SAN - Banco Santander

[gary17]

What would happen to option holders?  More options?

 

Yes. The default is that you get paid in shares with no withholding tax; thereafter you can sell the shares for cash or keep them.

Alternatively you can elect to take cash instead, net of the 25% Spanish withholding tax.

 

SD

[yitech]

What would happen to option holders?  More options?

 

Yes. The default is that you get paid in shares with no withholding tax; thereafter you can sell the shares for cash or keep them.

Alternatively you can elect to take cash instead, net of the 25% Spanish withholding tax.

 

SD

 

It's essentially dividend, just converted to additional shares, skipping the withholding tax, so option holders would not get any additional shares.

[gary17]

thanks, make sense

so from that perspective probably better to buy commons, not options if one want to own this long term...

[SharperDingaan]

The 4.4B is just the 3.3B 2013 Sep YTD profit showing on their financials x 4/3. Any reduction in loan write-offs, operating cost savings, or margin improvement - & profit will jump dramatically.

 

Buying back scrip as it is issued, creates an annual 5.3B buyback, & converts the scrip into a cash dividend. With a 9.3% cash yield, & an earnings driven sustainable 5B annual buyback, they will be well ahead of competitors - & with a share price to match.

 

Agreed re normalized earnings; for 2014 it would be around 20B net of 3B for SAN UK & the 5B scrip capital. We think it will go to Iberian acquisitions & regulatory capital, before it goes into buybacks. That said, once the Spanish write-offs dissipate & loan quality starts improving (releasing regulatory capital), very aggressive buy-backs make a hell of a lot of sense.

 

Not recognized is that every write-off will eventually come back to them when the asset recovers. Loans get written up to their former value, & 5yrs+ of cumulative charge-offs start hitting retained earnings. Guess what funds future buy-backs.

 

If you have a short time horizon, SAN does not make much sense. But if you have a longer horizon …… This also totally ignores Latin American demographics, plus the crisis driven consolidating Iberian loan growth.

 

SD

 

[SharperDingaan]

Correction: Loans do not actually get written up; the general & specific loss provisions against those loans get reduced as underlying conditions improve, which raises the net value of the loans - creating a write up. What does not show; is that because of the underlying quality improvement - less regulatory capital is required - which raises both the RAROC return & Basel capital ratio. ie: regulatory recapitalization via a different route.

 

Most would also argue that over the longer term, SAN will become so big that it is going to have to divest some of its holdings; or suffer a global anti-trust breakup. It will not happen anytime soon, but you have to think that at some point they are going to start raising their hurdle RAROC, to force the process. We would expect that most of the proceeds will go to buybacks, once they finish building their capital ratio.

 

Again, nothing but tailwinds .... but how long this takes to happen is nothing more than best guess.

 

SD

 

[JPerez]

Not to argue but i really doubt that they are going to repurchase shares, it is not something in the culture of spanish banks the same way it is in America.

They own  a small amount 0.4% of their own shares and they buy and sell their own shares daily but they as far as I can see have never repurchased any shares to retire them (I am talking in the last 15 years) just for trading.

They started the crisis in a strong position and did some clever acquisitions (sovereign, Brazil, consumer credits, poland, 25% of mexican subsidiary) in 2008-10 but they grossly miscalculated the extend of the crisis.

They were in desperate need of capital in 2009-11.

They introduced the script dividend which is just about the same as not giving any dividend  really back in 2009 and since they have done a rights issue, convertible bonds to buy the brazilian business, IPOs in their Brazilian and Mexican subsidiaries, sold further stakes in the chilean and brazilian subsidiaries, sold their insurance business in latin america and spain, sold their colombian and venezuelan subsidiaries and  sold 50% of their asset management business and part of the auto loan business in USA. They are also planning to IPO their UK business and US business.

They have been selling that it is part of their strategy to have all their subsidiaries independently traded in local markets, but what sense does that make they lose flexibility to move the capital around subsidiaries and more likely the market will give the holding a discount from the sum of the parts.

My opinion is that their strategy is extent and pretend, they keep the dividend paid in shares created from thin air to pretend that they have a yield of 10% and attract investors and they raise capital selling stakes in their subsidiaries pretending that it is all part of a master plan not related to their need of capital.

