Smoke on the Horizon?

A very quick post as I have had a rather odd email from a reader of the blog. I have taken out the identifying elements, but the email is as follows:

Just thought I would tell you about a letter I received on Friday from my bank,

I run a small business and bank with Santander in the UK.
The letter was to find out how big our business is.
They are creating a data base containing all small businesses eligible for the deposit protection scheme.

Smoke on the horizon?

This is some of the recent news on Santander, starting with:

Chief Executive Officer Alfredo Saenz told investors last month it may take three years for profit to “return to normal” in the face of mounting Spanish defaults and weakening earnings in the U.K. and Brazil. Santander expects to “approximately” match 2010 profit this year, he said today. The bank said it could reach a core capital ratio of 10 percent by June 2012, exceeding European requirements, without selling new shares and while maintaining its dividend policy.

“In Spain, I’m still a bit scared about the real-estate market because I still have the impression that there are more losses to come out there,” said Peter Braendle, who helps manage about $60 billion, including Santander shares, at Swisscanto Asset Management in Zurich. “Fortunately, Spain is only one side of the Santander story because they have a diversified business.”

And from the FT:

Retail and corporate customers withdrew £2.5bn of deposits from the UK arm of Santander in the third quarter of this year after the bank changed its funding strategy. Santander said it had moved to shift its funding mix away from expensive deposits by cutting interest rates on some accounts as it had been able to access cheaper financing elsewhere.

 And the UKPA:

Santander UK said it had also overhauled its customer complaints process, recruited 1,100 customer facing staff and relocated its call centres back in the UK to improve its service.
The bank admitted it still had more to do to improve customer service to levels of satisfaction in other areas of the bank. The group was the UK's third most complained about bank behind Barclays and Lloyds in the first half of the year.
The group is in discussions to buy more than 300 branches from RBS, which will add 30,000 small and medium-sized enterprise (SME) customers, which would take its share of the market to 9% from 4%. The deal is expected to complete towards the end of 2012.

 And the BBC;

The bank said it would increase its Tier 1 capital level to 9.2% by June 2012, which would bring it in line with criteria set by the European Banking Authority.

Smoke on the horizon? The most interesting part is that Santander has been losing customer deposits, and the bank's version of this is that the use of wholesale funding is a choice. This from the Financial Post:

Spain’s banks face a massive spike in their funding needs next year at a time when a credit crunch on wholesale markets and calls to increase provisioning against toxic property assets has made the sector’s liquidity a crucial concern.
Around 130 billion euros ($174 billion) of Spanish bank debt will come to maturity next year, according to Thomson Reuters figures. Many banks took on three-year, government-guaranteed debt in 2008, making up a large chunk of the borrowing.

but later in the same article:

Banco Santander SA, Spain’s biggest bank and one of the best-capitalised in Europe, issued up to 7.5 billion euros of three-month to 18-month commercial paper in September, paying between 3 percent and 3.75 percent depending on maturity.
On the covered bond side, bankers expect markets to stay closed for the foreseeable future unless a European-wide solution is introduced to deal with the sovereign debt issue.
In June, Santander struggled to place a 1 billion euro five-year covered bond, backed by a pool of loans the bank had made to regional governments across Spain.

Smoke on the horizon? You could read these articles many ways (if you read the complete articles, the picture is even less clear), but one thing that is certain is that any Spanish bank going to the wholesale funding markets is going to be treated with, at the very least, some caution. It seems odd that they might choose to opt out of the retail and corporate deposit markets in the current environment, regardless of how competitive they might claim those markets to be. It is also notable that in the environment that they are being squeezed two ways, with requirements for larger capital buffers, and facing a difficult market for raising capital. On the other hand, the letter in the email just seems odd, and might therefore be a badly timed administrative requirement, and the bank on a spending spree buying up RBS branches (but with access to deposits)?

I don't have time to go into more depth on this, as it is just an off-the-cuff article in response to the email, but I would certainly be concerned if my bank was in the Santander stable, regardless of the issue of the letter described in the email. I'll leave you to make up your own minds.