Today I am looking at why Banco Santander (LSE: BNC) (NYSE: SAN.US) is one of the most attractive banking stocks around.
Buckle up for blistering earnings growth
Against a backcloth of extensive de-risking and cost-cutting following the 2008/2009 banking crisis, Santander is expected to keep earnings rattling higher after belatedly moving back into the black last year.
Indeed, 2013’s 74% earnings rise followed four years of heavy declines, a transition that City analysts believe represented a watershed in the firm’s bottom line — Santander is predicted to punch growth of 25% this year, and an extra 20% advance is expected in 2015.
As a result the company carries P/E readings of 13.5 times predicted earnings for 2014, and 11.2 times for the following 12-month period, comfortably below the benchmark of 15 times which represents decent value for money.
But Santander’s reputation as an ultra-cheap stock is really underlined by price to earnings to growth (PEG) multiples of 0.5 and 0.6 for 2014 and 2015 respectively. Any figure under 1 is generally considered to be a steal.
Huge yields despite expected dividend cuts
But Santander is not just terrific value for money for growth investors, with dividing yields expected to continue burying the opposition during the medium term at least, too.
In line with its bid to maintain a strong balance sheet the Spanish bank has elected to reduce dividends to bring payouts closer to earnings performance. As a result Santander is expected to shell out a total payout of 58.1 euro cents per share this year, down from 60 cents in 2013. And a further dividend cut, to 50.5 cents, is estimated for 2015.
Still, these projections still produce yields which make a mockery of a prospective average of 3.5% for the complete banking sector — Santander currently boasts yields of 8.7% and 7.6% for 2014 and 2015 correspondingly.
An attractive emerging market play
Although earnings are likely to keep outstripping dividends during the medium term, investors should take heart from Santander’s robust capital position. Indeed, the European Banking Authority’s stress tests in October showed the bank’ CET1 capital ratio under ‘adverse’ conditions register at 9%, soaring above the minimum requirement of 5.5%.
And I am convinced that Santander is well positioned to benefit from the impending demand surge for banking products in developing regions. The business is aggressively ramping up its already-weighty exposure to lucrative Latin American markets, and earlier this year bought up the 25% stake it did not hold in Banco Santander Brasil for approximately €4.7bn.
Even though economic conditions in the eurozone could continue remain in the doldrums for some time, I believe that Santander’s growing position in emerging markets should drive earnings and dividend growth in the long-term.