Their management is very clever and is always ahead of competitors. They sold their bank branches and headquarters in spain just when the real estate bubble was about to explode (they are leasing them now), they were the first that introduced the script dividend a clever way of pretend you pay dividends (a lot of banks, utilities and other business follow them in this practices in spain), they starting selling the repossessed buildings in spain at cheap prices (a lot of the other spanish banks were keeping them in their balance sheets and give them unrealistic valuations until the bank of spain forced them to act) they have a 5-6 billion gross profit every quarter to compensate write offs (it is actually reducing every quarter for the last 6 or so but still around 5 billion)

The average bad loans in the spanish banking system are about 13% and still going up (Santander is below average with 6.4%not counting  the repossesed buildings) but they have over 30 Billion in provisions to cover them for all the group (only 40% coverage in spain).

I think that we are close to turn things around in Spain and if all their major markets (mexico, brazil, chile, Uk, spain and USA) have a good economy at the same time I see an upside for santander shares of 50% but there are basel III is going to be dragging their performance for years to come.

[JPerez]

http://www.bloomberg.com/news/2013-11-21/santander-reaches-preliminary-accord-to-sell-altamira-to-apollo.html

And they do it, again they just sold today their real estate/loan recovery operations to Apollo today.

You can see how most of their improvement in the core capital ratio is due to a reduction of RWAs and divestments.

 

 

[SharperDingaan]

JPerez thanks for your thoughts

 

In the short-medium term we are pretty comfortable we are going to see higher share prices. Combination of higher earnings from more business, reduced provisioning (improving loan quality), & higher multiples. Depending on the metric used; anywhere from 50-100%.

 

It is not really practical to assess the share count options; they are unlikely to do anything for quite some time, they have so many options, & the uncertainty over option X versus option Y is extreme. They could buy back shares, or simply consolidate on something higher than a 1:1 basis; both options are equally valid.

 

We actually prefer the asset & IPO sales. The less high RWA, & the more cash/T-Bills the better (Basel capital); & the more subs with their own listings the more indirect liquidity. SAN gets a rising but discounted sum-of-the-parts floor valuation, the ability to raise $ quickly through additional share sales (if required), & easy divestment to address any potential future anti-trust concerns. Hard to knock.

 

Given their size, what Europe has been through, & their prominence in the Spanish speaking world; most would argue they should be a GSIB (if they are not already). That implies capital well above the Basel requirement, & probably on par/comparable to the Swiss Finish currently under discussion; continued scrip issuance for quite some time, & growing bias towards an eventual share consolidation.

 

We also think that one either hates scrip, or does not. Canadian Sched-A banks have made the same cash/scrip DRIP offer to their shareholders for many, many years; & usually offer the scrip at 95% of prevailing market price. Same process, same outcome, but different messaging .... & that is all it is; spin.

 

Interesting times.

 

SD

 

 

[SharperDingaan]

Just in case folks forgot ... this moratorium ended December 31 ;)

SD

 

 

http://www.santander.com/csgs/Satellite?appID=santander.wc.CFWCSancomQP01&c=GSInformacion&canal=CSCORP&cid=1278689446208&empr=CFWCSancomQP01&leng=en_GB&pagename=CFWCSancomQP01%2FGSInformacion%2FCFQP01_GSInformacionGeneralPie_PT37

 

Since 2011 Banco Santander is offering a three-year grace period to alleviate the situation of personal banking and self-employed customers in Spain, with objectively justified economic problems, such as being unemployed or having suffered a loss in excess of 25% in their earnings, and who are having temporary difficulties paying the mortgage on their main home. Customers will have the option of extending their repayment term to compensate for the grace period without altering the financial conditions on the loan, either during the grace period or subsequently.

 

[phil_Buffett]

SD how is your take on the last quarter?

would be interesting to hear  :)

[SharperDingaan]

We think it should be a pretty good 2014 ...

 

They have announced that the intense BS restructuring is now complete, they have advised that provisioning should return to normal levels, & last quarter they announced they are looking for 1B+ in operational savings /year by the end of 2014. 2009-2011 annual provisioning was in the 11-12B range, 2013 provisioning was 11.1B; but 2008 was 7.1B. Suggests around 4B+/year in reduced provisioning going forward, maybe .5B in operating savings for 2014 .... & the year-end transactions that closed in Q1 have already added another 1B+ of additional realized gain. 2014 net income after tax should be more than double what it was for 2013.

The Spanish mortgage moratorium is now over, & they have the provisions to take the exit losses; the result will be a regulatory release of capital to push their Basel capital & liquidity ratios up, & possibly a further reduction in provisioning need. Tail winds.

