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The Bank That Grew Wings

|Includes: Banco Santander, S.A. (SAN)

From a macroeconomic perspective Spain is a country in dire distress. Experiencing depression levels of unemployment, an uncompetitive economy and as icing on the cake a banking crisis. The reasons underlying the structural problems in Spain, in good in company with many southern European nations, is as hotly debated as the crisis is deep.

This author believes the main reason is a rushed through introduction of join a currency that is basically a continuation of the D-Mark. The southern part of Europe that joined the euro had previously faced a fiscal environment that meant regular devaluations as a cure to keep themselves competitive. This also meant that wage levels did not have to keep in phase with productivity which in turn leads to high levels of inflation.

Going from a soft currency into a hard currency was a blessing in disguise, now nations that had previously borrowed at 10+% interest rates could borrow at 3 % interest rates. In personal finance terms it was much like having a credit card with unlimited credit without having to even apply. In a macroeconomic context nations could a time both eat and keep the cake, for.

That limited time is up now and even as a Keynesian I can reach no other conclusion then that structural changes are needed in the economies in the southern part of the Eurozone. The collapse in the demand side in the economies of Greece, Spain and Portugal should motivate some stimulus, but even so the supply side problems are the salient issue they need to address.

Putting macroeconomics aside, there is a bank in Spain with a great potential, Banco Santander (NYSE:SAN).

Santander is currently one of the world's largest banks and one of the most profitable. The main drawback for its shareholders is that the share is listed on the Madrid Stock Exchange (MADX). The Q2 report 2012 Santander presented showed a result well below expectations. This could be a warning signal at first glance but using a looking glass, the predominant reason for the drop in earnings that Santander reserved 99 % of earnings to possible credit losses in Spanish mortgages.

As Santander derives most of the revenue outside Spain the share valuation currently doesn't reflect the potential value or actual. As one of few banks it has set aside enough reserves to be able to handle defaults in its Spanish mortgage portfolio and still able to show a profit next quarter. Santander is also strategically well placed in nations with a strong growth potential, Mexico perhaps being predominant. Santander has committed to an annual dividend policy of € 0.60, of which about half, depending on the shareholders tax demonination can be received at 0 % taxation, by choosing new shares instead of cash.

The major drawback for an investor is I believe the place of listing. Listed in Spain currently depress the share price for any company. As the fundamentals look good and the dividend is currently € 0.6 ($ 0.78) meaning a yield of about 10 % at current price. And with Spain's problems not being Santander's problems the share should also be able to as the Eurozone recovers or splits up. Give a sufficient return compared to risk. Until then the dividend is well worth the wait.

I am long in SAN and intend to be so for many years.

Disclosure: I am long SAN.