Santander feels heat to raise capital safety buffers

Santander, the Spanish bank whose UK empire spans Abbey National, Alliance & Leicester and Bradford & Bingley's savings business, is under increasing pressure to raise capital to match European rivals' stronger safety buffers.

Santander was involved in talks on the UK bailout but turned down the Government's cash. Instead, it moved £1bn from elsewhere in the group to its UK business, boosting the tier-one capital ratio for Abbey-A&L to about 9.25 per cent. Santander's group tier-one ratio stands at a much weaker 7.89 per cent and its core tier-one ratio is 6.31 per cent. Those measures would have been considered strong buffers a month ago but now look thin compared with the European average for major banks of over 9 per cent for core capital, say Merrill Lynch analysts.

Spain has resisted a recapitalisation plan for its banks after the UK's strengthening of British lenders triggered a wave of cash injections. With Italy now working on its own plan, Spain will be the odd man out among the major European economies. "I am almost sure Santander will need to raise some capital at some point" as part of a Spanish capitalisation plan, a senior investment banker who has worked on several recent European bank bailouts said last week.

Santander, Spain's biggest bank, has reaped the benefits of its traditional retail banking businesses and the Bank of Spain's insistence that lenders shun racy credit assets and build impairment reserves during the good times. But Spain's property bubble has burst and the country is heading for recession, while Latin America, where Santander makes about a third of its profit, is also looking shaky.

Simon Maughan, at MF Global, said: "They are not immune to a very deep recession and 6.3 per cent core tier one doesn't cut it in a very deep recession. It is better to do it now than in a year's time." Sandander declined to comment.