Banco Santander announced a surprise 7.2 billion euro ($9.24 billion) rights issue to shore up its capital on Monday, only a week after saying it was comfortable with its core capital ratio.
Santander, which had concerned some investors with a string of buys that some feared would dilute its core capital, said in a statement it was not planning more acquisitions and would postpone planned asset sales until market conditions improve.
The rights issue has been fully underwritten by a syndicate of banks led by Merrill Lynch and also including Bank of America and Credit Suisse, the Spanish bank said.
Santander chairman Emilio Botin said in a statement this morning: "Banco Santander has always had a very clear approach to capital strength. That is why, although we are starting from a very strong position -- our core (tier 1) capital (to risk-weighted assets) ratio at Sept.30 was 6.31 percent -- the group has raised its goal to 7 percent in response to our higher expectations in the current economic environment."
Santander will delay sales of assets including its 31 percent stake in oil refiner Cepsa and its Banco de Venezuela subsidiary.
The bank said it would offer one new share for every four in circulation, or 1.6 billion new shares, at 4.5 euros per share to raise 7.2 billion euros.
"The timing of the announcement is a real surprise, particularly given that Santander only a week ago in its presentation on the outlook for its Brazil business said it was comfortable with its capital position," said an analyst at a US investment fund who requested anonymity.
Santander has emerged relatively unscathed from the credit crunch, sweeping up the savings and the branch network of the UK's troubled Bradford & Bingley and bidding for the remaining 75 percent of U.S. bank Sovereign which it does not already own.
Santander's share price was down 5.40 percent at 7.89 euros, when the Madrid market's IBEX-35 index was down 0.14 percent.
"The move is surprising as we were under the impression that they did not need capital," said one shareholder who asked not to be named.
"But we're not too concerned about it. They should have excess capital now, which puts them in the position to make further buys."
At the end of October Santander had attempted to calm investor concerns that the bank's string of acquisitions, which has also included Britain's Alliance & Leicester this year, had diluted its core capital.
"Although the timing of the cash call may surprise investors after recent moves by UK and Portuguese banks to raise minimum capital levels and Santander's failure to sell assets, this decision was perhaps on the cards," a Madrid-based equities analyst said.
Santander said it was being conservative and the move was not related to hidden losses.
"We have taken the strategic decision to operate with higher capital ratios within an environment of greater uncertainty and a market demand for higher capital ratios in the financial industry," it said in a presentation.
"We do not have acquisition plans," it said, adding that the bank would maintain its dividend per share in 2009 compared with 2008, which in turn would rise from the payout for 2007.
It would also maintain the payout ratio at 45-55 percent of profits.
The US investment fund analyst said: "By announcing a target of 7 pct for its tier 1 core capital ratio, it is very unlikely the bank will now unveil plans for further acquisitions which would effectively eat into this reinforced capital base."
"My feeling is that either the Bank of Spain lent on Santander to strengthen its capital ratios to levels more in line with its main European rivals or Santander got wind that the Bank of Spain could do this in the next month or so and made a pre-emptive move," the analyst added.
"I think this will put pressure on BBVA to shore up capital," he said.
But Santander's domestic rival BBVA said it has no plans to raise capital.
Up to now, the Bank of Spain has said that Spanish banks are well capitalized and that the Spanish financial system is healthy, despite a government plan to create a 50 billion fund to buy bank assets and to guarantee new bank debt.
Caja Madrid analyst Javier Bernat said: "The urgency of this move I think has to do with the increased perception of risk in the global banking sector and the indirect pressure from Santander's European peers to strengthen its capital base." Other European banks had struggled with rights issues earlier in the financial crisis, with British banks RBS, HBOS, Bradford & Bingley and France's Natixis all suffering from investor reluctance to pour in more money.
More recently, British bank Barclays decided last month to turn to two major Middle East investors to raise the bulk of its 7 billion pound ($11.46 billion) new capital requirement, saying it judged a rights issue too risky.
Santander should not suffer this sort of fate.
"The rights issue is totally underwritten, so it will be successful," a Venture Finanzas analyst said.
Trading in the rights to Santander shares will run for 15 days after the prospectus for the issue is approved by the Spanish stock market regulator.