I’ve never really been a fan of the banking sector. I like to know and understand the balance sheets of the companies I invest in, and it’s almost impossible to understand a bank’s balance sheet — even some of the City’s most experienced analysts struggle.
However, one bank that has recently been catching my attention is Banco Santander (LSE: BNC) (NYSE: SAN.US).
You see, over the past decade or so, Santander has shown that it is more conservatively managed than many of its larger peers. The Spanish bank managed to pull through both the financial crisis and Eurozone crisis relatively unscathed, whereas many of the bank’s peers did not survive. This is even more impressive considering the fact that Santander was highly exposed to the Spanish property market.
Nevertheless, until recently, there were several issues overhanging the bank. These included concerns about Santander’s capital position and an unsustainable dividend payout.
Unfortunately, Santander’s old management team was stuck in its ways, refusing to cut the bank’s unsustainable dividend or raise new capital. But after Emilio Botín — who ran the bank for 28 years — died in September, things have started to change.
Shaking things up
Emilio’s daughter, Ana Botín, took charge of the bank after his death and has started to shake things up. In November, Ana replaced CEO Javier Marin with finance boss Jose Antonio Alvarez, who was seen as a rising star at the bank.
Santander then raised $9bn — €7.65bn — from a share sales in order to bolster is capital position and slashed its dividend payout. What’s more, the bank then changed the way it paid the dividend.
Traditionally, Santander has paid the majority of its dividend as a script issue, diluting existing shareholders — the number of shares in issue has jumped 25% over the past five years. Now, Santander is going to divide the annual payment to shareholders into three cash dividends and one scrip dividend.
These two changes have completely altered Santander’s outlook.
Strong balance sheet
After raising $9bn in new capital and cutting its dividend payout, Santander is set to become one of Europe’s most liquid banks. By 2016 the group’s tier one ratio, under Basel three standards, is expected to be in the region of 10% to 11% compared to expectations of 8% to 9% for peers.
That being said, Santander’s current capital position is already well above capital requirements and in line with its peers. In theory, the bank didn’t need to raise any more capital but it seems that Santander’s new management is not willing to take any chances.
Additionally, a stronger balance sheet gives Santander more room to grow and benefit from economic growth within Latin America, and a return to growth within Europe. Management expect the capital raising to start contributing to growth by 2016.
