MADRID — 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.
The deal comes at a time when Santander shares have been taking a beating because of its exposure to its home Spanish market, which is in the grips of a deep economic downturn. Concerns over Spanish sovereign debt have also led to more 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 in a statement.
The deal also marks the end of a partnership between Santander and its U.S. peer that goes back to the 1960s, when they together set up a Spanish bank, Bankinter SA.
For Bank of America, the stake sale is part of a wider plan to sell non-core assets to meet requirements for paying back TARP funds it got from the U.S. government 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 saw the sale as a way to increase cooperation with its North Carolina partner and gain better access to corporate clients doing business in the U.S. and Mexico.
For the Spanish bank, which owns Latin America's largest banking franchise, the deal marks its biggest transaction in the region since acquiring Brazil's Banco Real for EUR10.5 billion in 2007.
"The deal looks sensible from a strategic and financial perspective," said bank analyst Antonio Ramirez from 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 pick-up in credit demand.
Caja Madrid analyst Javier Bernat said the valuation Santander has put on its Mexican unit implies a value for the whole of its Latin American franchise of more than $50 billion. In midday trade Wednesday, the market valued the whole of Santander at EUR61.3 billion ($73.6 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 the country's gross domestic product will grow 4%-5% this year, due in large part to a rebound in exports to the U.S., Mexico's largest trading partner. Mexican GDP plunged 6.5% last year.
In addition, a relatively low use of banking services means there is room for growth for banks like Santander.
On the downside, Santander said the deal would lower its capital ratio by around 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 during the depth of the financial crisis, Santander has lately been in capital raising mode, selling more assets than it has been buying.
At 1329 GMT, Santander shares were up EUR0.19, or 2.6%, at EUR7.54, slightly better than the overall market.
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.
It reported first-quarter profit of EUR146 million, according to Santander's latest earnings statement.