 

The UK IPO was delayed because UK regulators are not ready. Create a new bank in the UK right now, & you only have to put up 1/2 the regulatory capital requirement of existing banks; but it was intended for (small) start-up entrants who needed time to build up their capital through earnings. Most would argue that SAN qualifies as a new bank, but it is very far from what regulators might have had in mind. Tail winds.

 

The .60 Euro scrip was extended for another year, & yields 9%+ based on the Dec 2013 close price. Pretty hard to see why the share price would also not be at around $12 by the end of summer. Hence, a total 2014 return of around 40%, & it is looking pretty low end.

 

SD

 

 

[phil_Buffett]

We think it should be a pretty good 2014 ...

 

They have announced that the intense BS restructuring is now complete, they have advised that provisioning should return to normal levels, & last quarter they announced they are looking for 1B+ in operational savings /year by the end of 2014. 2009-2011 annual provisioning was in the 11-12B range, 2013 provisioning was 11.1B; but 2008 was 7.1B. Suggests around 4B+/year in reduced provisioning going forward, maybe .5B in operating savings for 2014 .... & the year-end transactions that closed in Q1 have already added another 1B+ of additional realized gain. 2014 net income after tax should be more than double what it was for 2013.

The Spanish mortgage moratorium is now over, & they have the provisions to take the exit losses; the result will be a regulatory release of capital to push their Basel capital & liquidity ratios up, & possibly a further reduction in provisioning need. Tail winds.

 

The UK IPO was delayed because UK regulators are not ready. Create a new bank in the UK right now, & you only have to put up 1/2 the regulatory capital requirement of existing banks; but it was intended for (small) start-up entrants who needed time to build up their capital through earnings. Most would argue that SAN qualifies as a new bank, but it is very far from what regulators might have had in mind. Tail winds.

 

The .60 Euro scrip was extended for another year, & yields 9%+ based on the Dec 2013 close price. Pretty hard to see why the share price would also not be at around $12 by the end of summer. Hence, a total 2014 return of around 40%, & it is looking pretty low end.

 

SD

 

 

 

thank you very much SD for your thoughts!!  :)

[TwoCitiesCapital]

Not to argue but i really doubt that they are going to repurchase shares, it is not something in the culture of spanish banks the same way it is in America.

They own  a small amount 0.4% of their own shares and they buy and sell their own shares daily but they as far as I can see have never repurchased any shares to retire them (I am talking in the last 15 years) just for trading.

They started the crisis in a strong position and did some clever acquisitions (sovereign, Brazil, consumer credits, poland, 25% of mexican subsidiary) in 2008-10 but they grossly miscalculated the extend of the crisis.

They weren't the only ones. As far as I'm concerned, they didn't need a bailout and were able to manage their own recapitalization through the SCRIP dividend over the past 4 years. That's a huge plus in my eyes. They were "wrong" about the duration of one of the biggest credit crisis in history and still managed to remain profitable through out. Seriously...what more could you ask for from one of the banks at the epicenter of the European debt crisis?

 

They were in desperate need of capital in 2009-11.

They introduced the script dividend which is just about the same as not giving any dividend  really back in 2009 and since they have done a rights issue, convertible bonds to buy the brazilian business, IPOs in their Brazilian and Mexican subsidiaries, sold further stakes in the chilean and brazilian subsidiaries, sold their insurance business in latin america and spain, sold their colombian and venezuelan subsidiaries and  sold 50% of their asset management business and part of the auto loan business in USA. They are also planning to IPO their UK business and US business.

They have been selling that it is part of their strategy to have all their subsidiaries independently traded in local markets, but what sense does that make they lose flexibility to move the capital around subsidiaries and more likely the market will give the holding a discount from the sum of the parts.

My opinion is that their strategy is extent and pretend, they keep the dividend paid in shares created from thin air to pretend that they have a yield of 10% and attract investors and they raise capital selling stakes in their subsidiaries pretending that it is all part of a master plan not related to their need of capital.

I agree with you that the SCRIP dividend is nothing but smoke and mirrors....and yet, whenever investors mention SAN they talk about the yield. I'm pretty certain this has a put a floor under the shares even though it's not real and that shows some brilliant financial engineering by SAN. This is the kind of management I want on my side. Somebody that not only understands banking but understands the psychology of the masses. As for extend and pretend, you're probably right, but sometimes all it takes is time to heal some old wounds. The U.S. removed MTM accounting - that's another form of extend and pretend and yet the banks in the U.S. turned out well. Again, smoke and mirrors, but it demonstrates and understanding of the mass pyschology and a way of addressing it. Plus, about 15-20% of holders elect to receive cash which means my marginal % of ownership in the company increases every quarter that a dividend is paid.

