The Surprising Buy Case For Banco Santander SA


Today I am looking at why improving fortunes in Europe are ready to help drive shares in Banco Santander SA (LSE: BNC) (NYSE: SAN.US) higher.

Europe well on the road to recovery

Santander is of course a favoured pick for those seeking vast exposure to the lucrative developing markets of Latin America. I have long been an advocate of the bank owing to its expanding presence these geographies, in which the firm currently sources half of all profits. But I also believe that improving performance in its previously-beleaguered European markets should also drive growth.

In particular, the bank’s October interims underlined the progress it is making here in the UK, the bank’s second-largest single market responsible for 15% of the bottom line. Profits here rose 7% during January-September, to €793m, as the bank’s focus on improving its product range and customer service attracted increased banking clients through its doors.

Of course the economic health of the eurozone remains a point of concern, with data this week showing unemployment in the region still around record highs at 12.1%. Still, with Spain having finally emerged from recession — albeit at a modest rate — and the company having made massive write-offs in the country’s real estate market, the company is in great shape to reap the rewards of improved prospects here. Santander’s market share in the loans and deposits markets also rose 0.4% and 1% during January-September.

Furthermore, the severe deleveraging in Europe following the fallout off the 2008/2009 banking crisis has helped to improve the firm’s liquidity significantly. Indeed, a loan-to-deposit ratio of 108% as of the end of September — compared with 117% at the same point in 2012 and 150% at the end of 2008 — illustrates the exceptional progress the firm has made in bolstering the balance sheet.

City analysts expect Santander to put five years of consecutive earnings drops behind it in 2013, and punch an 84% rise to 42.3 euro cents. And growth is expected to rattle on thereafter, with increases to the tune of 23% and 20% forecast for 2014 and 2015 correspondingly, to 51.9 cents and 62.3 cents.

Such figures leave the bank dealing on P/E ratings of 13 and 10.9, knocking out a forward average of 17.9 for the complete banking sector. Now that the worst of Santander’s severe capital building and massive write-down programme is now behind it, I expect the firm to post strong earnings growth in coming years.

On top of these bubbly earnings prospects, Santander is also a delectable pick for savvy dividend hunters, in my opinion. The firm is expected to generate payments around 48.7 cents for this year and next, resulting in yields of 7.6% which smash an industry average of 3.4% out of the ballpark.

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> Royston does not own shares in Banco Santander SA.