Santander Goes on a Diet

12/18/2012 6:00 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The bank has embarked on a cost-cutting exercise to stay afloat while keeping its dividend sacrosanct, a strategy that appears to be working, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

Finally, Banco Santander (SAN) has decided that in a shrinking Spanish banking market, it doesn’t need three separate brands.

The bank, Spain’s largest lender, will first buy the 10% of Banco Espanol de Credito or Banesto (BTO.SM in Madrid) that it doesn’t already own, and then shut 700 Banesto branches and eliminate the Banif private bank brand. The restructuring will give Banco Santander a single brand across its 4,000 Spanish branches. (Spain’s banks are expected to close 35% of their branches by 2015.)

The restructuring, which will see Banco Santander offer existing treasury stock to buy out Banesto investors, should help the bank close its cost gap with Banco Bilbao Vizcaya (BBVA), Spain’s second-largest lender. The bank is projecting €520 million in annual savings by the end of the third year of the restructuring.

The emphasis on increased efficiency is an implicit admission that growth isn’t coming back in Spain’s banking sector anytime soon. Banco Santander’s non-Spanish units in the United States and Latin America carried the bank through the early stages of the Spanish financial crisis. But results in those markets lagged in the last quarter, with net profit from US operations coming in 5% below expectations, as well as 3% below expectations in Latin America.

On the other hand, net profits for the quarter ran about 8% above expectations in the United Kingdom, largely as a result of cost cutting. And that certainly suggests that Banco Santander’s restructuring in Spain could help with the bank’s return to earnings growth.

Right now, it looks like 2012 will be the low point for earnings at the bank. For the year, Banco Santander will report earnings of 32 euro cents per share, according to estimates by Credit Suisse. That’s a huge drop from earnings of 58 euro cents in 2011. But Credit Suisse is projecting that earnings will rebound to 59 euro cents per share in 2013.

Banco Santander is a member of my Dividend Income Portfolio, and on the dividend front, 2012 also looks like the turning point for the bank. The dividend-payout ratio soared in 2012 to a projected 188% of earnings, a ratio that the bank only sustained by issuing stock to pay dividends.

The extra stock will push shares outstanding to 10.42 billion by the end of 2012, from 9.53 billion in 2011. That 9.3% increase in shares certainly didn’t help the price, even though maintaining the dividend did.

In 2013, Credit Suisse estimates, the dividend-payout ratio will shrink to 100.8%, on its way to 86.97% in 2014. Even that 2014 ratio would be extraordinarily high and unsustainable in the long run, but at least you can see a “normal” payout ratio from there.

I don’t believe for a moment that Banco Santander is out of the woods yet. But it does seem like the worst of the crisis for this global bank—if not for Spain’s smaller banks—is over. And that Banco Santander will continue to pay a yield of 8% of higher.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Banco Bilbao Vizcaya and Banco Santander as of the end of September. For a full list of the stocks in the fund as of the end of September, see the fund’s portfolio here.

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