Santander Banks on Brazil

The Spanish megabank sees ample opportunity in adding branches in Brazil, jump-starting lending, and building capital reserves

By Mark Scott

As the largest bank in the 16-member euro zone, Spain's Banco Santander (STD) has fared pretty well during the recession. Tough domestic regulation forced the Madrid-based giant to steer clear of toxic financial assets, and the bank mostly avoided excess lending to Spain's suffering real estate sector. Now, just when rivals in the U.S. and Europe are curtailing spending, Santander has reinforced its expansion plans.

Central to the strategy is Brazil. Once the sleeping giant of Latin America, Brazil, under the guidance of charismatic President Luiz Inácio Lula da Silva, has become an economic powerhouse. According to official statistics, the country's gross domestic product grew 1.9% in the second quarter of the year, even as many other economies around the world were shrinking. Citigroup (C) figures Brazil's GDP will rise roughly 5% next year.

Santander is preparing to take full advantage. Already the No. 3 non-state-owned bank in Brazil behind Itau Unibanco (ITUB) and Banco Bradesco (BBD), the Spanish company raised an eye-popping $7 billion to fund expansion there by selling a minority stake in its Brazilian business. Additional shares set to be sold this month will take the total raised to $8.1 billion—the largest public offering in the world so far this year.

Commercial Banking Push

The money will be put to good use. Santander aims to reinforce its own capital reserves, expand its local branch network in Brazil by one-third by 2013, and jump-start lending in the country's growing but still underserved commercial-banking sector. "Santander's move into Brazil has been smart and well-thought-out," says Robert Tornabel, a banking professor and former dean of ESADE business school in Barcelona. "It's a fast-growing economy that's becoming an important part of the bank's profitability."

Indeed, Brazil accounted for more than one-fifth of Santander's €4.5 billion ($6.8 billion) in "attributable profit," or net minus capital gains, in the first half of this year. (Attributable profit is the only earnings measure for which the bank provides a breakdown by country.) That's up from just 11% for the same period in 2008. Analysts say the change is due primarily to the consolidation of Brazil's Banco Real, which Santander bought for $16 billion in 2007 as part of the ill-fated takeover and carve-up of Dutch financial giant ABN Amro by Santander, Royal Bank of Scotland (RBS), and Fortis (FOR.AS).

While RBS and Fortis have struggled ever since, Santander's gamble paid off handsomely. Its expanded footprint in Brazil helped offset the bank's slowing operations in other regions—particularly Spain and Britain—during the worst of the downturn. Lending in Brazil, for instance, jumped 16% during the first half of 2009, compared with just 1% in Spain over the same period.

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