$SAN Stock: Is this a Good Time to Buy Bank Stocks in Spain?

The Euro crisis hit Spain hard and Spanish bank stocks have understandably suffered. Now that the EU economy appears to have stabilized a bit, you may wonder if this is the right time to buy SAN or other Spanish banks.

The Pain in Spain

Spain followed a story line similar to United States. Cheap credit and easy real estate loans, coupled with a sunny climate led to a boom in North Europeans buying up property in Spain. Many of these mortgages soured and with the housing market in a free fall, the banks ended up with significant amount of bad investments on their books. Bankia needed a bailout and although not all the banks were equally troubled, the low confidence in the banking sector punished all the Spanish bank stocks. Furthermore, tightening regulations meant all the banks had to increase their reserves to cover bad loans, improve liquidity and aggressively take the writedowns and chargeoffs which affected their bottomline.

SAN (Banco Santander) is the largest bank in the Eurozone. Headquartered in Madrid, Spain, the company operates primarily in Spain, the United Kingdom, other European countries, Brazil and other Latin American countries, and the United States. Throughout the crisis, the bank has remained profitable and continued to pay its 0.60 Euros/share dividend. The following chart reflects SAN performance over the last 5 years:

san5yr

 

SAN performance is in red and is compared to the S&P 500 index. While long term holders have suffered, investors who bought the stock last year are not complaining. Compare this to the Spanish Government 10 year bond, the benchmark issue (Source: Bloomberg). The yield on this crossed 7% last year that is considered to be unsustainable. Calm has now returned to the market and the yield has been settling down. Both the chart above (SAN stock performance) and the Spanish 10 yr note yields is set for the same 5 yr time scale, so it is easy to see the correlation in the recent years.

spanish10yrbond

 

Should You Buy SAN Now or Not?

SAN stock price is up 11.66% from the year ago and 81% from the lows it posted in Jul 2012. Still, the stock appears to be cheap. Generally, when an entire economy and its financial institutions have just gone through a wringer, it is not useful to make any projections based on the financials from the recent history. The most we can do is,

  1. Look at the current valuations based on known assets, and,
  2. Review the business performance during the crisis to get a sense of how well the company is run. This should give us a good indication of the potential under more normal conditions.

Current Valuations as of Jan 27, 2013

Stock price $8.81 Market Cap $83.65B
Forward PE 9.68 Price/Book 0.85
Dividend Yield 6.90% Profit Margin 6.72%


The company has over $479 B in cash with $451 B in total debt. While the earnings in 2012 have declined year over year, it is mainly due to extra provisioning of reserves for non performing loans as mandated by the government. For example, in the first half of 2012, the Net Income went down by 1.797 B Euros to 1.704 B Euros, of which 1.923 B Euros was due to the extra provisioning for the real estate risk. Interest income on the other hand increased by 2.3% in the same period. Total revenue producing assets (loans, credits) increased 7.5% even as the demand for loans and credit products declined in Spain (by 4%) and Portugal (by 7%). The increases came from Latin American, UK and US.

The company has less lending exposure to Spain and Europe today compared to the past. 60% of the loans the company makes is now outside of the Continental Europe, with Spain only accounting for 28%. UK at 35% and Latin America at 19% (Brazil 10%) now providing the much needed geographic diversification and exposure to fast growing emerging markets.

Dividend

The company has maintained a Euro 0.60/share annual dividend rate for the last 3 years and is likely to keep or grow it in the future. This roughly translates to 6.90% yield on its stock today. If you buy SAN stock for income, you have a choice of taking the dividend as either cash payment or in more shares.

Prognosis

Santander passed the stress test administered to the Spanish banks and now has adequate provisions against risk of bad loans. Going forward, the regulatory impact on the balance sheet and income statement should stop, and as the Eurozone returns to normalcy, the retail banking giant should be able to grow its deposit and lending base. Further growth in emerging economies and geographic diversification reduces the risk in the business and adds to the future growth rate.

At less than the book value and a projected PE ratio below that of its peers, the stock seems to be attractively priced. I would still like to go deeper and review its assets and asset quality, but the stock has me interested enough to add it to my watch list.

Want me to review a stock you are looking at? You can request it here and I will add it to my schedule.

Comments

  1. Ranjit says

    SAN is going through de-leveraging process as one can see in its balance sheet – loans-to deposit is about 110% down from 125%, which means they are shrinking their balance sheet by either selling assets or subsidiary. The process could be painful but given geopgraphic diversification, they can mitigate this process easily. Last year, they raised capital by selling their stake in banco santander mexico.

    To better analysis SAN, one has to analysis balance sheet/income statement by country as SAN has to match assets and liabilities by country. At the end, you will end up analyzing 5-6 different bank. The analysis could be tough as not enough information is available by country. Other question which remains unanswered, is a quality of assets of banco santander as they are heavily buying spanish sovereign debt. I personlly think it was buy at the height of euro zone crisis, it was elling at EUR 4-4.50 @ tangible book value. Since then stock huge run, is up almost 50%.

    I think US banks are in much better share – JPM is trading at book value, about 8x 2013 estimates, WFC at 1.3x book value about 8-9x 2013 estimates, but real advantage is that these banks can grown at much faster pace than banks which are in de-leveraging mode. WFC and JPM has about 200-300b in excess deposits, for them to increase lending is quite easy plus once interest rates start going up (which i think it will in 12-24 months), earning will increase exponentially.

  2. says

    Yes, going deeper in its business is going to take time but it could be worth while. They are bulking up on reserves by selling banks as necessitated by the new regulatory regime but they do not seem to have much of a non performing loans issues.

    I think you are too optimistic about the earnings response to rising interest rates for the US banks. I personally believe some of the skeletons currently hidden in the cupboard will start to come out and the earnings will be massaged over. Besides, cost to borrow for them today is pretty much zero and lending today is more lucrative when you look at the spread.

    Rising interest rates do not encourage borrowing in the economy so it doesn’t matter how much they are able to lend when very few want to borrow.

  3. Ranjit says

    Its hard to make call on hidden skeletons (I think most of bad loans have been written off and they have enough liquidity to mitigate through rough times esp. WFC and JPM) but i think valuation are pretty attractive at historic lows.

    In regards to interest rates, if you look at last year results for banks, NIM (net Interest Margin) was compressed because 10% treasury yield was down to almost 1%. I don’t expect treasury yields to be at 1-2% level over next 2 yrs (they are already at 2%, last seen in April 2011), which in turn should expand NIM this year and going forward. hence, should reflect in bottom line results.

    Given interest rates are at historic lows, even 1-2% increase in interest rate would not hamper loan demand. Even slight increase in interest rate with increase in loan growth of 5-10% at these level should expand their earning.

  4. says

    An increase in interest rates will increases their cost of money too. The only free lunch the banks are ever going to get is right now and they are still hoarding capital instead of lending. This level of conservatism in lending today does not make sense as lending is their bread and butter business. I know you said it is a tough call on the “skeletons in the cupboard” but only thing I can think of to explain their reluctance to lend today is that may be they are not really sure what else is on their books.

  5. says

    Santander is a good bank, but the share price will get hit when the spanish index does. It has seen a big rally in the last 6 months and will be corrected. SAN has good exposure to south america which is a growth area. I would be a buyer after a 20% correction in the current price.

Leave a Reply

Your email address will not be published. Required fields are marked *