Why I’ve Turned Bullish On Banco Santander SA

Find out why this Fool thinks Banco Santander SA (LON:BNC) may have its own bull run next year.

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Two economic ‘events’ have taken me by surprise this year. I’d now like to take a look at one stock that I believe will benefit from these surprises.

Resurrected economies

Whether it’s been done the ‘right’ way or not, the fact remains that Britain produced one of the more impressive economic recoveries in the world in 2014. Indeed growth is again forecast to remain robust in 2015. The latest report from PricewaterhouseCoopers forecasts GDP growth will remain at 3% in 2015.

That’s good for all stocks leveraged to economic growth and investment. The PwC report also shows business investment (a key ingredient for employment growth) is picking up. I expect all the banks will benefit from this.

It’s also not just the UK that’s responded well to some economic antibiotics. The latest figures out of the Eurozone show some surprising results. In recent months the economies of Greece and Spain have improved.

So which bank has the most leverage to stronger economic growth in both the UK and Spain? It’s Banco Santander (LSE: BNC) (NYSE: SAN.US).

The upside for Santander

Banks naturally benefit from economic growth. Investors will likely notice that employment growth encourages consumers to take out more loans, and increased confidence levels should see higher rates of business lending too.

Even more fundamental than that, interest rates will have to rise to stem the tide of inflation. It’s well known that banks reluctantly follow their central bank down in dropping interest rates, but they’re more than happy to increase borrowing rates when central banks take the lead. City analysts are now forecasting the first rate increase from the Bank of England in February or March next year.

OK so what? Well according to the bank, its net interest margin in 2013 was 2.6%. This year it’s expected to rise to 2.7%. It’s already done the hard work of lowering customer deposit rates and has taken advantage of lower wholesale funding costs, so if it can remain prudent on keeping costs down I suspect the bank may also have some scope to aggressively follow the Bank of England higher and raise borrowing costs next year — thereby improving its interest margin again in 2015 to 2.8% or greater.

So at its core, I think Banco Santander has room to improve its performance in the short to medium term, but what about returns to longer-term shareholders? A conservative measure puts the dividend yield at around 7%. Indeed given the bank’s unique scrip dividend option, and the potential for strong capital gains next year, investors could very well use the next couple of years to grow their stake in what will be a growing business. Indeed the bank is already showing promise. According to Banco Santander, earnings for the first nine months of 2014 rose by 32% to €4.36 billion.

Risks

While the bank’s non-performing loan ratio fell to 5.28%, the UK housing market is far from stable. And while Santander’s biggest profit growth came from Spain where new loans rose by 1%, Moody’s sights high unemployment as a potential threat to any sustained recovery in the property market in Spain.

There’s also been a recent management shake-up at Banco Santander. Ana Patricia Botín has made it clear she wants to put her stamp on her ‘father’s bank’ as she gets underway in her new role as chairwoman. José Antonio Álvarez will succeed Javier Marín as chief executive in January, while Santander will also add three new members to its board.

How many clichés do you want? Out with the old and in with the new? Nothing ventured, nothing gained? However you want to capture what Santander is doing, the fact remains that the environment in which the bank operates is changing (hopefully for the better) and Santander is changing with it. It’s enough for this Fool to get a little bullish about this Spanish bank.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

David Taylor has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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