Banco Santander SA Could Lose 25% Of Value This Year

Banco Santander SA (LON:BNC) is still overvalued by at least 20%, argues this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Banco Santander (LSE: BNC) (NYSE: SAN.US) announced a massive cash call on Thursday, which pushed the stock down 10% on Friday. The shares are unlikely to recover any time soon, in my view, as I expect investors will have to digest more bad news about the banking industry in weeks ahead…

No Bargain

Is Santander a bargain opportunity right now? I don’t think so.

I’d rather buy the bonds than the bank’s shares. The €7.5bn rights issue was widely expected, but the sale took place at the bottom of the suggested price range, which determined a significant loss of shareholder value today after trading was suspended on Thursday. The bank also slashed the dividend by two-thirds.

Santander’s current equity valuation simply implies that investors still focus on growth, rather than risk. The market seems to believe the bank will pursue acquisitions to grow its business, although Santander said inorganic growth is not on the agenda. 

Monte Dei Paschi di Siena (MPS), a troubled Italian bank, has often been suggested as a possible target. That’s complete nonsense, in my view. MPS stock rose significantly this week, but Santander denied it would acquire it. 

Some analysts have also suggested that Santander could target US expansion; forget about that, capital is just needed to shore up the balance sheet of the bank, whose core ratios are now broadly in line with those of its European rivals. 

Valuation

While some analysts estimate that the cash call should have no impact on Santander’s valuation, or Santander should even benefit from the fundraising, it appears clear that the bank has become financially stronger, but I am convinced its geographical mix is a massive headache, and large write-downs could be just around the corner.

According to analysts at Royal Bank of Canada, following the cash call Santander will report: a 10.9% Basel 3 core tier 1 ratio (previously 10%); a BV growth of 24% (previously 11%) for 2016/2014; an ROTE of 13.7% (previously 16.9%). Once the dilution for the right issue is factored in, RBC analysts estimates Santander will trade at 1.4x 2016e TBV. 

Don’t worry if you are not familiar with book value, return on tangible equity and tangible book value, the downside is still 25% or more for shareholders, in my view, based on trading metrics.

A Better Option 

If I were to embrace risk and  invest in the banking industry, I would rather consider Standard Chartered (LSE: STAN), which announced a promising cost-cutting plan this week, and whose stock has risen by about 6% since mid-December, when I suggested the shares could double in value over time if bold action is taken and a change of management occurs. 

Based on fundamentals and forward trading multiples, Standard Chartered trades at a 35% discount to Santander, and although I appreciate Standard Chartered faces a long journey to recover from its past mistakes in Asia, I am not convinced Santander deserves such a massive premium, particularly since most of its business is generated in Latin America and Continental Europe, where tough trading conditions and low investment are likely to persist for years, and will combine with higher credit risk and sovereign risk, as well as higher provisions. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »