Confession Time for Big Banks in Europe: Banco Santander Reports $12.7 Billion Loss

Too-Big-To-Fail Santander is also one of the Eurozone’s worst capitalized banks.

By Nick Corbishley, for WOLF STREET:

Banco Santander, Spain’s largest lender and one of the Eurozone’s eight global systemically important banks (G-SIBs), has posted its first ever loss in 163 years of operations. And it was gargantuan. During the first half of the year, the bank racked up a loss of €10.8 billion ($12.7 billion).

The loss was caused by heavy provisions for expected loan losses. This quarter wiped out the equivalent of one-and-a-half years of the bank’s global profits — in 2019, it posted total global profits of €6.5 billion, and in 2018 of €7.8 billion.

The losses were the result of a €2.5 billion charge related to the recoverability of tax deferred assets as well a €10.1 billion write-down on assets across a number of key overseas markets:

  • In the UK: €6.1 billion write-down of “goodwill” — amount overpaid for prior acquisitions, which included Abbey National and Alliance and Leicester. Santander already took a €1.5 billion write-down on the value of its UK business last year, blaming new regulations and the expected economic fallout from Brexit.
  • In the US: €2.3 billion write-down for Santander Consumer USA, which specializes in consumer lending, particularly subprime lending, and these consumer loans are now particularly at risk.
  • In Poland, its largest market in Eastern Europe: €1.2 billion goodwill impairments charge.
  • In its consumer finance division, which is present in 15 markets: €477 million hit.

Santander’s shares initially reacted to the news by slumping 5.8%. They then staged a partial recovery, only to slump again, ending the day down nearly 5%. Shares are down an eye-watering 45% this year, making it one of the continent’s worst-performing large financial institutions.

“The past six months have been among the most challenging in our history,” Santander’s Chairwoman Ana Botin said in a statement. “The impact of the pandemic has tested us all.”

Santander isn’t the only major Spanish bank to have reported unprecedented losses since the virus crisis began. In April, BBVA, Spain’s second largest bank, reported its worst ever quarterly loss, amounting to €1.8 billion, after the bank took a €2.1 billion write-down in the United States. In Mexico, its biggest market, BBVA’s profits also plunged 40%. The bank also faces risks in another major market, Turkey.

Santander and BBVA are more exposed to the emerging markets of Latin America than any other global banks. Those markets have provided bumper profits for both lenders since the last crisis. But in the second quarter, Santander Brasil’s earnings fell 41% to $353 million after the bank set aside €530 million to cover potential coronavirus-related loan losses.

Latin America is currently on the front line of the coronavirus pandemic, having recently surpassed 4.4 million infections. This is putting strains on the economies of countries that have neither the fiscal firepower nor monetary leeway to protect businesses and jobs in the same way that has happened in Europe. The major risk is that the region’s rising bankruptcies, surging unemployment and sharply contracting economies could spark another debt crisis. If that were to happen, Spain’s two largest banks’ outsized exposure to the region could serve as a source of contagion into Europe.

In Europe, the banks are once again gearing up for their earnings calls. Like Santander, many will report losses — some of them already have. The British lender Barclays posted an additional £1.6 billion to its credit impairment charges during the second quarter, bringing the total level to £3.7 billion at the end of the first half. Despite that, it still posted a pretax profit for the first half of £1.27 billion pounds, down from £3 billion for the same period a year earlier.

Deutsche Bank surprised investors by reporting a tiny net profit of €61 million in the second quarter as cost-cutting and revenue growth outweighed loan losses due to the virus outbreak. Attention now turns to France’s four G-SIBs, BNP Paribas, Société Générale, Credit Agricole, and Groupe BPCE.

The CEO of BNP Paribas Asset Management, Frédéric Janbon recently warned of the “mother of all recessions” as the fallout from the coronavirus triggers “a very, very substantial drop in activities in pretty much all of the economies in the world.”

Big banks have capital to absorb the losses that are coming. But some have less than others. According to the European Banking Authority, many of the worst capitalized institutions in Europe are in Spain. Almost at the very bottom of the pile is none other than Banco Santander, placing 123rd out of 127. By Nick Corbishley, for WOLF STREET.

Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  23 comments for “Confession Time for Big Banks in Europe: Banco Santander Reports $12.7 Billion Loss

  1. Timtim
    Jul 29, 2020 at 6:12 pm

    …..and all the Italian banks good to go. Nothing to see here. Nope….

    ( Sound of whistling……)

    • Cas127
      Jul 29, 2020 at 7:20 pm

      Excellent point…Italian banks have been barely surviving for at least 20 yrs…C19 would seem to be more than enough to push them over the edge

  2. Stephen
    Jul 29, 2020 at 6:16 pm

    Not to minimize the bad management of these banks, but the loses seem miniscule compared to the trillions of dollars kicked out by the Fed in QE and the stimulus by the US Treasury over the last 6 months.

    I suppose the term ‘billion’ is starting to lose its shock value. Reminds me of one of the Austin Powers movies where Dr. Doom wants to be paid 100 Billion in Ransom money, and all the military brass laugh at him saying that’s more money than exists in the world.

    In USD terms, 100B is a rounding error.

    • GotCollateral
      Jul 30, 2020 at 12:39 am

      Theres this thing, called derivatives, banks use their and their clients assets in those trades… +$1.5 quadrillion notional outstanding…

      Jerome and his merry sphincter bandits puny couple trillion is nothing compared to that

  3. gorbachev
    Jul 29, 2020 at 6:16 pm

    Non cash losses.Should be fine.

