The European banking sector has been especially beaten up over the past months. The debt crisis and the uneasiness of the euro have created plenty of pessimism towards many European banks. However, one bank has stood out above all else and has continued to grow at a feverish pace.
Banco Santander (STD) looks to be one of the safer and more promising investment opportunities in the financial sector in Europe. Founded in 1857 with a market cap of $89 billion, STD is the largest bank in the euro-zone by market capitalization. The bank offers a wide array of financial services in Europe, Latin America and the United Kingdom.
Let's take a look at some of the pros and cons of STD:
Pros: (Q1 2011 Financial Report)
- Currently yields a 9.1% dividend.
- P/E of 7.8.
- Highly diversified; more than 40% of profits come from Latin America.
- Latin American profit increased 26.8% yoy.
- 10% decrease in loan loss provisions.
- Conservative banking practices. Fiscally responsible.
- Recently acquired stake in Polish bank Zachodni WBK.
- European profit decreased 14.1% yoy and U.K. profit decreased 2.2% yoy.
- Operating expenses up 13.2% in recent quarter.
- Unrest and economic stagnation in Spain.
- Dragged down by sinking PIGS debt crisis.
- Appears to move in the general direction of the Euro, regardless of the fact that majority of profits derive from outside the Euro zone.
- Stiff competition in the Spanish banking sector.
Amid all of the growing uncertainty in the euro-zone, Banco Santander has continued to grow and strengthen its prospects for the future. The bank has diversified its holdings and is experiencing robust growth within Latin America. Lending in 2011 Q1 was up in Brazil, Mexico and Chile at 18%, 29% and 17%, respectively. It remains poised to benefit from continued growth in Latin America and in Europe when the debt crisis is resolved. Its acquisition stake in the Polish bank Zachodni also will help Banco Santander as it moves forward, Zachodni profit was up 15% yoy and total income was up 6% yoy. (Zachodni Q1 2011 Report)
There are certain areas that investors must be cautious of, however. Growth in continental Europe and the United Kingdom is decreasing/stagnated and that poses serious drawbacks when evaluating future growth prospects. Competition within Spain from other banks will remain an obstacle towards growth in the future, yet STD remains diversified enough not to rely solely on Spain. The bank has remained profitable, yet it is also prone to setbacks (in the short term) in bailout negotiations in other PIGS countries.
For riskier investors, National Bank of Greece (NYSE:NBG) appears to have more potential upside, yet there remains plenty of uncertainty over the outcome of the debt crisis. The Irish banking sector also looks to be riskier and rockier to invest in than STD. Both Allied Irish Banks (AIB) and the Governor and the Company of the Bank of Ireland (NYSE:IRE) are not as diversified internationally as Banco Santander and subsequently are more prone to economic stagnation in their home countries. The risks in NBG, AIB and IRE far outweigh those associated with STD and the solid yield it sports.
To conclude, STD looks poised to benefit from an eventual economic upswing within the euro-zone. The bank pays a large dividend of 9.1% that is among the largest in the financial sector. It also trades for very cheap multiples with a P/E of less than 8. STD remains a good stock to own in the present because of its dividend yield and in the future because of its international diversification in Latin America and Europe.
As Europe recovers and Latin America continues to grow, expect STD to remain poised to benefit from the upswing.
Disclosure: I am long NBG, STD.