Successful investors use a disciplined approach to picking stocks, and checklists can be a great way to make sure you’ve covered all the bases.
In this series I’m subjecting companies to scrutiny under five headings: prospects, performance, management, safety and valuation. How does Banco Santander (LSE: BNC) (NYSE: SAN.US) measure up?
Prospects
Largely a retail and commercial bank, Santander is the biggest bank in the eurozone and the largest provider of consumer loans in Europe.
Spanish banks over-extended themselves, culminating in the need for an EU bail-out. Santander did not need public money, but retains an overhang of distressed real estate loans.
It has grown rapidly and globally. Half of earnings derive from Latin America and 40% from Europe, of which the UK is the biggest contributor at 15%. Spain currently generates just 7% of earnings, but accounts for a quarter of the bank’s assets. Earnings are equally split between mature and emerging markets.
Santander is thus geared, upside and downside, to the global and Spanish economies.
Performance
Results have been volatile since the financial crash, with EPS declining year-on-year since 2009. 2013 has seen a turnaround, with attributable profit for the first three-quarters up 77% after reduced provisions.
However, non-performing loans have risen to 5.5% of the loan book, nearly triple the UK rate.
Management
Chairman Emilio Botin is the third generation of the dynasty to run the bank and his daughter, CEO of Santander UK, is widely expected to succeed him. Santander enjoys the benefits associated with family firms, including strong cost control and a conservative credit risk appetite.
Safety
Santander has a BIS core capital ratio of 11.6%, 180% of the regulatory minimum, and is rated higher than the Government of Spain. With customer deposits funding nearly 90% of loans, liquidity is relatively safe.
However, the ECB test of Spanish banks’ health next year could throw up questions of asset quality, and at worse require Santander to raise more equity.
Holdings of Spanish sovereign debt equal around 70% of net assets, and any Spanish bond crisis would be extremely serious.
Valuation
On a prospective P/E of 11, 0.7 times book value and 1.6 times tangible book value, Santander’s shares are valued on a par with UK banks.
The dividend yield of around 9% stands out. However, dividend cover (dividend: attributable profit) has declined in the past three years from 1.6 times to 1.0 times to 0.4 times, with 80% of shareholders taking scrip dividends.
Conclusion
Santander is a diversified play on global economic recovery and the Spanish economy. Though the yield is superficially attractive, until earning grow to cover the payout it is somewhat illusory as those who take cash are progressively diluted by those who take scrip.
