How Safe Is Your Money In Banco Santander SA?

Banco Santander (LSE: BNC) (NYSE: SAN.US) has been an investing oddity through the financial crisis, paying investors a dividend yield that has, at times, exceeded 10%.

The bank’s share price has risen by 73% from its July 2012 low, reducing this yield considerably, but at 7.7%, it still dwarfs the Santanderincome on offer from other big banks — so is Santander stock a true bargain?

I’ve been taking a closer look at some of the bank’s key ratios to find out more.

1. Net interest margin

Net interest margin is a core measure of banking profitability, and captures the difference between the interest a bank pays on its deposits, and the interest it earns on its loans.

Santander doesn’t seem to report its net interest margin anymore, but using the ratio of net interest income to net customer loans suggests that the bank earned a net interest margin of 3.9% in 2013, which is below the bank’s historical average, but significantly higher than the UK average — suggesting that Santander’s emerging markets business is highly profitable.

2. Common Equity Tier 1 Ratio

Tier 1 capital is essentially a measure of a bank’s retained profits and its equity (book value). One of the requirements of the new Basel III banking rules, which are gradually being phased in, is that banks will have to meet new, tougher, Tier 1 capital standards.

The key metric used to measure banks’ capital strength will be the Common Equity Tier 1 ratio (CET1). Large UK banks are currently required to have a minimum CET1 ratio of 7%, but anything under 10% is considered weak by markets.

Santander’s CET1 ratio was 10.6% at the end of March, suggesting that the Spanish bank has no major problems with capital strength at present.

3. Return on equity

Return on equity (RoE) is a useful way to measure the performance of banks, as it shows how much profit was generated compared to the book value (equity) of the bank’s assets, such as loans.

Santander reported a return on equity of 5.4% in 2013, which is lower than the 10% – 12% typically targeted by banks, but is a significant improvement on the 3% reported return on equity in 2012, suggesting that the bank’s profitability may be improving.

Although UK investors need to be aware of the exchange rate risk posed by Santander’s dividend (which is paid in euros), overall, I rate this big Spanish bank as a cautious buy.

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Roland does not own shares in Banco Santander.