Live Dangerously: Buy a Spanish Bank
05/28/2010 3:54 pm EST
I don’t know when the euro debt crisis will be over or when European stocks, particularly European bank stocks, will stop sinking like stones. Certainly investors aren’t out of the woods yet: Fitch Ratings downgraded
Spain to AA today (finally), for example.
But I do know that with a yield of 9.5% as of Friday, May 28, Banco Santander (NYSE: STD) is paying me quite handsomely to wait.
Whenever you see a yield this high, you know that the market thinks there’s a lot of risk in a stock. The Spanish economy is a mess, and the government’s efforts at cutting its budget deficit haven’t convinced anyone that the country is serious about fixing its problems.
But Spain represents just 24% of Banco Santander’s earnings, and the bank has been extremely good, so far, at managing credit risk in Spain. In fact, the Spanish banking crisis has shifted to the regional banks, the cajas.
Just this week, the Bank of Spain took over CajaSur, and I’m sure more takeovers are in the cards, since these banks decided to step up lending as the real estate market plunged in an effort to gain market share. (That market share is now set to shift back to the big banks like Santander.) For more on the current state of the euro debt crisis, see this post.)
Banco Santander’s biggest profit center in the first quarter of 2010 was Latin America (35% of profits), with the biggest share of those profits (21% of total bank profits) coming from Brazil. The bank also got 17% of its profits from the United Kingdom and has a growing business in the United States (2% of profits).
That profile buffers Banco Santander from the worst danger facing Spain-only banks—that the cost of capital will rise in Spanish financial markets. Santander is able to tap capital markets in Latin America, the United Kingdom, and the United States, so it doesn’t face that risk.
In other words, I think the market is overestimating the risk in Banco Santander shares. And, while these shares are by no means riskless, at 9.5%, the yield is more-than-adequate compensation for the real level of risk in the stock.
As of May 28, I’m adding these shares to the Jubak Dividend Income Portfolio. (The stock traded above $10 Friday.)Full disclosure: I own shares of Banco Santander in my personal portfolio.