Second, Banco Santander is actually finding buyers for some of the most troubled assets in its portfolio. For example, as of Dec. 9 it had sold $8.81 billion in troubled loans at its Brazilian subsidiary, Santander Brasil. The discount was huge — loans originally valued at 16 billion Brazilian reals went for just 300 million Brazilian reals — but these loans were delinquent by a year or more and represented the most troubled part (a 9% part) of Santander Brasil’s portfolio. Getting them off the bank’s books — even at a very low price — takes a big whack at the risk-adjusted capital requirements of bank regulators.
Third, Banco Santander is actually raising capital in the financial markets — although the bank has had to use some unusual methods for doing that. For example, the bank gives holders of its ADRs the option of taking new shares, without paying withholding tax, instead of cash for their dividends. In the third quarter, 73% of ADR holders took the share offer — that added cash to retained earning and $82 million in new capital. And it’s planning to sell convertible bonds, which will count as capital.
Add in the bank’s almost $8 billion in free cash flow in the past 12 months, and I think Banco Santander won’t have any trouble presenting a plan for meeting the European Banking Authority’s capital requirements by the Jan. 20, 2012, deadline — without dipping into dividends. (The bank then will have until June 30 to execute that plan.)
Unless, that is, Spain goes the way of Greece and the country has to write down its sovereign debt. Banco Santander holds $4.4 billion less of Spanish government debt in December 2011 than it held in July 2011. But it still holds almost $50 billion in Spanish government debt.
If you think Spain will have to write off part of that debt, then Banco Santander sure isn’t the pick for you. If you think Spain is in better shape than Italy (or Greece), I think that in Banco Santander you’re looking at one of the best performers in 2012. (For more on why I think Spain isn’t headed down the tubes in 2012, see my post on JubakPicks.com.)
I’d put a target of $12 on these shares by December 2012. That’s an almost 70% gain from the Dec. 15 price.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. Banco Santander is a member of my dividend income portfolio on JubakPicks.com. The mutual fund I manage, Jubak Global Equity Fund, may or may not currently own positions in any stock mentioned in this post. The fund did own shares of 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.
Jim Jubak is the brains behind Jubak Picks, a stock newsletter that has beaten the market since its inception in 1997. He also manages the Jubak Global Equity Fund (JUBAX) and operates Jubak Asset Management.