The rally in U.S. financials this year has left us a little dumbfounded. Although U.S. financials were oversold, they have now reached a level that is anything but attractive, especially when financial institutions abroad offer much more upside, stability, and better management. This article analyzes Banco Santander (STD) and compares it with Citigroup (NYSE:C), J.P. Morgan Chase & Co. (NYSE:JPM), Bank of America (NYSE:BAC), and Goldman Sachs (NYSE:GS).
The profit levels of the major U.S. banks may never return to pre-crisis levels as a majority of their profits were made from risk taking activities, such as their proprietary trading desks which are being dismantled.
The opposite is true of Banco Santander, which relies on deposits and traditional banking services for its profits (similar to Wells Fargo (NYSE:WFC), a major holding of Warren Buffett's Berkshire Hathaway (NYSE:BRK.A)). Banco Santander has a payout ratio of just under 30%, meaning that over 70% of the company's profits are reinvested in the business to expand operations or held as cash. Additionally, Santander successfully raised its core capital ratio to 10% in 2011 and generated a net operating income of EUR24 billion.
As the CEO of Santander said in the last earnings call:
The figure (net operating income) is particularly relevant for three reasons; first, because it puts us amongst the best banks in the world in income generation. Very few banks have been able to post around EUR25 billion a year in profit before provisions. Second, because it enables us to maintain an excellent track record during the downturn. In the last four years, we've obtained profit or pre-provision profit of EUR90 billion. And thirdly, because it makes our income statement extraordinarily robust and gives us an extreme ability to absorb provisions, even in the most demanding environment.
At Friday's closing price of $8.47, Banco Santander has a dividend yield of 10.23%. The dividends are subject to a Spanish withholding tax of 19%; however, the firm has offered an option to receive shares in exchange for cash for the previous two dividends paid. These shares do not require any payment to the government of Spain and are subject to U.S. capital gains tax, but it is unclear if this stock-for-dividend option will continue in the future.
Conversely, the major U.S. banks have much lower dividends, with Citigroup and Bank of America each paying $.01 quarterly, and Goldman Sachs and JP Morgan yielding an annual return of 1.21% and 2.60%, respectively.
U.S. and Spanish Crises
The U.S. and Spain experienced similar crises in their financial systems: they were both caused by falling real-estate prices and an inability of borrowers to repay their loans. To cope with the financial meltdown, Banco Santander has set aside provisions to cover 50% of the real estate on its books which should provide enough safety to cover mortgage defaults. This swift action by Banco Santander has positioned the bank to be healthy even if Spain falls into another recession.
Banco Santander's value is seen in several metrics. Its enterprise value is $123 billion, compared with JP Morgan at $6.9 billion, Citigroup at $-61.02 billion , and Goldman Sachs at -$281.28 billion. These values immediately display the high debt levels of US banks which have plagued them for the past 4 years and will continue to hamper their success going forward.
Additionally, Banco Santander has the highest operating margin of the group at 32.1%. This displays the efficiency of the company and management decisions. Although the profit margin lags that of JP Morgan and Citigroup, this can be attributed to the large provisions Banco Santander set aside during Q4 of 2011 for its real estate assets. Moving forward, Banco Santander will not need to make additional provisions, and this metric will likely outperform U.S. banks.
The return on equity (ROE) of Banco Santander is higher than Goldman Sachs and Citigroup, even with the large provisions for real estate assets. In the future, this metric should continue to increase.
Market Cap (intraday):
Enterprise Value (Feb 20, 2012):
Trailing P/E (ttm, intraday):
Forward P/E (fye Dec 31, 2013):
PEG Ratio (5 yr expected):
Enterprise Value/Revenue :
Profit Margin :
Operating Margin :
Return on Assets :
Return on Equity :
Investing in Santander requires the purchasing of ADRs, which gives the buyer exposure to the euro. Many pundits have questioned the long-term viability of the euro, but we believe the euro will remain intact. We are confident that EU leaders will successfully manage the situation in Greece due to recent concessions made by the Greek government to meet required budget cuts to receive bailout funds. Additionally, even if Greece and other financially distressed countries were to leave the Eurozone, there is a strong likelihood that
a core Eurozone would survive, namely of Spain, Germany, and France, who can benefit from the established common tariffs. Currently, the euro is weak against the USD in historical terms due to the uncertainty with Greece and will likely appreciate over the longer term (18-24 months). This gives ADRs in euro based stocks implicit value today, if the investing timeframe is longer than 18 months.
Banco Santander has never missed a dividend payment and its income stream is consistent and safe. The company operates in the Eurozone, Latin America, and is currently growing in the United States with the purchase and expansion of Sovereign Bank. We are advising the purchase of shares of Santander, and believe the firm is positioned for long term success. Uncertainty over potential bank regulations by the Spanish government has depressed the price of all Spanish banks; however, Santander is much better capitalized and better managed than the majority of its international and Spanish counterparts.
Disclosure: I am long STD, C.