Santander: Is This A Good Time To Buy Bank Stocks In Spain?
Shailesh Kumar | Jan 28, 2013 05:17AM ET
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 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.
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,
- Look at the current valuations based on known assets, and,
- 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.
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.
Get The News You Want
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.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.