Why pick a European bank? Even worse, a Spanish bank? And even, even worse, the Spanish bank that has to raise the most capital among all European banks — $15.3 billion euros ($20 billion) — according to the European Banking Authority?
Doesn’t everyone know that Europe’s banks are headed down the tubes, that they’re insolvent, that they’re headed to bankruptcy?
Yes. But “everyone” could be wrong, and that’s exactly why you want to own Banco Santander (NYSE:STD).
There’s no denying that, on the surface, this is an ugly, ugly stock — or rather, an American Depositary Receipt, or ADR. Banco Santander traded as high as $12.72 on July 1 and as low as $6.77 on Nov. 25. That’s a 38% drop in just a few months.
The ADRs of Santander are certainly cheap: They trade at a 33% discount to book value (or a price-to-book ratio of 0.67.) And they carry a huge 10.9% yield on the company’s promised 2011 dividend. But that’s because everyone expects massive writedowns in the company’s book value as its portfolio of Spanish real estate loans and government bonds heads even further south. And because everyone expects that Santander will have to cut its dividend to meet regulators’ capital targets — even though chairman Emilio Botin promised to keep the dividend intact as recently as the end of the September 2011 quarter.
But I think Banco Santander’s price has been a victim to standard investor behavior: In a panic, the motto is “Sell everything and sort it out later.”
I think that seriously underestimates the strengths of Banco Santander — and especially the ability of what still is the world’s 11th largest bank by market capitalization to raise capital.
The worry about European banks right now is that they can’t raise capital in the financial markets. It’s just too expensive when your shares are trading at 50% or 67% of book value. As a result, they can’t reduce their asset base by selling off debt because nobody wants to buy loans to Greek companies or mortgages on Spanish real estate — and they don’t have much in the way of non-core businesses to sell off, at least not at a decent price.
During the past two quarters, Banco Santander has very clearly demonstrated that this bank doesn’t fit that profile of worries.
First, this is a global bank with plenty of attractive assets outside of the struggling Spanish and euro zone markets. In the third quarter, the bank sold a piece of its Latin American insurance business and part of its U.S. consumer loan business for a total of $3.5 billion. In the fourth quarter, it sold pieces of its Chilean subsidiary and all of its Colombia unit for $2.75 billion.