Banco Santander Stares Down Triple Threat

07/29/2011 4:27 pm EST


Jim Jubak

Founder and Editor,

Tells you something about how beaten up Spanish bank stocks are when Banco Santander (STD) delivers news of a horrible first half and the stock only falls 5.6%. And that on a day too—July 27—when stock market indexes such as the Standard & Poor’s 500 were themselves down 2%.

The next day, July 28, shares of Banco Santander were up 0.89%, and they’ve inched ahead another eight cents per share today. The shares pay an 8.42% dividend, and at today’s price of $10.28, they are very close to their 52-week low at $9.43.

If they can get back just to their depressed 52-week high at $13.75, you’re looking at a gain of 35%, plus dividends. (Banco Santander is a member of my Dividend Income Portfolio.)

How bad was the July 27 report? So bad that Banco Santander’s results from its home market of Spain—you know, the Spain on the edge of joining the European debt-crisis club—weren’t the worst news the bank had to report.

That honor fell to the United Kingdom, where a huge, $1 billion charge to cover claims that the bank, like other banks operating in the country, mis-sold mortgage payment protection insurance was enough to turn a 9.3% drop in first half earnings per share from the first half of 2010 into a 22.9% plunge.

I’d make the case that the news from Spain wasn’t even the second worst for the bank.

Attributed profit from Brazil, the source of about one quarter of the bank’s profit in most quarters, grew by just 7.6% in the first half—and an even lower 3.5% once you factored in the stronger Brazilian real. But the real trouble in Brazil may be a rise in non-performing loans resulting in higher provisions for bad loans.

None of this is to say that Banco Santander recorded a great or even a good quarter in Spain. The bank raised bad loan provisions in Spain as a slow Spanish economy increased forecasts for bad loans. Because of the drag from Spain, Banco Santander’s profit in continental Europe fell by 17% in the first half.

The deterioration in the loan book in Brazil is worrying—and not less so because most banks in Brazil are seeing the same trend. But the bank sailed through the recent not-terribly-stressful European bank stress tests with a very high grade.

Under the case of the limited downturn used in the test, Banco Santander would be the most profitable bank in Europe. And the bank finished June with a very solid 9.2% core capital ratio.

In other words, I think Banco Santander can stick out this rough spot and continue to pay its current dividend. Results in the United Kingdom should start to pick up too as the bank makes more progress on integrating its recent acquisitions in that country—so there’s potential share-price appreciation ahead too.

Full disclosure: I do not own shares of any stock mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own shares of Banco Santander as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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