3 Reasons to Sell Banco Santander

These days, it isn't hard to be bearish on Spanish stocks, particularly in the financial sector. The country's economic woes are well-known; there's little reason to rehash that sob story here. It's too bad for Banco Santander (NYSE: SAN  ) , since the bank is run by smart managers and generally knows what it's doing. It's the clever underdog you root for to succeed, but given the enduring, awful conditions of its home market, its stock isn't looking like a thumbs-up at the moment. Here's a trio of reasons why.

1. The Spanish (economic) flu
For companies unlucky enough to operate in the country, it's all about survival these days. No one's going to thrive in an atmosphere where unemployment is over 25% and rising, the cost of borrowing remains prohibitive (despite some recent easing), and the housing market has ground to a standstill. Who or what is a bank going to lend to?

Spain Unemployment Rate Chart

Spain Unemployment Rate data by YCharts.

And there's that pesky real estate problem. In order to -- hopefully -- make sure its big financial operators don't collapse under the dead weight of all that empty property, earlier this year, the government mandated a steep increase in provisioning against such losses for its banks. This cost every Spanish bank; Santander set aside 1.1 billion euros ($1.4 billion) last quarter.

Which is the main reason why its 3Q net profit came in so low, at 100 million euros ($130 million) while it was around 1.7 billion euros ($2.2 billion). To its credit, Santander swallowed most of the bitter medicine of the real estate provisioning, but it's not yet done taking the cure. It's still got roughly 500 million euros ($648 million) to go before it hits this year's required amount. This probably won't zap results as badly as in 3Q, but the hit will be big nonetheless.

2. International diversification
Santander bulls hype this as one of the bank's strengths, and to some extent, they have a point. The company is widely spread around the globe and has lately taken in roughly half of its revenue from Latin America.

The problem is, international's not growing much. Over half of that half comes from Brazil, a country where the bank's ratio of non-performing loans have crept up steadily of late, from 5.5% in September 2010 to 6.8% this past September. By contrast, they've dropped slightly in the rest of Latin America, from 3.1% to 3.5% over the same time frame.

In 3Q, those crucial Brazil revenues fell after at least five quarters of steady if not stunning growth, to $5.2 billion. Granted, that's a 14% year-over-year improvement, but the bank needs those quarterly numbers to keep moving north, not the other direction. All told, net attributable profit in the bank's "big three" Latin markets (Brazil, Mexico, and Chile) crawled up only 1% on an annual basis for the company in the quarter.

3. There are more attractive banks out there
Santander's stock has had a bit of a mini-rally lately, with its ADRs rising from a low of recent low under $7 to the current $7.62. Spain's government has made the right noises regarding a bailout that once seemed inevitable but might be scaled back or even rendered unnecessary -- the country has had some notable success floating bond issues lately.

But still. That moribund housing market isn't going anywhere, and although money's becoming cheaper to borrow, it's still too rich for the blood of many Spaniards.

So if there's upside in a stock like Santander, it's probably limited. Contrast that with a well-performing bank on our shores like Wells Fargo (NYSE: WFC  ) , which has powered ahead in a clearly improved housing market and is collecting a virtual windfall in net interest income. Most of Santander's numbers aren't competitive with those of Wells.

Or other big financials. Here's a look at the Spanish bank versus two Americanos, Wells and Bank of America (NYSE: BAC  ) , plus domestic competitor BBVA (NYSE: BBVA  ) and a big global player, HSBC (NYSE: HSBC  ) .

 

P/E (TTM)

Forward P/E (upcoming fiscal year)

ROE (TTM)

Price/Book (most recent quarter)

5-Year PEG

Santander

30.0

9.5

3.3%

0.7

1.5

Wells Fargo

10.4

9.1

12.4%

1.2

1.3

B of A

26.6

10.1

2.3%

0.5

3.0

BBVA

20.1

9.0

5.1%

0.8

1.8

HSBC

14.4

7.7

8.4%

1.1

1.2

Source: Yahoo! Finance. TTM = trailing 12 months.

Santander doesn't leap ahead on any metric, and is dead last behind even clunky Bank of America in P/E terms. OK, OK, those big real estate provisions have an impact on earnings, but even the price/book doesn't indicate any special bargain. The bank just doesn't look worth the risk at the moment.

Good management, bad conditions
That aside, Santander has a decent management team that makes the right moves at the right times -- e.g., getting the bulk of the real estate provisioning out of the way last quarter. But good brains in the executive suite can't do much about bad macro conditions at home. And they don't seem to be fully utilizing that cleverness in relation to assets overseas.

Santander certainly has its strengths, but its markets both domestic and abroad aren't bringing it. I've been cautiously optimistic on the bank in the recent past; however, that domestic crisis really has claws, and it looks like it'll drag on for a quite a while. So as far as this Fool is concerned, Santander's not a buy right now.

To learn more about the most talked-about U.S.-based bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.


Read/Post Comments (10) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 30, 2012, at 10:16 AM, Teacherman1 wrote:

    Hey "Port"

    I still think it is a good long term investment, and will nibble if it dips on more bad news for the Spanish Real Estate market.

    Mexico will become more of a positive factor for them over the intermediate term.

    I also like the other banks you listed, with the possible exception of HSBC, only because I can't really get a handle on them and what they do.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On November 30, 2012, at 2:02 PM, jaah wrote:

    I saw something on tv this week about SAN. Does it really have a 10% dividend. If so why isn't that mentioned?

