Banco Santander SA said Wednesday that it has reached a deal to take full control of its Mexican unit in an effort to strengthen its position in Latin America's second-largest market.
The euro zone's largest bank by market value said it would buy back Bank of America Corp.'s 24.9% stake in Santander's Mexican unit, Grupo Financiero Santander, for $2.5 billion. Santander said the deal will boost its earnings per share by 1.3% from the first year.
Santander shares have been taking a beating because of the company's exposure to its home Spanish market, which is in the grips of a deep economic downturn. Concerns over Spanish sovereign debt have led to difficult financing conditions for Spanish banks.
"This acquisition reinforces Santander's commitment to Mexico, a country with a very positive outlook for growth, and furthers the geographic diversification of our group," Santander Chairman Emilio Botin said.
For Bank of America, the stake sale is part of a plan to sell noncore assets to meet requirements for paying back Troubled Asset Relief Program funds it received during the banking crisis. Santander had sold the 24.9% stake to Bank of America for $1.6 billion in 2003. The sale came shortly after Bank of America's rival Citigroup Inc. purchased Banamex, then the biggest bank in Mexico.
Santander at the time viewed the sale as a way to increase cooperation with its North Carolina partner and gain better access to corporate clients doing business in the United States and Mexico.
For the Spanish bank, which owns Latin America's largest banking franchise, this would be its biggest buyout since acquiring Brazil's Banco Real for the equivalent of $12.6 billion in 2007.
"The deal looks sensible from a strategic and financial perspective," said Antonio Ramirez, an analyst at Keefe, Bruyette & Woods. "Santander will now receive the full potential earnings from the Mexican business at a time when the Mexican economy is recovering, which should translate into improved asset quality and a pickup in credit demand."
Caja Madrid analyst Javier Bernat said the valuation Santander has placed on its Mexican unit implies a value for the whole of its Latin American franchise of more than $50 billion.
"Seems like the bank believes it's being unfairly penalized by the market," Bernat said. Santander derived 35% of its profit in the first quarter from Latin America. The rest came from Europe.
Mexico's central bank has forecast that the country's gross domestic product will grow 4% to 5% this year, largely because of a rebound in exports to the United States, Mexico's largest trading partner. Mexican GDP plunged 6.5% last year.
Also, a relatively low use of banking services translates to little growth for banks like Santander.
On the downside, Santander said the deal would lower its capital ratio by about 0.31 percentage points.
The bank reported a core capital ratio of 8.8% at the end of the first quarter. After making a series of acquisitions, Santander has lately been in capital raising mode, selling more assets than it has been buying.
The Mexico unit has 1,095 branches with 8.8 million clients, and a market share of 13% of the country's loans and 15% of its deposits.