The release of Santander’s (LSE: BNC) third quarter update today shows that the bank is making strong progress despite challenges in its key market of Brazil. With the bank relying on the emerging economy for around 20% of its profit, the worsening economic outlook for the South American country has acted as a brake on its financial performance. But, with other important markets such as the UK performing well, Santander has still been able to increase year-on-year ordinary profit by 17%.
Looking ahead, with Santander relying on Europe for 53% of its earnings, the improved economic situation within the Eurozone could boost its future performance. With the ECB undertaking to increase quantitative easing should the current programme prove to be inadequate, Santander’s future could be relatively bright. And, with the UK now being its major market, the improving UK economy is likely to have a positive impact on its income moving forward.
Meanwhile, Santander’s efficiency continues to be highly impressive, with its cost:income ratio standing at just 47%. And, with its common equity tier 1 ratio rising to 9.85% in the quarter, it continues to make progress regarding its financial standing.
Surprisingly, Santander trades on a price to earnings (P/E) ratio of just 10, which indicates that there is significant upward rerating potential. Furthermore, it is forecast to increase its bottom line at a similar rate to the wider index in the next two years, with growth of 5% this year and 7% next year being pencilled in. So, while Brazil is likely to continue to cause the bank a number of short term challenges (such as above average loan defaults and a lack of new business), Santander appears to be a strong long term buy.
Meanwhile, asset manager Henderson Group (LSE: HGG) also released an encouraging update today. It has reported net inflows of £1.3bn in the most recent quarter, with over 80% of its funds outperforming over the last three years. However, with global stock markets experiencing major falls during the quarter, Henderson’s assets under management have declined by £600m to £81.5bn, which means that its fees have also fallen.
Clearly, this is disappointing, but is a fact of life for asset managers who benefit from rising markets and experience reduced incomes during downturns. Looking ahead, Henderson expects the level of regulatory oversight to intensify and, with the outlook for the global economy being uncertain, it would be of little surprise for its financial performance to come under pressure in the short run.
However, in the longer term it has real upside potential. For example, Henderson trades on a price to earnings growth (PEG) ratio of just 1.2, which indicates that its shares offer good growth prospects at a reasonable price. And, with it yielding 4% from a dividend which is covered 1.6 times by profit, it appears to be a sound income play, too.
