Profits won’t return to normal for another three years, warns Santander

SPANISH banking giant Santander expects it will take three years for profits to return to normal as higher regulatory and funding costs bite while the credit cycle gradually improves.

The euro zone’s biggest bank expects its return on equity (RoE) to improve by between three and six percentage points over the next three years and sees profits in emerging markets growing by at least 10 per cent in the short to medium term, compared to “single-digit growth” in profit in mature markets.

“With our solid business model and a great effort from all our units, it is within our reach to return to levels of RoE of 12-14 per cent,” said chief executive Alfredo Saenz. The bank’s RoE dropped to 9.4 per cent in the first half of this year.

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Rivals including HSBC, Barclays and BNP Paribas are also trying to lift profitability that has slumped due to the need to hold more capital. Banks are selling assets to shrink balance sheets and cutting costs.

Santander outlined its expectations as it began meetings with investors and analysts.

The bank said its British arm plans to spend almost £500m in the next two years to improve returns to 16 per cent of tangible equity as it gears up for a flotation of the unit.

It is expected to spin off and list its British operations in 2013, delayed from this year due to the uncertain impact of regulatory change, financial market turmoil and a delay in its integration of branches bought from Royal Bank of Scotland.

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Santander has been on an acquisitive streak in Britain since 2004, buying Abbey, Alliance & Leicester and Bradford & Bingley’s branch network.

Santander expects losses from bad debts to start improving next year in Spain and Portugal, and will aim to “regain lost profit” and generate two billion euros in excess free capital a year in 2013 and 2014.

n New British banking venture NBNK Investments confirmed it has submitted a second-round bid for some 630 Lloyds bank branches, said to be worth £1.5bn. The auction, codenamed Project Verde, offers a chance to create Britain’s seventh-biggest bank.

“NBNK was formed for the purpose of making acquisitions in order to establish a significant UK retail bank and confirms that it has submitted a bid for Verde,” said NBNK in a statement.

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