Santander is said to plan raising stake in US auto loan unit

[MADRID] Banco Santander SA plans to go ahead with a proposal to increase control of its US subprime auto loan unit, after the business passed the Federal Reserve's stress test last month, according to people familiar with the matter.

Banco Santander believes it can benefit from holding a bigger stake in Santander Consumer USA Holdings as the world's largest economy strengthens, said the people, asking not to be identified because the matter is private.

While the Spanish bank is still waiting for regulators to sign off on the transaction, first proposed in 2015, passing the Fed's stress test makes that approval more likely.

Banco Santander, which already owns 59 per cent of the auto-loan provider, has been trying for two years to purchase a 9.7 per cent stake from co-founder Thomas G Dundon.

Shares in Dallas-based Santander Consumer USA have lost almost half of their value since the bank took it public in 2014, at a time when surging car sales and a search for yield fueled a boom in auto loans.

Last year, the business restated profit figures after regulators questioned its provisions for loan losses.

At current prices, a 9.7 per cent stake would be worth about US$450 million.

In 2015, when Banco Santander announced its intention to purchase Dundon's holding, it gave a price tag of US$928 million. It's not clear what the bank would pay if the transaction goes ahead now.

A Madrid-based press officer for Banco Santander declined to comment.

Santander Consumer is the largest issuer of bonds backed by subprime auto loans, having sold over US$50 billion of the securities since 2007, according to recent slide presentations from the company.

While the market for the debt is much smaller than the subprime-mortgage market that triggered the Great Recession, regulators have grown concerned that lenders are taking advantage of borrowers and putting them in cars that they can't afford.

Banco Santander entered the consumer finance business in the US in 2006 when it bought Drive Financial Services LP, where Dundon was president and chief operating officer.

He retained a 10 per cent stake of the new company and remained as CEO. In 2014, the Spanish bank sold stock in the consumer business in a US$1.8 billion initial public offering.

BLOOMBERG