 

I think that we are close to turn things around in Spain and if all their major markets (mexico, brazil, chile, Uk, spain and USA) have a good economy at the same time I see an upside for santander shares of 50% but there are basel III is going to be dragging their performance for years to come.

Based on my rough calcs, we have 50-70% upside based on normalized earnings now that I'm comfortable with the credit risk in Spain being covered. Plus, you are investing in a bank that has constantly displayed an ability to make savvy investments and has operating costs below it's competitors. The investment savvy may soon go away but the low cost will stay. That is a competitive advantage (moat) that it's competitors would have to invest billions to replicate.

 

What I see is a cheap bank with global diversification with 50-70% immediate upside plus a valuable franchise that has a long term competitive advantage and is largely focused in high growth areas. I think this is one of those "American Express" moments for us (Warren Buffett had his back in the 1960s amidst a credit crisis at AMEX). It's a great company at a great price with the probability of above average growth due to its exposure to developing and recovering nations.

[ERICOPOLY]

I agree with you that the SCRIP dividend is nothing but smoke and mirrors....and yet, whenever investors mention SAN they talk about the yield. I'm pretty certain this has a put a floor under the shares even though it's not real and that shows some brilliant financial engineering by SAN. This is the kind of management I want on my side. Somebody that not only understands banking but understands the psychology of the masses.

 

 

I thought the SCRIP dividend was merely to avoid Spain's dividend tax.

 

Plus, if you want cash instead you can get it directly from Santander (but you wind up paying the Spanish withholding tax):

 

http://www.santander.com/csgs/Satellite/CFWCSancomQP01/en_GB/Corporate/Shareholders/Shareholders-US/Santander-Scrip-Dividend.html#

 

 

[LC]

the way i see the dividend is a way to improve capital levels @ the bank while maintaining the illusion of a dividend.

[JPerez]

I agree that historically has been one of the best managed banks in the world, with very good acquisitions in latin america in the 90s and early 2000s when nobody would touch those makets. They have the advantage of being a spanish bank without the language barriers and with cultures that are somehow similar.

They also had a great advantage in emerging markets because they lived in first person the transition of the spanish economy from being an emerging economy to a develop economy. There are lessons learnt on that transition (risk management, business model, etc.) that you wouldn't learn in the best business school.

They are the main reasons why bbva and santander succeeded in their expansion in latin america where the united states banks failed (leaving aside the distrust to anything from USA that some people in latinamerica have which is an important factor too).

 

I agree that extend and pretend can be the best course of action in some cases if you can avoid a highly dilutive share offering it is certainly the best course of action for existing shareholders.

Lets not forget that they have done a rights issue in 2009 and together with the conversion of the convertible bonds and the scrip dividend the shares outstanding have gone from 6.2 billion in 2007 to something around 11.5 now, so nearly double.

I was a shareholder from 2009-2012 and i finally gave up because i couldn't trust management.

 

There was a lot of broken promises about the turnaround and although the environment changes and sometimes you can't achieve what you promise, every conference call they keep hammering the same message quarter after quarter and it never turns out the way they say. For me it is basic that if you don't achieve your objective, that is fine but please explain why not and what are you doing the turn things around but they don't even acknowledge the problems. During the investor day 2 years ago they projected 14% roe for 2014 i think they are far away from that at the moment.

 

The issue around the scrip divided, of course it doesnt bother me to wait and receive the script. What bothers me is that they keep talking about their great 10% yield and how the maintain their dividend through the crisis rewarding shareholders and even comparing themselves in investor presentations with other banks that give no dividend and counting the whole script as a return to shareholders!!!. I was a shareholder and when they talk that way I feel they are insulting our intelligence.

 

But what made me sell the shares was that i was worry about their capital. Their tangible book value is only around 53 billion for a 1.1 trillion euro balance sheet and of those 53 billion around 25 are deferred tax assets.

There was a row recently between the big banks in spain and the government about the DTAs because according to Basel III the DTA are not part of the core capital but think about it santander without the DTAs would have 28 billion in capital for RWAs of 500B (the subject of RWAs in european banks is a joke anyway) so it would give it less than 6% core capital. They would be extremely short. So the spanish government agreed to convert the DTAs into tax credits so that they could be counted and everything looks fine from the regulatory point of view.

The subject of the DTA's in spain is quite complex as in their majority didn't arise from recent loses as you may think but they are historic fruit of the spanish tax code and they won't mean that santander will have a close to 0% tax rate in spain for years to come.

Their book value has been static for the last few years despite the profits which for me is a red flag. Their book value for 2011 was 80.81B in 2012 81.27B and in 2013 79.9 B (this includes minority interest that has increased from 6 to about 9 in 2013) This is despite accumulated profits of 12B in those 3 years. Deducting the dividend still leave us with a retain profit of 9.4B.

So where are those profits gone? The answer seem to be that it is in the reduction of the valuation of assets through the balance sheet instead of P&L. That has gone from -6.4 B in 2011 to -14.1 in 2013. The surprising thing is that the value of spanish bonds has surge in the period but they could have been selling them to lock the profit through the P&L in the last year. The other explanation would be the drop in the value of the Brazilian real.

Anyway when i see a profitable company i like to see where those profits go (increase in the book value, dividends, purchases of their own stock, etc.) If i can see it I get nervous with the investment.

The other issue with the balance sheet is that their subsidiaries abroad have lots of capital so that the local regulators are happy with the local banks but  the spanish bank is dramatically undercapitalized but the bank of spain is happy to make an exception with them and count their capital as a global entity rather than just the spanish operations.

 

As I said on a previous post I think you would do well with santander and i see the 50% potential but I am afraid of the balance sheet and i don't trust management.

I prefer for example citigroup where you have a 10% earnings yield, increasing book value and  excess capital. They are both expose to EM but i see a better risk/reward ratio with citi. I believe they could also have a 50% potential if they start purchasing their own shares on the cheap. I am still researching citi and i am not as familiar with them as with santander but so far it looks to me like a better investment at this prices

 

 

 

 

[zippy1]

JPerez,

 

        Thank you for a very thoughtful and penetrating post!

 

       

[SharperDingaan]

JPerez, thanks for your post.

We are inclined to agree with most of it as well …

 

Different view on sovereign involvement. When we look at the major banks of the world (Canada big 5, Spain, US, Germany, Switzerland, etc.) we see the product of domestic central bank/regulatory intervention. Regulation, indirect capital injection, political protection, etc. to maintain the domestic &/or global status of the institution; & it is highly unlikely that the bank will be allowed to fail Basel requirements, or go under. For practical purposes, investors have an implied, open ended, AAA rated put on the bank.

 

… add to it that there has been a significant stream of former Canadian bank regulators to Spain over the last decade, Spanish intervention has been handled extra-ordinarily well (for the circumstances), & that Europe now has a former Canadian central banker in a key position ;)

 

The last few years have exaggerated the size of provisions, & lowered the MTM on most historic trading assets; coiling financial strength of the BS that is not visible (similar to PP&E with a MV well above recorded BV). And not just on the Spanish banks ….. but all the other major global banks as well. We think SAN is now through the build stage, there will be volatility in provisioning run rate as moratorium legacies clear, but provisioning is now biased to surprise on the upside.

 

Most would expect the global P/E multiple to expand as the collective BS starts to uncoil; & that EPS will improve only modestly as dilution acts against earnings growth. But once multiple expansion is over, we think share consolidation is highly likely. We expect that most of the gain over the next 2 years will come from multiple expansion, & only modest improvements from SAN itself ... but with bias to surprise on the upside.

 

We do not expect SAN to buy back shares but we do think that when earnings permit, they will start buying back what they issue in scrip – when they issue it. ADR shareholders will continue to receive shares to avoid Spanish tax, & SAN will continue to increase capital; SAN would use cash on hand to buy back the equivalent # of shares issued, reduce capital, & keep share count the same; the dividend becomes .60 euro in cash, & backed with a big buyback program. Tail winds.

 

Lot less risk than might be expected, & a lot higher return. Bank X over Bank Y is nice, but the real risk is not being in either of them.

 

May 2014 be very profitable for us all!

 

SD

 

[TwoCitiesCapital]

So I've been looking into this further in an attempt to build confidence to make this one of the larger positions in my portfolio. The pros I have are below:

 

1) Pro-provision, pre-tax profit on average has been $20+B EUR ($27 B) per year for each of the last three years. Adjust this number accordingly for provisions and taxes, slap a multiple on it, and it's hard to make sense of the $107 B market cap without expecting things to get really, really bad for Santander.

 

2) PPPT profits, plus the 25B EUR that is currently in reserves, should be more than enough to cover loan losses in the future. 9-10B EUR of this PPPT is derived from fees and should allow for provisions up to this amount no matter how much more the loan portfolio deteriorates. (charge offs have only been 10-12B EUR for the last 3 years so I think this 9-10B EUR buffer plus the reserves is more than sufficient).

