Santander's €60 billion in asset shifts is set to slow next year

Banco Santander, one of Europe's most active sellers of bank risks and assets, is setting a lower bar for next year, as the competition to win investors such as private credit giants Apollo and Blackstone is heating up.

Strong demand for bank assets has created a "blue-sky scenario" that's likely to enable Spain's largest bank to move €60 billion ($63 billion) in risk-weighted assets off its balance sheet this year, said Sergio Gamez, who runs the Global Asset Desk unit overseeing the effort. That's likely to drop to €40 billion in 2025, Gamez said in an interview at the lender's headquarters in Madrid.

As explanation, Gamez referred to comments from his boss, Chief Financial Officer Jose Garcia Cantera, who said in an analyst meeting earlier this month that the lower figure would be more sustainable.

Gamez' GAD unit is at the center of a program, known as balance sheet rotation or asset mobilization, that has turned Santander into a prolific seller of bank assets and credit risk. As part of the effort, it's been making heavy use of significant risk transfers, which allow banks to free up capital used to back up loans by paying investors to take on some of the credit risk.

But Santander faces rising competition from other banks seeking to shed assets and risks. SRTs in particular have surged in popularity, with S&P Global Ratings saying that's likely to make pricing less favorable for issuing banks.

While Santander has long used asset sales and SRTs to manage its balance sheet, the more centralized approach to the deals under the GAD unit has helped focus the program, Gamez said. He can now use securitizations across jurisdictions and loan types.

Gamez got a new mandate to speed up the asset rotation in mid-2023. He has created a team of around 50 people that includes staff around the world.

These so-called capital relief trades are set to help Santander increase its pretax profit by as much as €800 million this year, Cantera said in the analyst meeting earlier this month, according to a note from Barclays analysts.

Below peers

As with so much else in banking, capital relief trades are driven by regulation. Banks are required to hold risk-dependent levels of capital to backstop assets such as loans, which can render them unattractive if they yield too little. Selling those loans or the attached risk to investors that are outside the banking sector — and its rules — tends to free up capital for new investments at higher returns.

The deals are seen as key for Santander, which has long had a capital level below many of its peers. While analysts have said that this situation constrains the lender's ability to make strategic decisions such as acquisitions, they also expect that gap to narrow in the future.

Santander's ability to increase its capital levels was previously "our biggest issue" with the stock, Morgan Stanley analysts including Alvaro Serrano and Giulia Aurora Miotto said in a note last month. But there's now an improved outlook for the lender, partly thanks to its use of SRTs, they said.

As part of its asset mobilization effort, Santander is currently seeking to offload €150 million ($158 million) worth of mortgages to KKR & Co., people familiar with the matter said. It's also close to agreeing a sale of €900 million in similar loans to Morgan Stanley, Bloomberg has reported.

Representatives for Santander and KKR declined to comment on the previously unreported transaction.

Santander is also partnering with large credit investment firms that take on some of the loans originated by the Spanish lender, but don't face the same level of regulation since they don't take deposits.

Ramping Up

Recent examples are two separate deals that saw Blackstone and Apollo each invest in infrastructure loans originated by Santander worth $1 billion and $370 million, respectively.

The big question is just how long the boom in investor demand that's underpinning Santander's asset mobilization program will last.

Many other banks are ramping up their usage of SRTs to manage their capital and the increasing supply may eventually force the issuing banks to offer higher rates to investors. A plan by Europe's top banking regulator, the European Central Bank, to speed up approvals may further stoke issuance.

New bank capital rules known as Basel endgame are set to kick in next year and could mean banks have to sell bigger risk chunks to obtain capital relief, S&P Global Ratings said in a report in November. SRT pricing "may not remain as favorable to issuers as it has been so far this year," the firm said in the report.

As a result, Santander is trying to identify new ways to keep balance sheet rotation at an elevated level. Gamez is looking into so-called forward flows agreements during 2025, he said, referring to a novel partnership between banks and private credit firms in which the latter commit to finance lending that's yet to come.

Another potential headwind is intensifying regulatory scrutiny, with the International Monetary Fund recently warning of "negative feedback loops" from SRTs. Some watchdogs are taking a close look at the links between banks and the non-bank investors in their loans and risks, especially if the deals are funded by credit from other banks.

"We generally think that securitization can be a useful instrument to move risks to the part of the financial system where they can be better borne than on banks' balance sheets," ECB banking supervision head Claudia Buch said earlier this week. But "we need to make sure that there is no spill-back effect on the banking sector."