Is Banco Santander SA A Treacherous Value Trap?

Royston Wild runs the rule over Banco Santander SA’s (LON: BNC) investment profile.

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Shares in Spanish financial giant Banco Santander (LSE: BNC) (NYSE: SAN.US) have endured a disastrous run so far in 2015, and the business is currently trading at a 17% discount to prices recorded at the start of January.

While much of the UK banking sector has got off to a bad start, investor appetite for Santander has taken a particular hammering after new chairperson Ana Botín introduced a share placement to shore up the firm’s capital base, as well as announcing plans to slash the dividend by much more than analysts had been expecting.

An appealing earnings and dividend pick

The effect of this double-whammy on stockholder nerves hardly comes as a surprise, but I remain convinced that Santander offers terrific value for money at these levels. The effect of significant restructuring at the firm is anticipated to deliver further splendid earnings growth in 2014, and a 20% advance is expected when the firm releases its results next week.

And City analysts expect the bottom line to keep on rolling higher in the coming years, with increases to the tune of 15% and 13% chalked in for 2015 and 2016 correspondingly. As a result, Santander’s P/E multiple of 11.1 times prospective earnings this year moves to an even more delicious 9.7 times for 2016 — a reading around or below 10 times is generally considered a steal.

While it is true that Santander’s aggressive dividend rebasement has obliterated its previous appeal to income chasers, this does not mean that the bank is now a laggard in the payout stakes. Botín announced that the payment for 2015 will register at 20 euro cents per share, a colossal drop from the 60-cent payout afforded in previous years.

But this figure still produces a solid-if-unspectacular yield of 3.3%, and with the firm’s capital base shored up and earnings poised to rise higher, I believe that Santander will be well positioned to get payments trekking higher again from next year onwards.

Long-term picture remains promising

All is not plain sailing for the firm, however, particularly as economic conditions in its critical Latin American hub of Brazil continue to drag — Santander sources around a fifth of group profits from this country alone, so news that Brazil’s central bank expects GDP to grow just 0.4% this year is troubling.

Still, the bank is pulling out all the stops to give its Brazilian unit a shot in the arm, and speculation is mounting that industry veteran Sérgio Rial will be appointed chairman as chairman in the coming days. Santander Brasil is also ramping up its retail and corporate banking propositions, and this month made its first foray into the prepaid cards market by acquiring a 50% stake in digital platform Super.

The business is also well placed to ride the UK economic recovery, a country from which it also generates 20% of profits, and to a lesser extent the improving Spanish marketplace. Although Santander naturally remains exposed to deteriorating economic conditions in the eurozone, severe restructuring means the firm has limited exposure to the worst the region has to throw up.

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.

Royston Wild 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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