Santander Could Swallow Sovereign

A rumored capital injection could put Banco SantanderSTD in control of Sovereign BancorpSOV.

Citing unnamed sources, The Wall Street Journal reported Friday morning that Sovereign was planning on raising $1.5 billion in capital. The Journal's piece also speculated that Banco Santander could quickly pony up a major investment in Sovereign's common stock. Under the 2005 agreement that saw the Spanish bank take a 24.4% stake in Sovereign, Santander would need to pay $40 per share if it took an additional stake in after May 31, 2008.

This was followed by a report in the Financial Times, also citing unnamed sources, that Sovereign would raise between $1 and $2 billion in capital from "a group of investors led by Banco Santander."

Sovereign's shares were up 5% to $7.81 in midday trading.

Considering Sovereign's current market capitalization is $3.8 billion, Banco Santander could wind up with a controlling stake, depending on the size of the capital injection and the makeup of the investor group.

Ed Shultz, a Sovereign spokesperson, said the company would not comment on the rumors.

Nonperforming loans totaled $482.7 million as of March 31, an increase of 29% from last quarter. Loan loss reserves were very strong, especially in this environment, covering 156.5% of nonperformers.

Sovereign's asset quality and reserves paint a much prettier picture than other large banks that have been forced to raise capital recently, including National CityNCC, Washington Mutual WM, WachoviaWB and, of course, CitigroupC. Still, Sovereign's risk-based capital ratio declined to 10.24% as of March 31, just above the 10% required for the thrift holding company to be considered well-capitalized under regulatory guidelines.