2 Reasons Why Banco Santander SA Looks Cheap To Me Right Now

Just two years ago, investors were treating shares in Spanish bank Banco Santander (LSE: BNC) (NYSE: SAN.US) with about the same enthusiasm you might have for a plate of yesterday’s fish tapas.

If you remember, the Euro crisis was still raging in the summer of 2012. Pundits were lining up to tell us that the peripheral European countries were going to be booted out of the Eurozone. Joblessness in Spain was soaring, and the economy was contracting. Wilfully owning a Spanish bank seemed like madness.

Indeed in the dog day’s of late July 2012, Banco Santander’s share price fell below 330p, and the dividend yield bobbed above 10% accordingly. That dividend seemed doomed, and the future of the bank itself uncertain.

But as so often when investing, the point of maximum despair turned out to be just the moment to buy…

Banking great returns

Two years on and people are much happier to admit to having Banco Santander in their portfolios.

The Spanish economy has improved, for starters, and almost more importantly the yield on Spanish government bonds has fallen very sharply as a result of tough talk from the ECB. In turn, the prospect of Spain being ejected from the European Union has dissipated, and as a consequence the big Spanish banks like Banco Santander have lost their potential pariah status.

As you’d expect, the share price has recovered strongly. In early June it touched 630p – a 70% gain in two years. Count in another 20% or so from reinvested dividends, and the bravest investors might have bagged a double with their shareholdings if they bought during the drama of 2012.

SantanderTrue, since that early June peak the share price has drifted down to around 600p, but this shouldn’t be taken as any sign of weakness at the company. Rather, I think it’s just investors pausing to catch their breath as the price adjusts to the dull reality of a European economy still slogging its way out of the mire, as well perhaps as a bit of risk reduction in the light of the headlines emanating from Ukraine and Gaza.

In fact, I think if anything the prospects for Banco Santander have brightened further during the past few weeks.

There are two developments in particular that caught my eye recently that have added to my comfort in continuing to own these shares.

Mergers, not madness

Firstly, Banco Santander’s arch-rival, the similarly mega-globally-diversified BBVA (or Banco Bilbao Vizcaya Argentaria in full) has just bought the Spanish lender Catalunya Banc SA.

Catalunya Banc was formed when the Spanish government merged three bust ‘cajas’, or Spanish regional banks, and injected some €12 billion of taxpayer’s money in a huge bailout. With Spanish real estate an utterly broken flush back then, no private buyers were then interested in picking up such toxic assets.

So to my mind BBVA’s purchase this month is more evidence that the corner has been turned when it comes to the Spanish property sector, and hence for the source of so much pain and write downs for the big Spanish banks like BBVA and Banco Santander.

BBVA didn’t have to buy Catalunya Banc, after all. So the fact that it’s doing so is pretty strong evidence that when the chairman says the bank is “extremely confident of the current economic recovery”, it’s not just bluster.

That’s great news for Banco Santander, because while the bank has operations all over the world, it still has a huge slug of assets in Spain that have been a drag on its profitability (or indeed a source of massive losses) for years.

As these assets start to strengthen and Santander’s Spanish business begins to pull its weight, it should be great news for the bank’s overall earnings.

Economic expansion: It’s official

The other recent piece of good news is that it’s not just BBVA that sees the economy recovering.

As I type, the latest GDP figures have just come out for Spain. They show the Spanish economy expanded at 0.5% in the second quarter – the fastest pace for six years. It suggests the Eurozone’s fourth largest economy could chalk up annualised growth rate of 2% or more, which is a strong recovery from the dark days of 2012.

Of course, with massive unemployment still the scourge of the country and millions of empty homes from the property boom remaining unsold – as well as fears that Spanish exports may be peaking – the country is hardly out of the woods yet.

But strong, persistent economic growth is infinitely preferable to the opposite for a bank trying to repair its balance sheet like Banco Santander. Hence the latest GDP figures are for me more evidence that this once-blighted bank is now well out of the emergency room.

The experiences -- good and bad -- of shareholders in banks over the past few years have underlined just how important it is understand and be comfortable with the business, balance sheet, and even the culture of a bank, if you're to be confident that your bank will be one of the strong ones left standing like Banco Santander when the dust settles.

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Owain Bennallack owns shares in Santander. The Motley Fool has no position in any of the shares mentioned.