A former Sovereign Bank branch is rebranded as Santander's first retail bank branch in the United States in New York, U.S., on Thursday, Oct. 17, 2013. Photographer: Ron Antonelli/Bloomberg *** Local Caption ***
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Spain’s Banco Santander is set to pass the US stress test at the fourth attempt as the Federal Reserve prepares to make the lender’s struggling American offshoot one of several groups granted an exemption from the most demanding part of the process.

The move is the result of proposed changes to the Fed’s annual stress tests of the biggest US banks. The regulator is expected to exclude smaller US lenders and several foreign groups — including Spain’s BBVA, France’s BNP Paribas and Canada’s Bank of Montreal — from the most onerous part of the exercise.

It is a rare piece of good news for Santander’s US operation, which last year set an unenviable record by becoming the first bank to fail the Fed’s Comprehensive Capital Analysis and Review for a third year in a row.

From this year, Santander and a handful of other banks that have US operations below certain size thresholds are expected to be excluded from the qualitative part of the test, which has been the main stumbling block for banks that failed in the past.

They will still be subjected to the quantitative element of the tests, which assess whether a bank has a strong enough financial position to continue trading through a catastrophic shock to the system. The Fed and the banks declined to comment.

Ana Botín, who took over as Santander’s executive chairman after her father died in September 2014, has set a deadline of this year to turn round its American business before deciding what to do in the region.

The US operation, accounting for about 10 per cent of Santander’s total loans, is again set to be the worst performer of the group’s main business units in 2016.

It suffered a 42 per cent drop in net profits from the US unit in the first nine months of the year to $425m. The bank blamed this on rising IT and regulatory costs, higher bad debts from oil and gas producers and a strategic shift at Santander Consumer USA (Scusa), a separately listed auto loans provider.

In a further setback, Scusa admitted late last year to errors in more than three years of its accounts because of changes in the way it accounted for loans bought at a discount from dealers and made allowances for credit losses.

Santander has been struggling to improve the performance of its US operation since its 2009 acquisition of Sovereign, a midsized retail lender based in Philadelphia that was hit by a wave of mortgage defaults in the financial crisis.

The Spanish bank is still under a cloud with US regulators as it remains subject to an enforcement order by the Fed for paying an unauthorised dividend from Scusa in 2014.

But if it passes the stress test this year, it could apply for permission from the Fed to restart dividend payments and it may find it easier to do acquisitions or disposals in the US.

Under proposals put out to consultation last September, the Fed plans to exempt from the qualitative part of its stress test any “large and non-complex firms” with $50bn to $250bn of assets, less than $10bn of on-balance sheet foreign exposure and total consolidated nonbank assets below $75bn.

The largest international banks have also been forced to set up separately capitalised intermediate holding companies for their US operations. These new entities will be subjected to the stress test this year, though the results will not be made public for the debut year.

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