
Mexican clients who do M&A deals with Citi’s investment bank and
then conduct international cash management operations via GTS.
Nonetheless, listing foreign units doesn't seem to have
prevented Santander from finding similar synergies between
different parts of the bank.
But the Santander model is still instructive for a bank like
Citi, trading below book value even now that it’s recovering
from its huge problems a few years ago. Spinning off pieces of
the empire could bring in cash that Chief Executive Vikram
Pandit could return to shareholders – something he wants to do,
but has been denied by regulators.
It would create clarity for shareholders, which should lift
the company’s overall valuation, and provide a modicum of
autonomy that would fire up employees. It might also offer a
model for eventually setting problem children free – like, say,
an investment bank. And the spun-off companies can more easily
use their stock to do deals, as Santander's Bank Zachodni WBK
BZW.WA is doing to acquire rival Kredyt Bank in Poland.
Sandy Weill, the former Citi CEO who is largely responsible
for the U.S. company’s sprawl, highlighted the existential
conundrum when he recently suggested it’s time to consider
breaking banks up. But current boss Pandit’s Spanish
counterpart, Botin, may actually have found the workable way to
make that happen.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- Santander on Sept. 4 announced the range for an initial
public offering of up to 24.9 percent of its Mexican business.
- The Spanish bank said the price range for its Mexican
listing, which constitutes 20 percent of the shares being
offered, would be between 29 and 33.5 pesos, implying a total
offer amount of between 3 billion and 3.4 billion euros. That
implies a maximum valuation of 13.7 billion euros for Santander
Mexico as a whole.
- The pricing for its New York listing will be between
$10.99 and $12.70 per American Depository Receipt, each of which
represents five shares. That implies a total offer amount of
between $3.7 billion and $4.3 billion, valuing the whole company
at $17.2 billion.
- The shares should be quoted in Mexico and New York on or
around Sept. 26. The offering should increase Santander's core
Tier 1 capital by 50 basis points.
- Reuters: Santander eyes 3.4 bln euros from Mexico listing
Mexican save [ID:nL4E8K52RN]
Breaking Glass-Steagall [ID:nL2E8J32ZQ]
- For previous columns by the author, Reuters customers can
click on [COX/]
(Editing by Richard Beales and Martin Langfield)
Keywords: BREAKINGVIEWS CITI/SANTANDER
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