Banco Santander: European Bank Weathering the Subprime Storm

Every private investor’s portfolio should contain some international stocks; in fact most portfolios should have a lot of foreign stocks. Also, most well diversified portfolios should contain some financial stocks.

Finding an attractive U.S. bank, however, is a challenge and finding an international bank is even more difficult. Overseas financial information is in less abundance and often less reliable. The same things go for solid information concerning local economic conditions. To make the search even more difficult, many banks took their lumps last summer with the sub-prime shakeout. The fallout for U.S. financial institutions has been stunning; and in Europe, UBS AG, Barclays PLC, and HSBC Holdings PLC alone, have written off billions of dollars. One European bank, nevertheless, has weathered the storm in pretty good shape.

Headquartered in Madrid, Banco Santander SA (STD) and its subsidiaries offer a wide range of financial products in Spain, other European countries, the UK, and Latin America. With total assets of 834 billion Euros (December 2006) and 10,852 branches worldwide it is one of the largest banks on the continent. Banco Santader’s European operations accounts for 51% of its income, Latin America provides 34%, and the UK’s Abbey National contributes 15% of the bank’s income.

What I like about Banco Santander:

- Revenue has improved every year since 2003.

- Earnings per share has improved every year since 2001

- Although not great for a bank, its 3.27 % yield is acceptable.

- Its net profit margin of 31.8% is better than the 20.7 % average for the industry

- Its debt to equity is only 0.69% versus the industry average of 3.42%.

- With a PE of 13.5 the stock is fairly cheap. Its forward looking PE of 9.47 and five year expected PEG of 0.75 add to the attraction.

- Its Latin American operations offer great opportunities, particularly in Brazil where it has merged with ABN Real. Brazil has a vibrant, although high risk, economy.

The other risks:

Banco Santander’s FORM 20-F contains the obligatory and fairly predictable list of risks. It is in a cyclical industry. It is highly exposed to developments in the real estate market as real estate comprises more than 50% of its loan portfolio. It is vulnerable to interest rate changes. Interestingly enough, the FORM 20-F listing these caveats was dated back in December 2007. Predictable or not, this is a bank and these risks are worth noting.

The stock price:

The current stock price of $21.79 is near the high of its 52 week range of 16.93 - 22.34. Although its financials are in good shape, Banco Santander is attractive over the longer haul rather than presenting an opportunity for a quick profit.

Disclosure: Author has no position in any of the stocks mentioned in this article.