|
Published: September 20, 2010
I attended an
investment conference last week and listened to a number of
business updates from leading financial institutions. The vast
majority are staying extremely conservative with their lending
activities and are waiting for more tangible signs of an
economic recovery before they start shifting gears from
surviving the credit crisis to growing their operations.
This sentiment is similar across the United States and
throughout the world, with the vast majority of big banks taking
a wait-and-see approach in regard to the future economic
climate. With so many in the industry playing defense, it takes
a brave firm to go on the offensive and stand against the crowd.
Banco Santander (NYSE: STD) is one those rare banks and
understands that being bold when others are fearful can be a
wonderful strategy for picking up business on the cheap.
Santander has succeeded where other banks have failed in two
ways: one is through organic growth and aggressively taking on
deposits, which forms the capital to make loans and earn a
spread in the form of a net interest margin, and the other is
through acquiring best-in-class assets during the downturn.
Santander is pursuing both, but focusing on buying
market share as more beleaguered banks are desperate to sell
assets and raise capital to appease regulations that are
requiring more conservative bank balance sheets. Additionally,
many made loans that have gone bad and stand little chance of
being repaid. As a result, these banks must raise liquidity to
shore up their finances.
Santander focuses on commercial banking and boasts 91 million
customers through nearly 14,000 branches around the world. As of
last year, the bank counted itself as the fourth largest in
terms of profitability and by
market capitalization. The bank also provides asset
management activities and sells insurance.
To give you a feel for just how large and profitable Santander
is, last year total assets exceeded 1 trillion euro, or nearly
$1.3 trillion based on current exchange rates (the company
reports its results in euro).
Net income came in at about $12.1 billion while return on
equity was very decent at nearly 14%. Its Tier 1 capital ratio
(basically a ratio of common and preferred equity, plus some
adjustments as a percent of assets) exceeded 10, which is ahead
of many peers and leaves the
balance sheet in good shape.
Santander should be struggling
royally -- it is based in Spain, which is reeling with close to
20% unemployment and the bursting of one of the largest housing
bubbles in the world. Fortunately, Spain represents only a
fraction of its business and is one of nine primary markets, the
others of which include Portugal, Germany, the U.K., Brazil,
Mexico, Chile, Argentina and the U.S. As such, it is one of the
most globally diversified financial institutions in the world.
Santander's acquisition-hungry focus recently led it to Poland,
where it won an auction to buy a controlling stake in Polis Bank
Zachodni WBK from Allied Irish Banks for $3.8 billion. It has
also recently bought business in the U.S., a minority interest
in Mexico and bank branches in Germany, and the U.K.
On the
dividend front, management returned $6.3 billion to
shareholders last year. This represented +2.2% growth in the
payout from the previous year. Over time, the bank says it aims
to pay out 50% of earnings as dividends, and therefore should be
able to build off the already-respectable current
dividend yield of nearly 4.5%.
Action to Take --->
Santander is rare in that it is growing while other banks are
shrinking. This is paying off for shareholders currently and
should further boost their returns when the global economy
reaches a sustainable recovery.
For the full year, analysts expect of the bank to earn $1.36 per
share. At current share prices, the stock's forward
P/E ratio is below 10 and represents a very reasonable entry
point for investors.
The bank's
return on equity (ROE) exceeded 20% before the credit
crisis. New regulations will hamper bank profit prospects going
forward, so estimating a more conservative steady-state ROE
suggests earnings of about $15 billion, or $1.42 per ADR (1 ADR
share equals 1 ordinary share). Applying a conservative multiple
of 12 translates to a share price of $17, or +34% above
current levels, which doesn't even factor in the considerable
upside from Santander's active acquisition strategy. It's not at
all unreasonable to see the stock doubling within the next few
years.
-- Ryan Fuhrmann
Contributor
StreetAuthority
|
