Santander shares: an undervalued investment for 2022?

The Santander share price looks cheap compared to the firm’s London-listed peers, considering its growth and international footprint.

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Key points 

  • The Santander share price appears cheap 
  • With interest rates rising, the firm’s profits look set to rise 
  • The international footprint gives it a competitive edge 

I think the Santander (LSE: BNC) share price is one of the most overlooked investments in the UK financial sector. 

When investors and analysts look at the UK financial sector, they tend to focus on local peers such as Lloyds, which is a mistake in my view.

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Indeed, unlike Lloyds and NatWest, the company has a much larger international footprint. This could act in its favour as the global economic recovery builds over the next 12-24 months. 

Company outlook 

Over the past year, the Santander share price has struggled to move higher. The stock has traded in a range of between 220p and 300p. Overall, excluding dividends paid to investors, the shares have added 8%. Meanwhile, Natwest and Lloyds have returned 57% and 54% respectively. 

The question is, why has the stock performed so poorly compared to its domestic peers? I think the firm’s sizeable European presence is to blame.

While the Bank of England has started hiking interest rates, which should enable banks to increase the rates they charge to consumers, in Europe, interest rates are nailed firmly below 0%. It does not look as if this is going to change anytime soon. 

Still, only a third of Santander’s underlying profit comes from Europe. The South American and North American markets make up another 60%. Digital services make up the remainder. 

And it is not as if the low-rate environment is holding the business back. For the third quarter of 2021, the firm reported a near 100% increase in European profits. Overall, the underlying profit before tax was €11.4bn in the first nine months of the year, up 74%. 

Santander share price opportunity 

I think this presents an opportunity for long-term investors. With profits surging and the Santander share price not reflecting this growth, the stock is starting to look cheap. At the time of writing, the stock is selling at a forward price-to-earnings (P/E) multiple of 7.1.

To put that into perspective, Lloyds and Natwest are trading at multiples of 8.5 and 10.3 respectively, giving an average of 9.4.

Still, as domestic UK banks, these businesses are not the best comparisons. A better option could be HSBC. This firm is one of the world’s largest international banks. Right now, the stock is selling at a P/E of 10.8. 

These figures show that Santander appears undervalued compared to its peers in the financial sector. 

However, some risks could hold the bank back in the near future. These include the potential for future economic disruption from the pandemic as well as rising wage inflation around the world. 

Despite these headwinds, I think the Santander share price looks cheap. As such, I would be happy to add the stock to my portfolio today. 

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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