Banco Santander a Buy After $26B Write-Off

by Dan Burrows | January 31, 2013 1:40 pm

Cleaning up after a disaster sure makes a mess.

The good news is that Banco Santander (NYSE:SAN[1]) — Spain’s biggest lender and the largest bank in the eurozone by market capitalization — shored up its already solid balance sheet in the most recent quarter.

The bad news is the bank did so by taking a charge of about $26 billion (that’s billion with a “b”), to write off bad loans and real estate assets in Spain.

Complicating matters is that business in two of the bank’s most important markets — Brazil and the U.K. — wasn’t so hot in the final three months of the year.

Brazil’s economy is barely above stall speed, while the U.K. is essentially in recession yet again. Throw in the truly epic charges, and Banco Santander’s net income missed Wall Street estimates by a wide margin.

Predictably, shares slumped on the news, losing more than 4% at one point early in the session. But for a number of reasons, Banco Santander still looks like a buy.

The stock remains off about 60% from its 2008 peak, beaten down largely because of its position as Spain’s biggest lender. But the write-offs of 2012 now leave the bank covered on nearly three-quarters of all its bad loans and soured real estate assets in the basket case of an Iberian nation. That should put the drag from Spain definitively in the rearview mirror.

Profits appear to have hit an inflection point in 2012 and are poised to accelerate. As Chairman Emilio Botin said in a media release:

“In 2013, with the exceptional write-offs behind us, we should see a marked increase in earnings based on the group’s recurrent revenues and cost control.”

Furthermore, Spain, accounting for only 15% of earnings, isn’t where the bank’s money comes from. As InvestorPlace’s Charles Sizemore notes, Banco Santander gets the vast majority of its profits from overseas[2] — particularly from its growing Latin American subsidiaries.

If anything, the firm offers “great ‘back door’ access to one of the few areas of the globe that’s still growing,” Sizemore writes.

Indeed, half of Banco Santander’s profits come from Latin America. True, with Brazil contributing 26% of that income, the slowdown there is troubling. Fortunately, Mexico and Chile together account for nearly 20% of Latin American earnings — and those two economies are purring along.

Perhaps most important is that even after rising 72% since late July — or ever since European Central Bank President Mario Draghi said he would do “whatever it takes” to save the euro — shares still look compelling.

Santander has a solid capital position, notes BPI equity analyst Carlos Peixoto, who rates shares a “buy.” The firm was a “standout” in stress-test results, the analyst writes, yet the stock trades at significant discounts to the European sector average, as well as its own net asset value.

Meanwhile, the forward yield on the dividend now stands are more than 9% — and it is a payout you can bank on. During a five-year period when most big banks cut or suspended dividend payments, SAN not only kept shelling out cash, but actually grew its dividend by 0.7%.

Continued weakness in Brazil and the U.K. are likely to make for a bumpy ride, but if you can tolerate the volatility, Banco Santander’s solid capital position, much-improved earnings potential and sky-high dividend have the stock look poised for some market-beating returns.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

  1. SAN:
  2. Banco Santander gets the vast majority of its profits from overseas:

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