  • Report this Comment On November 30, 2012, at 3:30 PM, Teacherman1 wrote:

    jaah

    They are paying a dividend, but the % varies, based on the price of the stock when bought.

    It is currently about 8%, but they have three different ways of paying it.

    You can get it in "script" and use it to buy more shares, you can have them sell it on the market and get something less, or you can get it in cash; but that is subject to a 15% Spanish withholding tax.

    I take mine in script and buy more shares.

    They may have to lower the dividend based on what the reserve requirements are for their R/E holdings on the books in Spain end up as, but they will likely still pay a dividend.

    I like the dividend, but own them as a longer term investment, because the current share price is way down from their historical price, and if and when the economy improves, it should go back up significantly.

    They are a global bank with holdings in many places, and in my opinion, are one of the best run banks in the world.

    They are not the ones who ruined the Spanish R/E market with reckless overlending, and even cut back before this all came to a head, but are a victim of the "Cajas", that were basically unregulated and made loans on anything.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On November 30, 2012, at 4:02 PM, whyaduck1128 wrote:

    SAN is a prime candidate for possible year-end loss sales for me, if I decide t go that route. It's a question of a loss possibly being more valuable in 2013 vs. money in hand now.

    That said, the other banks mentioned don't hold much interest for me. Even if I liked WFC and BAC as investments, I've heard too many stories of how shabbily they treat people to have any desire to own them. Even a hard-hearted investor like myself, who disdains the whole "socially responsible investing" thing, can have some scruples.

  • Report this Comment On November 30, 2012, at 8:33 PM, puppydog100 wrote:

    Say what you will, I'm selling my SAN at 12.

  • Report this Comment On December 01, 2012, at 4:32 AM, TMFVolkman wrote:

    Teacherman1, I'm sure there will be more dips. Spain's nowhere near out of the woods yet and it's hard to see a clearing now. I like many things about the bank but the domestic market is and will probably continue to be a disaster. As far as foreign markets are concerned, I think they're under-performing in Mexico, if anything.

    whyaduck1128, there are some good financials to be had at a decent price that are outside the banking sector. For one (plus a fine article), take a look at my Foolish colleague Matt's piece about AIG - http://www.fool.com/investing/general/2012/11/20/1-stock-tha...

    puppydog100, I'm a convinced bear as far as Santander goes... but if I'm wrong, I hope it goes at least that high for you!

  • Report this Comment On December 02, 2012, at 2:16 PM, puppydog100 wrote:

    Thank you, EV....let me expand a bit, I wasn't just being contrary. I got into SAN a while back, and am showing a nice profit. My rationale was, and is, that the baby is being thrown out with the bath water, and over time, perhaps years, things in Spain will improve. SAN is a well-run, shareholder friendly institution. I have some of their preferred, which is trading over par, which I take to be a good sign. Sure, I could book the profit, but instead I'll wait for that mythical $12 and in the meantime collect the dividend, which is being paid in shares, thus circumventing the Spanish tax. If my profit erodes back to zero, I'll bail.

    I don't consider myself a savvy trader, but on rare occasions, I get it right!

  • Report this Comment On December 03, 2012, at 5:50 AM, TMFVolkman wrote:

    puppydog100, if you're showing a profit on Santander I'd argue that you ARE a savvy investor. It's not a stock for the faint of heart. I doubt the "Spanish flu", as I call it, will last forever; the question is, will it be worth it to hang on that long to the shares? Over that time, other financials in less volatile markets could provide a much nicer return.

    It's tough for me, because as I mention I like this bank's management and I'd be happy to see the company succeed. There's no way they can escape the damage from the crumbling domestic economy, though. But let's see how this bailout plays, and how the banks get through it.

  • Report this Comment On December 03, 2012, at 7:41 AM, markor1 wrote:

    Well I can tell you I bought 20k shares when the stock fell below 5!! Everyone thought the sky was falling then and that it would go broke, but I like many others realize the strenght in this company globally, slow growth or not! I sold it 4 months later when it hit over 8.. then rebought it again when it was just below 7 a couple of months ago... Now I will add to it for the LONG term anytime it dips below 7.40.. LONG term this company will be much bigger, stronger and higher than BAC, Wells fargo or any other american bank.. SAN has a large presence in the States as well under the SOVEIRGN name.. People laughed at me back in 2009 when I bought 10k shares of GE under 6.50 too.... no ones laughing now!

  • Report this Comment On December 03, 2012, at 1:53 PM, TMFVolkman wrote:

    markor1, I'm glad the stock has done well for you so far. But I think you might find that long term might stretch out for a VERY long while; economic crises and bailouts tend to be deeper and more involved than politicians are willing to admit. Given the depth of the real estate problem and the still-rising unemployment, I think Spain's going to take quite some time to get on its feet... even if the rest of the continent pumps in lots of bailout money. Who's going to soak up those empty properties, and who's going to take on credit without a job?

    You're right that Santander has a presence in the US, the problem is it's not doing anywhere near as well as its home-grown rivals: net operating income there dropped by over 15% in 3Q.

    Regardless, if I'm proven wrong I hope your position is large and you make a handsome return on it!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2134276, ~/Articles/ArticleHandler.aspx, 12/18/2014 9:17:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement