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Citizens, Sovereign unfazed by European counterparts' plight

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Having a parent exposed to danger overseas can be frightening for a child. But not, apparently, for a bank.
Spain's Grupo Santander owns Sovereign Bank, while the Royal Bank of Scotland Group owns Citizens Bank. Yet Sovereign and Citizens rebut concerns that their parent companies' travails amid the European debt crisis could extend to them.

"Sovereign is among the strongest U.S. banks," spokeswoman Kathy Klingler said in an email last week. "As a well-capitalized and autonomous business, Sovereign continues to invest in line with its growth strategy."

Citizens Bank's Tier 1 capital ratio, a standard measure of bank health, is 13.6 percent, "more than double the amount required to be considered a well-capitalized bank," spokeswoman Sylvia Bronner said.

Sovereign's capital ratio is 13 percent, Klingler said.

Sovereign and Citizens have, respectively, the seventh- and eighth-largest presences in the midstate, according to Federal Deposit Insurance Corp. data. Boston-based Sovereign has 48 offices and more than $1.5 billion in assets here. Citizens, based in Providence, R.I., has 27 offices and assets of more than $1 billion here.

Citizens is the 19th-largest bank in the U.S., with $130 billion in assets, according to the Federal Reserve. Sovereign has $80 billion in assets nationwide, according to the FDIC.

Europe's sovereign debt crisis stems from the same worldwide financial collapse in 2008 that brought on the Great Recession in the U.S. In Europe, the situation has been complicated by the euro. The currency union led to investors underestimating risk in "periphery" countries such as Greece and Spain and now is hampering the periphery's ability to respond to the downturn.

Austerity packages intended to improve governmental balance sheets have instead led to deteriorating economies and high unemployment. The European Central Bank has had to lend huge amounts, most recently to Spain, to stave off banking crises and possibly the euro's demise.

Santander and RBS Group both have been rocked by the turmoil. In 2008, RBS Group posted the largest annual loss in the history of U.K. business. The British government poured billions of pounds into the ailing bank as part of two broad bailout packages and now owns a majority interest —

80 percent — in the institution.

Banco Santander has remained profitable and avoided bailouts. However, its stock price has fallen by nearly half in a year. In May, Moody's downgraded its credit rating and those of 15 other Spanish banks.

Santander has had to increase its provision for real estate loan losses in Spain considerably, leading to a sharp drop in first-quarter profits.

However, it's important to remember that Santander's overseas subsidiaries "are independent in terms of capital and liquidity," Klingler said.

Santander is highly diversified, generating half its profits in Latin America, compared with 12 percent in Spain and 10 percent through Sovereign in the U.S., according to company data.

Sovereign is focused on growth, increasing its deposit base by 12 percent in 2011, she said. In January, it converted from a savings and loan charter to a national bank charter "in order to serve a broader range of customers and expand our product offerings," she said.

Sovereign reported net income in 2011 of $316.9 million, according to the FDIC. Citizens reported net income for 2011 of $506 million.

Like Sovereign, Citizens is a U.S.-chartered and capitalized bank. Citizens did not offer further details about its operations.

The U.S. system does indeed have features that insulate banks considerably from the troubles of parent institutions overseas, said Fariborz Ghadar, Penn State professor of management and finance and director of the university's Center for Global Business Studies.

The FDIC fully insures all domestic accounts up to $250,000. Foreign-owned banks have U.S. charters and must meet U.S. capital, safety and soundness regulations.

"Both Sovereign and Citizens are doing OK," Ghadar said. "The question is, what's going to happen to the parent companies?"

Europe essentially needs to create a eurozone version of the FDIC, he said. If that doesn't happen and the crisis continues, some banks may have to liquidate assets to raise capital and avoid bankruptcy, he said.

If Santander or RBS Group falls into that category, Sovereign or Citizens could end up being sold, Ghadar said, though he characterized the possibility as remote.

One indication that Santander has no such plans: Sovereign is scheduled to rebrand as Santander Bank next year.

Another possible consequence, Ghadar said, is that the challenges facing Santander and RBS Group could lead their U.S. subsidiaries to pull back on their lending.

So far, that doesn't appear to be the case at Sovereign. The bank's loan portfolio grew to $50.6 billion in 2011 from $47.9 billion in 2010, according to the FDIC.

Sovereign has grown its small-business lending by more than 30 percent since 2010, Klingler said.

Citizens, on the other hand, reported total loans shrinking from $87 billion in 2010 to $86.8 billion in 2011.

Solving Europe's debt crisis will require more than handing out loans, Ghadar noted.

"That just kicks the can down the road," he said.

Background: Who bought whom when?

Grupo Santander only recently acquired Sovereign Bank; Royal Bank of Scotland Group's interest in Citizens Bank is more longstanding.

RBS Group acquired Citizens Bank in 1988. Citizens' Pennsylvania division dates from 2001, when RBS acquired the retail operations of Mellon Bank, a former Pittsburgh-based bank now part of Bank of New York Mellon. That division, Citizens Bank of Pennsylvania, remains a separate bank with its own charter; it and RBS Citizens are held by RBS Group's U.S. holding company UK Financial Investments, according to the Federal Deposit Insurance Corp.

Citizens Bank of Pennsylvania has nearly 400 branches in Pennsylvania and 13 in New Jersey, according to the FDIC.

Santander bought a 20 percent stake in Sovereign in 2006. It then acquired Sovereign outright in January 2009, as the latter bank struggled to weather the financial crisis.

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