Light Santander unit earnings impacts from Zurich deal, but parent gained more

Wednesday, February 23, 2011

Santander Brasil (NYSE: BSBR), the local subsidiary of Spain's Santander (NYSE: STD), should see only small impacts on earnings from the deal struck by its parent with Zurich Financial Services, but analysts contended that Spain looks to have done better than Brazil in this transaction.

As part of the regional deal by Santander to sell a 51% stake in its Latin American insurance units in Brazil, Chile, Mexico, Argentina and Uruguay to Zurich Financial Services for about US$1.67bn, Santander Brasil, which had its IPO in October 2009, must sell its insurance business, minus its auto and savings bond divisions, back to Santander Spain.

Roberto Attuch and Fabio Zagatti of Barclays Capital said the deal's "base" price was 3.17bn reais (US$1.9bn), but was "subject to further assessment of the insurance arm shareholders' equity," among other items. The deal should be finished by 2H11, Santander said, but will require the spin-off of the savings bond business, which had equity of 495mn reais, said the analysts.

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"[This is] unlikely to trigger us to materially change our earnings outlook for Santander Brasil in coming years," they wrote. "Despite a portion of insurance results being potentially at stake (we estimate around 50%), we note payment in cash may be an offset to earnings, as it [will] bring financial revenues at least - if we were to conservatively assume Santander Brasil would initially allocate proceeds to government securities - regardless of its insurance arm's profitability (reportedly lower than industry's average)."

However, on the longer term, Santander Brasil will have to watch out for excess capital if it hopes to catch the ROE seen at other peer banks in Brazil.


The Barclays analysts agreed with Mario Pierry of Deutsche Bank (NYSE: DB) that the implied valuation of the deal came to about 2.3x tangible book value.

For Barclays, this showed a premium to the 1.6x seen at Santander Brasil as a whole, while for DB it "is slightly below the price that Santander Spain is being paid of 2.8x tangible book value by [Zurich]."

But another angle to look at is the accounting of the one-time gain. "Santander Brasil will realize a one-time gain of about 750mn reais related to the sale of this business. Furthermore, it will retain the distribution rights of these insurance products, which generates around 60% of insurance earnings, according to the company," Pierry wrote.

"It will realize a one-time gain of only about 380mn reais in Brazil [generally accepted accounting principles] GAAP, which is only half of the value received in [international financial reporting standards] IFRS."

For Alcir Freitas of UBS (NYSE: UBS), the deal would cause a "slight dilution" in earnings per share of 0.6%, but the analyst kept his buy rating.