UPDATE 1-Shares of Santander Brasil jump on $2.7 bln dividend plan
(Updates with share performance, analyst comments in paragraphs 1-5)
SAO PAULO, Sept 27 (Reuters) - Banco Santander Brasil SA , seeking to jumpstart its flagging return on equity, will modify its capital structure by paying shareholders a one-off dividend of 6 billion reais ($2.7 billion) and issuing foreign currency-denominated debt.
The plan will allow the Brazilian subsidiary of Spain's Banco Santander SA to tap a cheaper source of capital. The dividend payout will be followed by a sale of Tier I and II debt in the same amount that the parent company could subscribe to in its entirety.
Units of the São Paulo-based bank, a blend of common and preferred shares, jumped as much as 10 percent on the news. Friday's gain helped pare back Santander Brasil's year-to-date decline to 1.3 percent.
While the one-off dividend payout should improve Santander Brasil's return on equity readings, analysts were concerned the move could have an impact on earnings per unit. Santander Brasil's return on equity, a gauge of profitability that measures how well banks use shareholders' money, is the lowest among Brazil's largest listed lenders, mainly because the bank has lagged behind rivals in terms of lending growth, margin expansion and default controls.
"Without any additional change to underlying operations, the final impact on earnings per share and return on assets is negative, which could hurt prospects for the shares after the extraordinary dividend is paid out," Goldman Sachs Group analysts led by Carlos Macedo wrote in a client note.
Once among the world's most profitable companies, Brazilian lenders have struggled in recent years with a flagging economy, a decline in interest rates and the impact of competition between private-sector and state-run lenders that led to steep margin compression.
Changes in the bank's capital structure would leave Santander Brasil's regulatory capital ratio unchanged at 21.5 percent, although its Tier 1 ratio may fall by a full percentage point to 19.3 percent. Tier 1 capital consists primarily of common stock and retained earnings.
Santander Brasil by law has a capital structure independent of parent Santander, limiting the means by which it can return funds. Analysts have said the parent, Europe's largest lender, may need capital to offset losses incurred in recession-hit Spain.
"The goal of this is to augment the efficiency of the bank's capital structure and put it in line with the necessities and the realities of the market," the bank said in a securities filing late Thursday.
Santander Brasil has for years held capital in excess of central bank requirements. The plan also includes a reverse split of its common and preferred shares, with no impact to unit value.
(Reporting by Guillermo Parra-Bernal; Writing by Reese Ewing; Editing by Christopher Cushing, David Holmes and Diane Craft)