Santander Could Swallow Sovereign

A rumored capital injection by the Spanish bank could lead to it acquiring Sovereign outright.
By Philip van Doorn ,

A rumored capital injection could put

Banco Santander

(STD)

in control of

Sovereign Bancorp

(SOV)

.

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 City

(NCC)

,

Washington Mutual

(WM) - Get Report

,

Wachovia

(WB) - Get Report

and, of course,

Citigroup

(C) - Get Report

. 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.

With problem loans increasing at an accelerating pace, raising capital at this time is a prudent move. Sovereign suspended its dividend on common shares during the first quarter in another effort to boost capital. The company has also been reducing the size of its balance sheet.

Total assets were $81.9 billion as of March 31, down 3.3% from last quarter.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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