Subprime Nightmare on Wall Street for TBTF Grupo Santander

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SEC gets edgy. Investors get crushed. 

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

On January 23, 2014, the shares of Santander Consumer USA Holdings (SCUSA), the U.S. auto-lending unit of Spain’s largest bank, were launched on the New York stock exchange. For the bank’s Spanish owners and management — in particular the firm’s president and undisputed capo of Spanish banking, Emilio Botín — it was a dream come true, the culmination of decades of rampant international growth and consolidation. Finally, Spain’s biggest bank had made it to the top of the global financial heap.

But the plan has gone awry. Auto-lending in the U.S. is no longer the low-risk, high-growth business it was cracked up to be, Emilio Botín has passed to the other side, and Santander’s American dream, now under the supervision of his daughter, Ana Botín, is turning decidedly sour.

Rumors have been circulating for some time that the auto lender was in trouble. Barring a six-month period between February and July 2015, its share price has been on a consistent downward trajectory. In the first quarter of 2015 the company announced that it would be getting rid of numerous portfolios of bad debt as well as ending all personal lending operations that were not directly linked to its core operation, auto-lending, in particular subprime auto-lending.

That core business is now under serious strain, with delinquency rates of close to 5% and default rates of over 12%. Over the last two years, SCUSA’s total exposure to subprime loans has shrunk, according to Bloomberg, but they still represent a whopping 25% of its entire loan portfolio.

Alarm bells began ringing when SCUSA failed to present its financial results for 2015 before the Feb. 29 deadline — a serious no-no for any publicly listed company. Its excuse, according to the Spanish daily El Confidencial, was that it was already under investigation by the SEC for financial irregularities. The SEC reacted by requesting immediate clarification on how the firm calculated the loans and bad-loan provisions on its books. SCUSA asked for 15 extra days to provide the information. It was granted the extension but, once again, it failed to meet the deadline.

Sources close to the Spanish bank insist that at the heart of the matter is a “mere accounting issue” that will have “barely any repercussions” on its U.S. subsidiary’s books. The markets are not convinced, however. On March 15, the day SCUSA failed to meet its second deadline, its shares plummeted 7% to reach their lowest point ever, though they have ticked up since.

At the closing price today of $9.44 a share, the shares remain 61% below their IPO price. And market capitalization has shrunk from $8.3 billion at the IPO to $3.36 billion today.

SCUSA is one of only two banks out of 31 to have failed the Fed’s last stress test, apparently due to governance failings and capital shortfalls. The other was Deutsche Bank. Santander already assumes that its US subsidiary will also fail the Fed’s next stress test. On a more positive note, the ECB has made sure that not a single European bank will be allowed to fail its stress test this year.

Santander is unlikely to enjoy the same regulatory lenience in the U.S, where its problems continue to stack up.

Barring a miraculous last-minute turnaround or reprieve, Grupo Santander will have little choice but to include its American subsidiary’s losses in its financial report for the first quarter of 2016. The timing could not be worse, what with the firm already facing a frightening array of risks in its home market, as well as acute exposure to Latin America’s struggling emerging economies, in particular Brazil, now in the second year of its deepest recession since 1931.

Thankfully, and ever so graciously, in the name of fiduciary responsibility, the ECB has allowed Spain’s largest lender to apply the confidence-inspiring “alternative standardized approach” to its Brazilian subsidiary, Banco Santander (Brasil) SA, which contributes 19% of net profit to the group.

“Investors are overestimating Santander’s capital needs and the threat that Brazil’s economic downturn poses to profit,” executive Chairman Ana Botin said in a letter to shareholders earlier this month. No doubt the new accounting rules approved by the ECB will help the global systemically important institution to provide a clearer portrayal of the genuine state of its Brazilian subsidiary’s financial health.

Meanwhile, in the U.S. its troubles continue to mount. In the last few days, six law firms (Khang & Khang, Goldberg Law, Pomerantz Law, Bronstein, Gewirtz & Grossman, GPM y Rosen Law) have announced that they are considering suing Santander’s American subsidiary over its failure to report its financial results from 2015.

In response, the bank’s senior management has done what senior bankers have always done to ensure that their interests are resolutely defended in key foreign markets: it has greased the wheels of the revolving door.

To try to make its US problems go away, the bank has unveiled a new, improved and – in keeping with the times – digitally focused international advisory board to be headed by, hilariously, Larry Summers, a man who was one of the most influential economic policy makers of his generation but whose credibility has sunk to such lows that the only way for him to get any attention these days is to call for the systemic extermination of the $100 bill. What could possibly go wrong? By Don Quijones, Raging Bull-Shit.

