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What Should Banco Santander SA Shareholders Do Now?

Shares in Banco Santander SA (LSE: BNC) (NYSE: SAN.US) fell by 8% when markets opened this morning, as investors reacted to yesterday’s news that Spain’s largest bank is to raise €7.5bn in new capital to strengthen its balance sheet, and will slash its dividend by 66%.

If you’re a private investor who has grown used to receiving the firm’s generous €0.60 scrip dividend each year, then yesterday’s news may have been a big shock: your shares may now be showing a loss, and your dividend income has been cut by two thirds.

Overall, it seems like a good time for investors to reassess their commitment to Santander — should you stay put, or are there better choices elsewhere in the banking sector?

What’s the outlook?

Santander said yesterday that it expects to report a net profit of €5.8bn this year, 30% more than last year.

After allowing for the new shares which will be created as a result of the bank’s cash call, this equates to earnings per share of around €0.42, which is slightly below consensus estimates, and places the shares on a P/E of around 14.6.

This seems pricey compared to most UK banks:

Bank

2014 forecast P/E

Lloyds

9.4

RBS

10.0

HSBC

10.1

Barclays

11.0

Banco Santander

14.6

It’s a similar story in the dividend department. Santander has come under pressure from Spanish regulators to pay a dividend that is covered by earnings.

The bank’s new payout policy of between 30% and 40% of underlying profits reflects this and means that from this year, Santander’s yield will be much lower than we’ve become used to:

Bank

2015 forecast yield

RBS

0.3%

Banco Santander

3.2%

Lloyds

4.0%

Barclays

4.2%

HSBC

6.0%

Santander’s cash dividend payouts will also be subject to Spanish withholding tax.

Despite this, Santander isn’t a bad bank for long-term investors — its size and global diversity remain attractive, in my opinion, especially if you are keen on exposure to South America.

However, there could be more downside, and I believe there are more appealing options elsewhere in the banking sector.

Best bank buys?

For income investors, I believe HSBC is very attractive — it is well capitalised, globally diversified, and pays a reliable cash dividend.

For value investors, Barclays remains my pick. The UK bank’s shares currently trade around 20% below their net tangible asset value, despite a year of stable results and falling impairment charges.

Ultimately it’s your choice — and it’s worth noting that for investors with a long-term horizon, this week’s news could be a decent buying opportunity.

It’s certainly true that banks remain a complex sector for investors to understand — and there’s no guarantee that UK banks will be able to meet analysts’ bullish forecasts for 2015.

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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.