ALEX BRUMMER: Sun sets on Spanish boom

By ALEX BRUMMER, CITY EDITOR
Updated:

We should all beware of complacency about the return to health of the banking sector. The world has moved rapidly from an era when regulators and the banks conspired to convince us that it was safe for financial institutions to hold very little capital, to Basel 3 and beyond, when capital requirements will become very onerous.

Indeed, despite the immense confidence among the banks that their capital ratios are now sufficiently robust to meet the new rules, one must take everything they say with a pinch of salt.

In the run up to the financial crisis the banks engaged in collective dissembling on their wholesale funding, liquidity and the strength of their equity capital.

A Santander bank branch in London

Carry on abroad: Santander has become reliant on overseas earnings


One was reminded of all this when Santander, one of the banks which came through the financial crisis best, reported its latest results.

They showed a bank struggling in its home market of Spain, where only now the bad debt horrors are being realised.

Santander has become increasingly reliant on earnings from overseas with the UK now larger than its native Iberian operations and Brazil (largely the result of the opportunistic break-up of ABN Amro) saving the day.

Santander's skill in cherry picking assets during the financial crisis failed to fully disguise an unsatisfactory picture, with net profit falling by 26pc as provisions soared.

In the UK, Santander says it is having a great time with business and mortgage lending strengthening and it is acquiring customers from the other banks.

Unfortunately, the service provided to consumers does not justify the promotional hype. The bank headed the league table for complaints in the first half of the year when 216,158 were reported. If J Sainsbury or Tesco treated consumers so badly they would be out of business.

Yet despite this, Santander's hand was almost bitten off when it bought Royal Bank of Scotland's English branches and NatWest's Scottish branches.

Should we be comforted by the fact that Santander is promising a London flotation next year?

Certainly, it will be a chance to raise some fresh capital. But it would be a pity if this were to be swallowed up in the black pit that is Spanish property.

Then there are governance questions to be addressed, including the domination of the board by the Botin family through a relatively small equity stake.

Despite a number of acquisitions in the last year, Santander's core capital stood at 8.5pc at the end of September compared with 7.7pc last year. But one has to ask is that robust enough to withstand the hurricane blowing through Spain's economy and the risks of overheating in Brazil?

Nerves could start to rattle. 

Labour pains

The determination of Labour loyalists to rubbish George Osborne's spending review knows no bounds.

A release from rising star Chuka Umunna MP, of the Treasury Select Committee, suggests that Osborne and the coalition have been overegging the scale of Britain's financial difficulties.

It quotes former Cabinet Secretary Lord Turnbull contradicting the view that Britain was on the 'brink of bankruptcy'.

Turnbull is almost certainly right to point out that Britain was ' capable of producing a financial settlement that wouldn't take us into Irish and Greek problems'.

Nevertheless, as a senior Treasury official during the exchange rate mechanism crisis of 1992, Turnbull should know better than most how quickly financial markets can turn against you.

The bald facts are that without a change of direction UK debt was heading towards 80pc of gross domestic product and the interest rate on the national debt would have been £60bn. The risks of a full scale sterling crisis, together with a strike on the gilts market, were very real.

Indeed, what state might the gilts market be in had not the Bank of England soaked up £200bn of debt for quantitative easing purposes?

Earlier this week, Umunna's colleague, shadow chief secretary Angela Eagle, was on TV claiming that the UK could suffer the very same fate as Ireland as a result of coalition cuts.

Labour cannot have it both ways. 

Legion's loss

An unexpected victim of the bread wars between Premier Foods and Tesco could be the Royal British Legion's poppy appeal.

Premier donates 4p for every Hovis poppy seeded loaf it sells to retailers to the appeal, raising £130,654 last year.

That was before Tesco decided it would no longer be stocking 11 lines of Hovis loaves, including the poppy seeded variety. Any loss of income will clearly be sad for Britain's war veterans. But they will not thank Premier for dragging the poppy appeal into a commercial row.

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