Europe’s banking sector has been hit hard. The new bail-in rules have caused bondholders and stockholders to have second thoughts. So the ECB is trying to prop up confidence by hook or crook. Read…  ECB Unveils Ingenious Strategy to Reduce Banking Stress

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  14 comments for “Subprime Nightmare on Wall Street for TBTF Grupo Santander

  1. chip Javert
    March 21, 2016 at 8:42 pm

    Question: are the numbers in the statement “…delinquency rates of close to 5% and default rates of over 12%….” reversed?

    Comment: always interesting to read about the new ECB magic for applying lipstick (all to the same end result – roast pig with lipstick).

    • March 21, 2016 at 9:25 pm

      No, it is correct. Delinquency rates are normally lower because loans stay in the “delinquency” basket only a short time, usually 2-3 months.

      If the delinquency is cured during that time, these loans are moved to the performing loan basket. If they’re not cured, they’re moved into the “default” basket. And they stay there for quite a while. And so they accumulate there.

      They stay in the default basket until after the unit has been repossessed, sold, and the losses written off, distributed, charged back to the dealer, etc. Only then, finally, does the loan get moved from the default basket to the cash basket (for the amount collected) and the write-off basket (for the remainder of the loan and expenses).

      • d'Cynic
        March 22, 2016 at 6:29 pm

        What happened to securitization? Aren’t these loans supposed to be packaged and sold to yield starved investors?

        • March 22, 2016 at 7:33 pm

          Yes, the infamous subprime-auto-loan-based asset backed securities. Some of their collateral (auto loans) has had the worst default rates. These losses from the loans get spread around. There usually is some tussling going on between the parties. They would all like to charge the loan back to the dealer … and if the dealer screwed up, the dealer gets to eat the loss. The lender that put together the ABS is also at risk in a verity of ways, including through the rention of the riskest slices of the ABS. Normally, a good part of the losses are in the end shuffled to the ABS investors.

  2. nick kelly
    March 21, 2016 at 9:36 pm

    I just left Uruguay and saw Santander branches everywhere. Uruguay was bustling but the long time folks I stayed with said it was all recent- 5 years.
    I think Santander is faced with a lot of things going sour at the same time. I know they are big in Brazil and I assume they have a presence in most of South America.
    Then there is Abengoda ( or however it’s spelled) and all the probs in Europe.
    I think an appointment with Dr. Draghi is indicated.

  3. Bruce Adlam
    March 21, 2016 at 9:42 pm

    Yes and it looks like the biggest coal mining company Peabody energy corporation is heading for bankruptcy with to much debt

  4. Bigfoot
    March 21, 2016 at 10:09 pm

    Let’s see, a bank that has subprime lending as 25% of it’s core business. What could possibly go wrong ?

    Don’t worry, since the heart of the matter is “a mere accounting issue”, we’ll just change the accounting rules. Poof, all should be good now, right??

    You have to wonder how much toxic sludge like this is in portfolios all over the world? I think it would be quite interesting & telling if one had the time to put some of the larger investment funds out there under the microscope, kick some tires, & see what’s hiding under the hood.

    • Jungle Jim
      March 22, 2016 at 10:37 am

      I am skeptical about the toxic sludge if only because the central banks have so accommodatingly purchased it from the banks that held it. Now they are sitting on it. It’s the taxpayers who have the most to fear.

    • unit472
      March 22, 2016 at 12:23 pm

      Good point! Don’t know if SCUSA qualifies for Draghi’s ECB ABS purchases but if it does will the ECB have to start an auto repo business in the US to recover the vehicles they have title to?

  5. Michael
    March 21, 2016 at 10:19 pm


    Your comment is quite relevant.

  6. walter map
    March 22, 2016 at 9:17 am

    Good thing they’re TBTF. Otherwise they could be in trouble.

  7. bill
    March 22, 2016 at 2:43 pm

    I get the feeling that used car prices will be declining.
    How to tell which/how lenders will be impacted by this subprime stuff.
    I’m mulling over, a little, on possible bond purchase from Ally, is why I’m curious.
    (first post!)

  8. AC
    March 22, 2016 at 3:18 pm

    Who could have possibly foreseen that loaning money to people incapable of making the payments on the loan, could ever turn out badly?

    Presumably the same people selling off those loans as asset-backed securities, as fast as possible, I suppose?

    • walter map
      March 22, 2016 at 5:17 pm

      “Presumably the same people selling off those loans as asset-backed securities, as fast as possible, I suppose?”

      Fortunately the ratings agencies have assured us that those ABSs carry very low risk so you can invest with confidence.

      One wonders what possible purpose corrupt rubber-stamp ratings agencies could still have, other than to cheat whatever suckers they may have missed last time.

Comments are closed.