    • Cas127
      Jul 29, 2020 at 7:25 pm

      G,

      Huh?

      Non-cash?

      Reserving for loan losses (which hits reported earnings and therefore is poison to banks) only happens when banks are *very* sure that *cash* losses on bad (very bad) loans are essentially certain to occur in the near term future.

      To airily dismiss them as “non cash” is to grotesquely mislead people.

    • Jul 29, 2020 at 8:04 pm

      Banks hardly ever have cash losses. They have loan losses — meaning borrowers cannot make payments and the loans become worth what the collateral is worth at fire-sale prices. It’s loan losses that causes banks to collapse.

      • sunny129
        Jul 30, 2020 at 8:05 pm

        Is it not ‘ suspension of Mkt to Mkt accounting standard still operative, since March of ’09 ( in USA) ? Do they have to show the ‘losses’ on their balance sheet?

  4. Cobalt Programmer
    Jul 29, 2020 at 6:49 pm

    One good thing in USA and other countries is that, consumer banks (my bank) and investment banks (casinos) are totally separate. I think the major reason the investment banks do not fail is, the owners, investors and policy makers (Wink… Wink…) are one and the same. When they are projected to fail, these investors magically get out early, bailed out at the expense of taxpayers and live another day (invest earlier like 2011) to recoup their losses. Now I realize these banks, investors, policy makers and the real Gods are together and often one and the same.

    • MonkeyBusiness
      Jul 29, 2020 at 7:33 pm

      “consumer banks (my bank) and investment banks (casinos) are totally separate.”

      Are you just being sarcastic or are you living in a different USA than the rest of us? They repealed Glass Steagal almost 2 decades ago.

      Four of the Big 5 have both commercial and investment arms. So JP Morgan, Citibank, BofA, and even Goldman (Marcus). Not sure about Morgan Stanley.

      • Lisa_Hooker
        Jul 30, 2020 at 11:26 am

        Morgan Stanley too.

    • John Henderson
      Jul 30, 2020 at 12:27 pm

      I am happy you now know.
      Sorry it took so long.
      Look at the lists of paying interests they work for and crucially who owns those companies.

  5. leanfire_Queen
    Jul 29, 2020 at 6:55 pm

    Confession is good for the soul!

    In Europe and the USA, the flood of bankruptcies and foreclosures will be tougher to contain than the Yangtze River. Policymakers’ responses will show more cracks than the Three Gorges dam.

    BTW Will Economists ever learn to avoid blowing bubbles? That is the lesson of the Great Depression, if you don’t want to have one, don’t encourage a Roaring 20s and peak inequality.

  6. DR DOOM
    Jul 29, 2020 at 7:15 pm

    Bank debts don’t matter in bizzarro world and quite frankly are not even newsworthy. A bankruptcy would be news worthy but that will not happen. Nothing to see here. Waste of time.

  7. GotCollateral
    Jul 29, 2020 at 8:07 pm

    Luckily, for owners of SANTAN trash: US05964HAB15, US05964HAF29, US05964HAJ41, US05971KAE91, and US05971KAF66… they are secured by bail-ins on depositors (SBN-NT)!

    Unluckily for owners, there might not be much left of deposits :P

  8. Ian
    Jul 30, 2020 at 2:41 am

    Why should any entity have a status of systemically important? It is just a company. Terminology invented to get us all used to the fact that endless bailouts are required. And what is the use of the competition commissions when they sit back and allow companies to buy up endless smaller ones to get to problematic size. As with all our institutions and regulators, not fit for purpose and existing only to give the appearance of control while the looting goes on. We fleas on the other hand are subject to ever increasing real control.

    • Nestor Reyes
      Jul 30, 2020 at 5:19 pm

      Dead on correct. The appearance of regulation.

  9. Normansdog
    Jul 30, 2020 at 3:14 am

    no way that these private companies that we call banks will ever be allowed to fail. the debts will be collected by the ECB and written off and they will carry on carrying on.

  10. Putin on the Ritz
    Jul 30, 2020 at 3:21 am

    The advertising slogan for Alliance and Leicester was “You at a smarter investor at the Alliance and Leicester.” Clearly, that doesn’t include Spanish banks.

  11. Brant Lee
    Jul 30, 2020 at 5:41 am

    “In the US: €2.3 billion write-down for Santander Consumer USA, which specializes in consumer lending, particularly subprime lending, and these consumer loans are now particularly at risk.”

    But you would have thought $75K Dodge Ram Pickups were a good investment. Especially when waiting in food donation lines with the a/c turned on high. They are loading up provisions with the truck before it’s legal to get your vehicle repoed again.

  12. BuySome
    Jul 30, 2020 at 10:00 am

    Resting between a rock and a hard place while living underwater…perhaps time for a name change to Banco Salamander.

  13. Frente_amplio-Uruguay
    Jul 30, 2020 at 10:47 pm

    Accounting shenanigans? These guys were not “surprised”. They might`(?) be acting pre-emptively. Think about it!

  14. SOG
    Aug 4, 2020 at 10:25 am

    Writing down the goodwill is already in the stock price, goodwill for bank purchases is nearly always worth zero just takes them a while to fess up.

    If you can you kitchen sink as much as possible ( esp when the govt is hell bent on underwriting your business). Get paid in options set at a low benchmark price/ ratios and be laughing eventually .

    Bad debts, well thats a whole other story.

Comments are closed.