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Why Investors Favor Simple Banks

By Motley Fool Staff – Jul 28, 2016 at 8:45AM

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Complexity doesn’t necessarily mean higher returns for bank shareholders.

Often called America's largest community bank by its fans, Wells Fargo's (WFC -4.96%) wholly American business model means simplicity for its investors, and a higher valuation by Wall Street.

The Motley Fool's Gaby Lapera and contributor Jordan Wathen discuss why Banco Santander's (SAN -1.36%) complexity doesn't necessarily mean investors will be rewarded with higher returns, and the challenges that come with dissecting an international bank from an investor's perspective.

A transcript follows the video.

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This podcast was recorded on July 18, 2016.

Gaby Lapera: They're dealing with a lot of regulatory things that, say, a Wells Fargo is not, because they have a much more limited market, Wells Fargo does, so that they can be a lot simpler. As a retail bank, they function very efficiently in the United States because they have a very clear, or at least for investors, they have a very clear business model.   

Jordan Wathen: I think most investors would prefer to have a pure play, I think. When you think about investing in a bank in the United States, I would say a lot of investors prefer the simplicity of Wells Fargo, for example, because you know it's basically an American bank. What happens in the American economy affects Wells Fargo. If you look at, say, Citi, for example, you know you have worldwide exposure. Frankly, I don't have that much insight into how Latin America's going to look five years from now. I just don't. I don't live there, I don't see it day to day, but I know what America looks like. From an investor standpoint, I think being a global bank is something that will always, to some extent, negatively affect its valuation.   

Lapera: Right. It's just interesting because this is a retail bank that has the complexity of a universal bank, which is a very unexpected thing to find, I think. Overall, what do you think of Santander after our conversation today?   

Wathen: Santander Consumer (SC) is very interesting to me. I think the subprime auto business in general is very interesting because I think there's a lot of money to be made, and I think there's a lot of, probably, concern that might potentially be overblown. I don't know if I could add more qualifiers to that. Santander Consumer has been warning for a long time, well not for a long time, but especially recently, that auto loans aren't going to perform as well as they were. Yields are down, and also their expectations for losses are way up. I think there's a point at which this gets really interesting for me to buy. I don't know if it's 5 times last year's earnings, which it basically trades out right now. I'm still not quite comfortable with what losses will look like in the future, but it's definitely one that's on my watch list as something to potentially buy as just a value play.   

Lapera: That's interesting. It's definitely not on my watch list at all.   

Wathen: It's one of those things where, there's a price at which something's so cheap that it's worth a flyer. If you look at the valuation of Santander Consumer USA, it's really just a call option because it's just priced so inexpensively. If things work out the way they're projecting, it'll do just find. They'll print money. It might not ever get the valuation they want, but I think it could potentially be a good investment as long as they don't lose it all on subprime over the next couple of years.   

Lapera: For me, the risks that are happening internationally, which is confusing, because they also trade on different tickers everywhere, is enough to be very off-putting to me, especially their exposure to Latin America.  

Gaby Lapera has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo. 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.

Stocks Mentioned

Banco Santander Central Hispano Stock Quote
Banco Santander Central Hispano
$2.91 (-1.36%) $0.04
Wells Fargo & Stock Quote
Wells Fargo &
$43.66 (-4.96%) $-2.28
Santander Consumer USA Holdings Stock Quote
Santander Consumer USA Holdings

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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