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:
- To normalize their earnings in Spain, increase margins and gain some efficiency (Banif and Banesto merger). Ok with that.
- Grow in underdeveloped segments (SMEs in the UK and the US),. This seems very generic message, but ok, we can accept it.
- Continue hand in hand with structural growth in Brazil. Of all the markets that SAN is in, this is starting to preoccupy me.
- 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.
Disclosure: I am long SAN.