Saturday, February 20, 2016

Analysis of Banco Santander

Please read the disclaimer here: Enjoy the article, bitches!


Hello again, in this article I will be taking a look at Banco Santander. I took a position in the stock a few months back and again recently. I have a few main reasons for investing in the stock: it’s cheap, it’s geographically diversified, it pays a healthy dividend, and it has decent profitability and growth.

Update on the Greedy Dragon portfolio: I recently sold my stake in UOA REIT. It was a good run, but I needed the proceeds to reduce my margin debt.


Santander, like other European banks, is priced as if Europe is going to enter a deep recession.  While Europe may enter into a recession, I don’t think it will be a deep one. Then again, I wouldn’t put it past Draghi and all the socialist parties to really fuck up the European economy (more than Europe is already fucked anyway). Based on Santander’s closing price of €3.50 per share on February 19, 2016, the bank would have a price/underlying earnings ratio of 7.69 and a price/tangible net asset value ratio of 0.85. I actually invested in the ADR instead of the shares trading on the BME, but it doesn't really matter as there isn't much discrepancy between the values of the two. My man Peter Lynch made some serious paper taking part in thrift conversions to get bank shares below book value. While this might not exactly be the same thing, I think that it’s a pretty good deal to invest in a bank trading below book value if 1) you’re confident that the bank has a handle on its risks and 2) the bank’s profitability hasn’t been regulated to oblivion. 

Geographical diversification

The group generates its profits from a number of different countries. So, the negative impact of something happening in a country in which Santander has a presence could be mitigated by the profits from the group’s operations in other countries. Here is a breakdown of the group’s underlying profit by country: 

Santander consumer finance (Europe)

Profitability, growth and dividends

For the year ended December 31, 2015, Santander generated a return on tangible equity of 11% which is aight considering all the shit that the banks have to shovel. The group managed to increase its customer deposits and net customer loans by 5.5% and 7.6% respectively in 2015. Net interest income grew 8.9%, fee income was up by 3.5%, loan loss provisions fell by 4.3%, and operating expenses increased by 7.6%. Santander’s underlying profit grew by 13% to €6.56 billion in 2015.

If you annualize the latest dividend announced by the group of 0.05 per share (the group pays a quarterly dividend), Santander would have an attractive gross dividend yield of 5.71% based on the stock’s closing price of 3.50 on February 19, 2016. Spain had a withholding tax rate of 19.5% on dividends effective from July 12, 2015. Subject to approval by the Spanish government, the withholding tax will drop to 19% effective from January 1, 2016.

Loan portfolio

Santander’s non-performing loans ratio came down by 83 basis points in 2015 to end the year at 4.36%; the group had a coverage ratio of 73%. When analyzing a bank, it’s important to go through their loan and securities portfolios to find out how much shit they have on their books. Sovereign debt of highly indebted countries and loans to the oil & gas sector tops the shit list today.  

I think that Santander is good on the O&G front. I couldn’t find O&G among the sectors that the group has exposure to, so I assume that the O&G sector made up less than 1% of Santander’s loan portfolio. Refined oil made up 1% of the group’s loan portfolio, but I’m not worried about that part of the O&G sector. You can find the group’s sector diversification chart on page 221 of its 2015 annual report.

 In terms of sovereign risk, the group has exposure to the following countries with high debt-to-GDP ratios as at December 31, 2015: Spain €48.69 billion, Portugal €10 billion, Italy €2.71 billion. The combined sovereign risk exposure to Spain, Portugal and Italy made up 4.58% of Santander’s total assets. I consider a country to be highly indebted if its debt-to-GDP ratio exceeds 75%. The way I see it, the EU will try hard to prevent another default. Greece is the canary in the coal mine. If Greece defaults again, then Portugal might be next in line to default. But I don’t see the EU letting Portugal default in the foreseeable future as that would be catastrophic to the very concept of the EU. But what do I know? I’m no political scientist, whatever the fuck that is. I’m just an investor analyzing companies in my bedroom, trying to move up in the world.     

The group’s sovereign risk exposure to Brazil was €23.92 billion as at December 31, 2015. While its debt-to-GDP ratio is below 75%, investors in Santander should monitor the situation as the ratio is likely to get worse considering the state of the Brazilian economy. Santander also has sovereign risk exposure to the US and UK which has high debt-to-GDP ratios. However, UK and US government debt instruments will probably continue to be one of the safest assets in the world. And if either of those countries did default, the US especially, then the world economy would have been so screwed that most of us would be worrying about dinner instead of stocks.      

Capital and liquidity

The group had a common equity tier 1 (CET1) phase-in capital ratio of 12.55% as at December 31, 2015. The prudential minimum capital requirement for Santander in 2016 is to maintain a CET1 phase-in capital ratio of 9.75%. On a fully-loaded basis, Santander has a CET1 capital ratio of 10.05% as at December 31, 2015, up from 9.65% a year ago. The group is confident that it will be able to increase its CET1 capital ratio on a fully-loaded basis to over 11% by December 2018 (at that time, the group’s regulatory requirement will be to maintain a CET1 capital ratio of 10.5%).

At the end of 2015, the group had a liquidity coverage ratio of 146% which is in excess of the expected minimum liquidity coverage ratio of 100% in 2018.

Potential risk events

While by no means exhaustive, the following are potential risk events that I think investors should take into account before deciding whether or not to invest in Santander:

·         The Brazilian economy could fall significantly further than expected, causing the non-performing loan ratio in the group’s Brazilian subsidiary to surge.

·        The ECB could do the European banks the same way the BOJ did the Japanese banks by setting negative interest rates. 

·         Europe could go through another sovereign debt crisis. With the troubled European countries trying to avoid austerity like it is fucking cancer, I won’t be surprised if Europe has to deal with a sovereign debt crisis again somewhere down the road.

I guess I will end the article here. Right now I’m just waiting for all the earnings reports from the companies in my portfolio to come out before making any decisions. Thank you for following my blog despite me only writing a new article once every month or so. I guess I’m just a lazy ass motherfucker. Anyway, take care and stay rational.