Banco Santander And Banco Bilbao: 2 Consistently Undervalued Spanish Banks

 |  Includes: BBVA, C, JPM, SAN
by: Rupert Nicholson

I watched in disbelief Wednesday morning as the two largest Spanish banks lost another 5% of their value. The fall from grace of Banco Santander (STD) and Banco Bilbao (NYSE:BBVA) is no secret. Banco Santander has lost two-thirds of its market capitalisation since the end of 2009, while Banco Bilbao has faired similarly, losing 65% since the end of 2009. This has occurred while Banco Bilbao reported revenue of 25.442 billion euros in 2011, an increase of 1.1 billion euros on revenue reported in 2010. Banco Santander has fared slightly worse, having reported a drop in revenue of 600 billion euros in the same time period. Nevertheless, the drop that the share price has experienced has been disproportionate and stunning.

Crisis in Spain

Simply put, the Spanish crisis has wreaked havoc on these two banks. A loss of confidence in the Spanish market has led to a severe and frankly illogical response hurting these banks. Both banks are international corporations. Banco Santander is one of the largest banks in the world, while Banco Bilbao operates in 40 different countries. However, ultimately, they are both Spanish banks and therefore the average investor has reacted to them appropriately.

The Spanish crisis itself is not necessarily as bad as it seems. The European Union has shown surprising strength recently in its unwillingness to let European countries default. This is a very encouraging trend, which can only be beneficial for Spain. Spain, even if it does face default, is likely to have the protective barrier of the EU to support it and stop it ultimately defaulting. Therefore, the panic over the crisis might well prove to be unfounded as well.


Morningstar rates Banco Santander at a fair value of $9.50 per share. It is fairly conservative in its estimates so it is probably undervalued by about 33.3%. Furthermore, if Banco Santander were to liquidate all its assets now and pay off all liabilities the total shareholder remuneration would be $26 billion more than the current market capitalization. This seems slightly ridiculous to me.

Banco Bilbao is also far below its fair value of $10.00 per share. It is currently trading about 33.3% under that as well. If it stopped operations and sold off now, it would similarly be able to provide shareholders with $6 billion in excess of its market capitalization. It is important to note that these fair values have high uncertainty due to the current issues in Spain. Nonetheless, in a worst-case scenario, the fair values would not change so much that the fair values would drop to anywhere near the current market prices for the banks.

Furthermore, if you compare this market capitalization to companies in the U.S. the current price of those two banks become even less understandable. Apple (NASDAQ:AAPL) and its recent rise to become the largest company in America has made headlines recently as a wonderful company and an example of American exceptionalism. People look at the figures $25.922 billion in revenue and think isn't that just a great company. The reality is that if Apple ceased operations today it would be able to pay shareholders back just $80 billion of a current market capitalisation of $547.9 billion. This seems to me to be insanity on the average investor's part. Nonetheless, banks in America like JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) have suffered fates similar to Banco Santander and Banco Bilbao and are very similar if you examine their assets and liabilities compared with market capitalization. These banks would also be a very attractive buy for the savvy investor as their respective fair values per share are in excess of their current prices per share.


Banco Bilbao and Banco Santander also offer a dividend to their shareholders. They are so undervalued right now, that this dividend is very attractive, especially so for Banco Santander's dividend. It also has paid it consistently in the past as well over a number of years, so it is very likely to continue paying the dividend in the future, and might even increase it in a year or two if the Spanish crisis is resolved. Banco Santander currently pays annuals dividends of 14.3%, while Banco Bilbao pays 7.3% in dividends annually. These dividends are both unbelievably high for solid banks, which just proves how undervalued they are.


Both banks would be very solid stocks to initiate an investment in over the coming months, Banco Santander in particular. Over the coming year, if the Spanish crisis is resolved, both stocks could see a large increase in share price, possibly even upwards of 50% in a best-case scenario. As I pointed out earlier, the European Union is as unlikely to let Spain collapse as pigs will fly. Therefore, I would highly recommend initiating a position in either of these two stocks. They are very undervalued and have huge upward potential. I am particularly leaning towards Banco Santander, due to the huge dividend returns. This dividend is not that large considering the price before the recession, however, at this price, in my opinion, it would be madness to pass it up.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BBVA, STD over the next 72 hours.