There's a lot of Foolish love for Spanish lender Banco Santander (NYSE:SAN). Taking a peek at our CAPS ratings on the stock, the overwhelming majority of the players grade it as a potential market outperformer.
But the awful state of the Spanish economy and the damage it's caused the firm's results have held back the share price -- it's barely moved from where it was a year ago. Spain's going to keep it from soaring as high as it otherwise might, but there's a trick or two the company can pull from the vault if the domestic market keeps dragging it down.
The back-pocket dollar bill the bank has is stakes in a cluster of Latin American subsidiaries. The collective performance of Grupo Financiero Santander Mexico (NYSE:BSMX), Banco Santander-Chile (NYSE:BSAC), and Banco Santander Brasil (NYSE:BSBR) has been mixed as of late, but the company sure took in a lot of cash when it listed those entities on the market.
The IPO of the Mexican unit is the most recent of the three. It took in over $4 billion when 24.9% of it hit the market a few months ago. This came less than a year after a successful secondary offering for Banco Santander-Chile, which raised $950 million or so in return for a 7.8% piece of the company.
The Big Daddy of the three, and the float that probably encouraged the company to tap the market twice in subsequent years, was the 2009 debut of Banco Santander Brasil. That country was a hot ticket at the time, coming off a year of fat GDP growth (5.1% in 2008). The 15% Santander sold in its South American unit was similarly torrid; the double issue was simultaneously the largest in Brazil's history and the biggest one on the NYSE that year. That was good enough to bring in a whopping $8 billion for the company.
Santander the parent company still has big stakes in the troika. And they add up to a considerable set of assets, even if we don't assume a premium to current market value:
|Bank||Santander Ownership||Market Cap ($bn)||10% Stake Value ($bn)|
|GF Santander Mexico||75%||21.9||2.2|
|Banco Santander Brasil||76%||27.7||2.8|
Theoretically, Santander as a group could easily spare a 10% stake in each company while retaining plenty of control in its operations. Those 10% chunks taken together add up to well over $6 billion, which is a big number for a rainy-day fund.
Santander hasn't been drenched yet, but the weather's looking grim. Spain continues to be battered by a nasty economic storm, with GDP dropping, unemployment rising, and key sectors (e.g., real estate) going nowhere in a hurry. Although the bank's done well in spreading its operations around the globe -- look how big those Latin subsidiaries are -- it's still trapped in the mud of its domestic economy, where it has over a quarter of its total assets.
That's why profitability has been so weak of late. To add injury to injury, on the back of that stagnation in the real estate market, the Spanish government forced its banks to take heavy reserves to guard against large-scale defaults on property.
In 3Q alone, Santander put away 1.1 billion euros ($1.4 billion) for the purpose. This sucked most of the air out of that quarter's income statement, to the point where the bank posted only a token profit of 100 million euros ($131 million). Considering the size and sprawl of the company, that ain't much.
So far, the government isn't demanding additional contributions to the kitty... but the country is in poor shape, and no one's buying those houses. It's entirely within the realm of possibility that Santander and the other unfortunate domestic banks will have to pony up again. No one should be surprised if the lender posts another wafer-thin profit... or no profit at all.
Of course, selling off pieces of your company isn't the most efficient way to push through a difficult period. It would be preferable if Santander as a whole could, say, reverse the growth of non-performing loans in BS Brasil, or stem the decline in net interest income at its U.K. operations. None of the bank's operations outside of its native market is doing outstandingly well at the moment. And given the prospects for Spain, they need to.
Given these challenges, Santander is to be commended for making a profit at all, token or otherwise. It remains to be seen whether it can continue to do so, however. At least if it doesn't, it has some stock it can sell off to help it get through the stormy times.