Today I am looking at why I believe Banco Santander SA (LSE: BNC) (NYSE: SAN.US) is primed to surge skywards.
Profits primed to head higher
Banco Santander’s turnaround strategy following the 2008/09 global financial crisis has been highly impressive to say the least. Indeed, last month’s full-year results showed attributable profits surge more than 90% to 4.37bn euros last year, the result of lower write-downs compared with previous periods, particularly in the bombed-out economic regions of Spain.
As the bank noted, the economies of its main target markets are expected to grow in 2014, according to the IMF, the first such instance since before the banking crash occurred. With the bank having strengthened its balance sheet significantly since then — its Basel III capital ratio leapt to 10.9% last year — I believe that Santander is well placed to enjoy the fruits of its intensive self-help exercises well into the future.
Great emerging market exposure
Indeed, Santander’s extensive operations in long-term growth regions underpins this rosy outlook — the company sources 53% of all profits from developing markets, with those of Latin America responsible for 47% of the group’s bottom line.
Brazil is the firm’s single largest market — almost a quarter of profits are sourced from the country — while the continental hotspots of Mexico and Chile are third and fourth correspondingly.
Santander noted in January’s results that both loans and deposits rose 14% in emerging regions last year, and investors will be cheered by the bank’s improved performance in South America — indeed, market share grabs in a number of sectors, including SME loans, mortgages and insurance, is helping to drive performance in the region. Loans and deposits in Brazil alone rose 7% and 6% during 2013.
A stunning all-round value pick
Following January’s full-year results, City analysts expect Santander’s transformation plan to continue delivering the goods in the coming years.
Forecasters expect earnings to advance by a chunky 25% in 2014 and a further 18% next year, figures which create P/E ratings of 12.6 and 10.8 respectively, comfortably trouncing a prospective average of 16.4 for its banking peers. And these stratospheric growth projections leave Santander dealing on price to earnings to growth (PEG) readouts around 0.5 for these years, well below the value benchmark of 1.
Pleasingly for income investors, these solid growth predictions are also expected to keep dividend yields comfortably above a forward average of 3.7% for the rest of the banking sector. Although the full-year payout is expected to dip from 50.1 euro cents per share this year to 48.1 cents in 2015, these payments still generate mammoth yields of 7.7% and 7.3% correspondingly.
