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Gasebu Private Investor
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I am a private investor mainly focused in so called value investing. Writing helps me to structure my investment ideas as well as to submit them to other people's opinion and critics.
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  • Santander Accounts Restatement

    Banco Santander (NYSE:SAN) restated 2011 and 2012 accounts in order to make them comparable with future reporting. From January 2013 new mandatory rules will be applicable and in particular a reviewed IAS19 standard that deals with cost recognition of employee's benefits.

    Putting aside some other segment and disclosure issues, the core of this restatement is indeed this new IAS19 impact, since it decreases bank's equity in $2,350 million, close to 4% of 31 December 2012 equity balance.

    This amount was already estimated and disclosed in 2012 Annual Report, but it was not deducted from 2012 Annual Report equity figure.

    IAS19 puts European standards at par with US standards in this matter, so I assume, but I cannot guarantee it, that accounts of SAN adapted to US GAAP, if any, shouldn't be affected.

    I couldn't obtain from SAN's website the information in English about this restatement.

    For those of you that want to know where this impact comes from you will need to go through a lot of detail shown in the 2012 Annual Report and make hypothesis on where is this exactly coming from. Honestly I do not have the time to do that.

    IAS19 states something relatively simple: The cost of providing employee benefits should be recognised in the period in which the benefit is earned by the employee, rather than when it is paid or payable, but nothing in accounting is kept simple as we know.

    For a more detailed review and explanation please visit IAS website. I will try to summarize what I understood, and in that light go back to SAN restatement.

    The IAS19' review focuses on three key areas:

    1. Elimination of the option to defer the recognition of actuarial gains/losses resulting from deļ¬ned benefit plans.
    2. Elimination of options for the presentation of gains and losses relating to those plans that made difficult to compare different companies.
    3. Improvement of disclosure requirements in order to highlight the risks arising from those plans.

    Point 1 is the most important. Before this review, companies had the option to defer actuarial gains/losses on defined benefit plans using the so called "corridor method", which implied that, only when the cumulative gains/losses exceeded 10% of the present value of the plan's benefits (liabilities for the company), or the plan's assets, if bigger, companies had to start recognizing them.

    When that value corridor was exceeded, companies had to amortize the net excess on the remaining employee's working life. That was the minimum amortization, but companies could recognize the impact faster, meaning they could amortize the net cumulative excess on the corridor on a smaller number of years.

    With the new IAS19 standard, actuarial gains/losses are included in what they call "re-measurements" and all re-measurements are recognized immediately in "other comprehensive income", that is through balance sheet, and not through P&L.

    The logic of the new IAS19 is that in relation with the employees' benefit plans, only the earnings/losses the that come from the passage of time are recognized in the P&L and all the rest are to be recognized in other comprehensive income (balance sheet) and in an immediate fashion.

    Therefore, some volatility is transferred from the P&L account to the balance sheet and some more is added, because of the immediate recognition logic. This is, as far as my knowledge in the subject allows, much closer with US GAAP than it used to be.

    The issue then is that SAN used the so called corridor system and had an outstanding amount of $2.35 billion in deferred actuarial losses that had to be immediately recognized under the new IAS19 standard.

    Instead of recognizing that loss through P&L to make it visible to investors and shareholders they made this restatement in April 2013, even they knew it, and had even quantified it, since December 2012.

    On the quantitative side it is relevant, but still not a big issue and it's something that, in theory, if the market has done its job right, should have been already discounted from SAN's valuation.

    I, being honest, had not discounted this effect from their equity, so I have to adjust my valuation 4% down.

    There was no mention about this effect in the 2012 4Q Presentation nor in the Financial disclosure made in February about 2012 accounts. It was only mentioned in March when the bank released their 2012 Annual Report and it was back in the notes to the balance sheet.

    I am really not comfortable on how this was managed by the bank. My margin of safety in the investment is significant so I am not concerned about the value of the investment but more about this precedent that is not a good signal and as such it has to be recognized.

    Gasebu.

    Disclosure: I am long SAN.

    Tags: SAN
    Apr 09 3:29 PM | Link | Comment!
  • Update On Banco Santander Strategy

    Banco Santander (NYSE:SAN) recently released the presentation their CFO made on Morgan Stanley Financial Sector Conference.

    It gives some comfort on our rationale for this investment since it provides assurance on the capacity of the bank to recover its average earnings capability in the coming years.

    Page 14 and 17 of the presentation are specially interesting in this regard, giving a quick snapshot at the operative (pre-provision) and net profit evolution.

    The bank calls this shrinking process a "Balance Sheet Cycle" that might be concluded in 2012 giving birth to a new, so called, "P&L Cycle".

    I don't go along very much with this tagging fashion, since for me it isn't necessary. On the good-growing-years banks are full of confidence and money and end up financing things they shouldn't for the sake of a growing EPS/bonuses. Later on, comes the hangover and cleaning and management has to be made on all that went wrong.

    I'd rather have a management capable of identifying and avoiding those cycles than one being able to put names on them, but I agree with their view that the adjustment cycle (they call it Balance Sheet Cycle) is over or almost over, and that is what counts for me at this moment.

    As a summary on the bank's views, in page 32 they expose next three years strategic guidelines:

    1. To normalize their earnings in Spain, increase margins and gain some efficiency (Banif and Banesto merger). Ok with that.
    2. Grow in underdeveloped segments (SMEs in the UK and the US),. This seems very generic message, but ok, we can accept it.
    3. Continue hand in hand with structural growth in Brazil. Of all the markets that SAN is in, this is starting to preoccupy me.
    4. In other emerging markets they want to take full advantage of long term growth potential, with a measured risk appetite. This looks indeed generic, as void of content, but sounds good.

    The only preoccupying element I found is on Brazil as I noted earlier. On page 12 they summarize in a chart what has been the financial development of the country in the 2003-2013 decade. Credit, as a percentage of GDP, has doubled in Brazil in this period, going from 25% to 50% of GDP.

    They note that the "..long term growth story remains intact with increased bancarization and development of middle classes...". They point out that "..Banks with a strong local presence, a solid business model and a measured risk appetite will continue to deliver strong results...".

    This speech sounds very familiar to me and to anybody that spoke with a bank in Spain in 2006 or 2007 and is not very reassuring. It is true that middle class development in Brazil is a long term trend but the rest is a typical investor's presentation void speech. I'd rather have more details on the nature, loan standards, maturity of their loans, etc... than this generic speech.

    I will pay more attention on Brazil situation on next earnings release.

    Until now I have been much more focused in Spain, to be honest.

    Gasebu.

    Disclosure: I am long SAN.

    Tags: SAN
    Apr 08 10:41 AM | Link | Comment!
  • Gecina Publishes Its 2012 Reference Document

    Gecina (OTC:GECFF) sent an email to notify its shareholders that their "2012 Reference Document" had been made available as of 28 of February. For those interested in the company it might be worth reading it.

    French companies regularly report to the AMF (equivalent to the SEC in the US) a document that comprises all relevant information on the company at that date. The document contents are essentially the following:

    • Group profile
    • Business review
    • Consolidated Financial Statements
    • Corporate Governance
    • Distribution of share capital and shares
    • Social Responsibility and performances
    • List of property holdings

    I am a shareholder in the company and I started to regularly report on the main events of the companies that I am invested in.

    As you might know, Gecina is a Real Estate French REIT. In my opinion it has an excellent and diversified office and residential portfolio that is mostly located in Paris. The company has some efficiency problems but in general is a very good inflation-protected real estate play.

    In 2012 rental revenues came down almost 6% and Net Asset Value (NYSE:NAV) came down 1% to EUR 100.53. Therefore the company trades at 15% discount to NAV which is a reasonable discount.

    As said, just a reminder for those interested in the company.

    Gasebu.

    Disclosure: I am long OTC:GECFF.

    Tags: GECFF
    Mar 03 10:52 AM | Link | Comment!
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