* IPO mainly to fund organic growth in bouyant economy
* Some small purchases possible in Americas
* Brazil expansion will lessen drag from Spanish market
* Brazil could provide 27 percent of Santander's value by 2011
By Judy MacInnes
MADRID, Sept 22 (Reuters) - Banco Santander's partial flotation of its Brazilian subsidiary will raise cheap cash to fund organic growth just in time for an oil rush in Latin America's most attractive market.
Santander, Spain's biggest bank, said on Monday that it could raise up to 15.6 billion Brazilian reais ($8.6 billion) by listing part of Banco Santander (Brasil) SA.
"By unlocking the value of its Brazil business, Santander avoids having to divert funds from other business areas to take advantage of the huge growth potential in the country," said Caja Marid banking analyst Javier Bernat.
Santander's decision to grow its presence in Brazil over the last two years, mainly by grabbing Banco Real from ABN Amro in 2007, has propelled earnings from its Santander Brazil arm to over 20 percent of group profit.
Return from equity was 25.7 percent of the end of June, making it one of Santander's best businesses.
Some 10 percent of the proceeds of the IPO, possibly the biggest in the world this year, will go to strengthening Santander's capital base, and analysts said the cash could also allow the bank to make a small purchase somewhere in the Americas.
"They could buy out the 25 percent of their Mexican arm held by Bank of America and or a U.S. acquisition to complement the Sovereign franchise," said Antonio Ramirez, bank analyst at Keefe, Bruyette & Woods.
Another possibility would be a further acquisition in Brazil, according to Renta 4 bank analyst Nuria Alvarez.
But analysts saw a major buy as unlikely, as tough key markets and a big plate of recent acquisitions, particularly in Britain, are likely to keep Santander focused on consolidation.
The lion's share of the IPO proceeds, 70 percent, will be used to buy organically into Brazil's oil-fuelled growth story, opening new bank branches, installing automated teller machines and increase lending to Brazilian consumers.
"Brazil might soon be the new flagship of the group, accounting for 27 percent of its value in 2011," said Evolution Securities bank analyst Arturo de Frias Marques.
Banks in Brazil have benefited from the relative strength of the nation's commodity-driven economy during the global financial crisis as well as upbeat forecasts for credit growth. A series of oil strikes converting Brazil into one of the most promising hydrocarbon frontiers has strengthened an outlook already improved by a significant period of stable government and economic management.
"Giving visibility to the Brazilian operation means that Santander will increase local brand awareness with clients, institutions and authorities as it is now a top-tier Brazilian bank," KBW's Ramirez said.
Brazil's central bank in August increased its forecast for credit growth in 2009 to 16 percent from a previous estimate for 14 percent and analysts expect record low borrowing costs and fast growth in the economy to stoke credit demand in the years ahead.
BRAZIL BET PAYS OFF
At end-June, Santander had a 10 percent market share in Brazil, with 21 million clients, 3,612 branches and 18,077 ATMs.
Analysts flagged the potential for mortage lending growth in Brazil. Brazilian mortgage lending is equivalent to only 2 percent of gross domestic product compared to 60 percent in Spain.
"The growth potential in Brazil will to some extent offset the problems in Santander's home market where it is exposed to an over-leveraged economy and a slumping property market," a leading U.S. fund manager said.
The sale of the stake of more than 16 percent in the Brazil unit will also help Santander strengthen its capital base, following similar moves by domestic peers BBVA and Popular as regulators impose tighter controls on the banking sector.
Analysts from Portuguese investment firm Banco BPI said in a research note the offering could "have a positive impact of about 78 and 88 basis points on Santander's capital ratios."
Santander's core capital ratio stood at 7.5 percent at the end of June.
"We consider Santander group to be well capitalised with a estimate for 2009 of core tier 1 at 8.0 percent," KBW's Ramirez said.
(Reporting by Judy MacInnes; additional reporting by Elzio Barreto and Jesus Aguado; editing by Sitaraman Shankar)