Is Now The Right Time To Buy Banco Santander SA?

SantanderAfter hitting a 52-week high of 636p earlier this year, Banco Santander SA (LSE: BNC) (NYSE: SAN.US) shares have fallen by 15% to 540p.

Is this a good time for investors to add to their holdings in Spain’s largest bank — which offers a prospective yield of more than 7% — or is there worse to come?


Let’s start with the basics: how is Santander valued against its past earnings, and the market’s expectations of future earnings?

P/E ratio Current value
P/E using 5 year average adj. EPS 12.1
2-year average forecast P/E 12.3

Source: Company reports, consensus forecasts

Santander’s current forecast P/E of 12.3 is in-line with its historical valuation, suggesting that the market is confident that the Spanish bank will continue to perform in-line with expectations.

A P/E of 12.3 doesn’t look expensive to me, either, especially as Santander’s prospective yield of more than 7% provides generous compensation for holding the shares.

What about the fundamentals?

I’ve been deeply impressed by Santander’s performance during the last five years. Its ability to generate cash and write off bad debts without cutting the dividend or requiring a bailout has set it apart from Spain’s other banks.

Admittedly the dividend is mostly paid in scrip form (ie, by issuing new shares) and it’s Santander’s overseas operations that have generated the cash to provide for bad debts in Spain, but the bank’s resilience has been impressive, nonetheless.

The bank’s late Chairman, Emilio Botín, promised shareholders last year that “we expect to regain our pre-crisis profit levels” in the next three years — ie, by 2016.

Do the bank’s fundamentals back up this claim?

Metric 5 year compound
average growth rate
Net Operating income -2.8%
Normalised earnings per share -17.5%
Return on equity -17.2%
Dividend 0%* 
Book value -1.5%

* the amount paid in Euros has not changed, although its value in GBP for UK shareholders has fluctuated with the £:€ exchange rate.

Source: Company reports

It’s clear that Santander’s profits and return on equity have plummeted over the last five years as it has been forced to write off billions of euros of bad debt. But expectations of a return to normal don’t seem completely unreasonable to me — in 2013, earnings per share rose by 71%, and the bank’s return on equity rose by 86%.

Buy Santander?

I believe Santander is an attractive buy in today’s market, although investors should be aware of the exchange rate risk involved in owning the bank’s shares. Santander’s share price (in euros) has risen by 4.5% so far this year on the Madrid Stock Exchange, but the bank’s London-listed shares are down by 1%.

Of course, exchange rate fluctuations can work in your favour, too, but it’s important to understand how this factor could reduce your dividend income, if the pound continues to gain strength against the Euro.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.