It’s not often that UK-listed banks beat market expectations. But Banco Santander SA (LSE: BNC) did exactly that this morning, announcing a third-quarter profit of €1.7bn. Market forecasts had suggested net earnings for the period would be just €1.55bn.
Despite this good news, shares in the Spanish bank have hardly moved today. In this article I’ll take a closer look at today’s results and at Santander’s valuation. I’ll also ask whether investors might do better to consider investing in challenger bank OneSavings Bank (LSE: OSB).
Good news from Spain
Santander is unusual among UK-listed banks in having major operations in Spain, Latin America and the UK. This means that its performance hasn’t always mirrored that of troubled UK-focused banks. And that’s no bad thing.
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Today’s results show a continued improvement in several key areas. The quality of Santander’s loan book continues to improve, with non-performing loans down to 4.15%, from 4.29% at the end of June.
As I mentioned above, net earnings rose by 1% to €1.7bn. The bank said this morning that this figure would have risen by 7.2% if adverse exchange rates hadn’t hit earnings.
Today’s Q3 figures suggest to me that conditions may be improving for Santander. The rise in profits compares favourably with the bank’s performance over the first nine months of this year, during which net earnings fell by 22.5% to €4.6bn.
Santander shares have gained 18% so far this year, in part because of the weaker pound. The bank now trades on a forecast P/E of 11 with a prospective dividend yield of about 4.5%. I’m not sure I’d rush to buy Santander after today’s results, but I’d certainly be happy to hold.
Where next for this upstart?
OneSavings Bank shares are worth almost 70% more than when the bank floated in 2014. If you’ve been invested in larger UK banks during this time, you’re probably feeling envious.
But it’s less clear what will happen next. Shares in OneSavings have fallen by about 20% over the last year, in line with most other UK banks. However, some experts believe that smaller banks will have a particular problem maintaining their profits in the face of ultra-low interest rates.
Growth certainly seems to be slowing at OneSavings Bank. While underlying earnings per share rose by 27% to 19.7p during the first half of the year, broker forecasts are for earnings of 38.7p for the full year. That implies that H2 earnings will be unchanged from H1.
This isn’t necessarily a big problem for investors. OneSaving’s key ratios are superior to those of many bigger players. The bank has a CET1 ratio of 13.3% and a net interest margin of 3.07%. Losses on bad loans have fallen since last year.
OneSavings also look quite cheap. The stock trades on 7.6 times forecast earnings and offers a reasonable 3.3% forecast yield.
The risk is that if earnings stay flat or fall in 2017, the shares probably will too. OneSavings already trades at 1.8 times its book value, and its dividend yield is only average. There’s no reason for the bank’s shares to rise, if profits stop growing.
I’m attracted to OneSavings Bank, but the outlook seems uncertain. I’m going to watch and wait a little longer before making a decision.
