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Banco Santander Takes On the Hidden Kingdom: China

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The resilient Banco Santander (NYSE: STD  ) is back with its expansion spree, and it seems as if there's no stopping it. After Europe and Latin America, the Spanish giant is now planning to establish a rural banking joint venture in China. Santander will take a 19.9% stake in a tie-up with China Construction Bank Corp. to extend banking services to Chinese rural areas and towns. Each will make an initial $534 million investment.

After ignoring the market for a long time, many big foreign banks are interested in entering rural Chinese towns and villages. Banking giants such as HSBC (NYSE: HBC  ) , Citigroup (NYSE: C  ) , and Standard Chartered are doing so even without a Chinese partner. Singapore's Temasek Holdings is planning to enter into a joint venture with Bank of China with 40 to 60 outlets in the rural sector.

Quantifying performance
In my study on Santander's acquisition strategy in "Banco Santander Takes On the World," I offered up a few examples to show the long-term prospects of the bank. Now I would like to evaluate the same through a more concrete financial analysis.

Santander's total revenue grew by 7.3% in 2009 and by 9% in 2010 on a year-on-year basis. Considering the fact that Spain's economy has been passing through a difficult phase, improving revenue should give investors quite the shock. The Spanish banking system has been shaken by the crisis, and raising funds is one of the biggest challenges at the moment and yet Santander (thanks to aggressive expansion in Brazil and other markets) has marched forward. The thriving Chinese market should serve as an additional source of funds as well as a huge potential customer base going forward.

The net income margin at the bank improved from 21.4% in the third quarter of 2010 to 26.9% in the fourth quarter. However, it declined by 4.9 percentage points on a year-over-year basis. Another crucial ratio that should be examined (as my colleague Ilan Moscovitz explained) is the leverage ratio. A ratio above 15 should make investors wary. And Santander, even in this chaotic situation, has managed to restrict its assets-to-equity ratio to a reasonably safe 15:1.

Reiterating my stance
Santander is gearing up to race against the global giants, and this Chinese deal is just another building block in that greater process. But I would reiterate that this stock requires patience since it is venturing into deals that involve high costs and a considerable amount of time. If you are ready to wait, you should be prepared to reap the benefits as well.

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Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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