 

3) This has been the worst recesion since the Great Depression and Santander hasn't lost money, improved it's capital standing without any government bailouts, and geographically diversified into emerging markets and America. What could it do in a healthy environment?

 

4) Long-term competitive advantage by being a low cost and high credit quality operator

 

5) Normalized earnings would result in a ROE in the high teens (maybe even low 20s).

 

6) A management that has been known for their business savvy.

 

The only thing I'm concerned about is the rise in the NPL ratio that we saw for 2013. While capital levels improved, profitability improved, and leverage and assets both shrunk, we still have deteriorating asset quality. Anybody know how long it typically takes for asset quality to improve once your "over the hump?" Should this be something that I'm even worried about given their current provisioning/reserves?

 

[SharperDingaan]

NPL trends will probably change quite a bit as we see the impact of the moratorium exit.

 

You may also want to keep in mind that because of their SA presence, they are sometimes seen as an emerging market bank. It is also in the interests of top 20 Euro-Banks to ensure they don't trade at the appropriate valuations.

 

SD

 

 

 

[SandU]

 

 

5) Normalized earnings would result in a ROE in the high teens (maybe even low 20's)

 

I agree with this, but i've read the management guided that ROE wont reach the old levels and that a ROE of 14% is the new goal.

 

Very Nice forum you guys run here btw, glad to have joined it  :)

 

[TwoCitiesCapital]

NPL trends will probably change quite a bit as we see the impact of the moratorium exit.

 

You may also want to keep in mind that because of their SA presence, they are sometimes seen as an emerging market bank. It is also in the interests of top 20 Euro-Banks to ensure they don't trade at the appropriate valuations.

 

SD

 

Agreed on the NPLs; however, the moratorium is in effect through the end of 2014 if I'm not mistaken. It will be 2015 earnings and beyond when this will be reflected and likely the later half of that year as it will take a few months to offload some of the foreclosed inventory. I really doubt they'll immediately liquidate tons of it in Q1 of 2015.

 

 

 

5) Normalized earnings would result in a ROE in the high teens (maybe even low 20's)

 

I agree with this, but i've read the management guided that ROE wont reach the old levels and that a ROE of 14% is the new goal.

 

Very Nice forum you guys run here btw, glad to have joined it  :)

 

They will probably continue to strengthen the balance sheet as they have been doing, albeit at a slower pace. Earnings may continue to slide but they're currently earning 19B EUR (pre provision, pre tax) with 25B in reserves. Over the last 3 years, they have been writing off 10-12B per year. The expectation is that this will begin declining. Let's assume that next years write offs will remain elevated at 8B with offsetting provisions. This means that SAN could easily earn 11B EUR pre tax resulting in about a 10-12% ROE depending on tax rates and such. But that is with provisions still escalated at 8B EUR, reserves remaining at 25B EUR, and earnings remaining depressed at 19B EUR PPPT (as compared to 23.4B in 2012).

 

You can just as easily get to a scenario assuming that they are able to increase their PPPT by 1B to 20B EUR. On top of this, instead of provision to sterilize the full 8B write off, they provision 5B and take a hit of 3B to their net reserves (leaving them with 22B in reserves). This would result in an ROE of 11-13% with provisions, reserves, and write offs still being historically high, and NIM & PPPT remaining historically depressed.

 

I imagine that the next 3-5 years will show marked improvement in earnings, provisioning, and reserves resulting a significantly elevated ROE. This could be offset by management efforts to continuing increasing equity but it's still not hard to construct a scenario where the bank increases its equity base by 25% and is still able to maintain an ROE in the mid-to-high teens just by reaching the PPPT profitability that was seen in 2010-2012. The bank has been deleveraging and shrinking its loan book over the past several years. It's possible this begins to expand again in the near future allowing for increased profits. If interest rates continue to rise (doubtful IMHO) then it would contribute to a higher NIM further assisting the bank.

 

 

On a slightly unrelated note, the only metric that has me concerned is the rise in NPLs and the rising Texas Ratio because of it. Currently, the TR is at .6417 which is elevated from the .5316 at year end in 2012. As long as charge offs stay below 9-11B per year (as I expect they will), then I'm not so concerned about this because the earnings power from fees alone could reduce the TR figures .59 - .55 in one year if charge offs remain reasonable. It's just worth keeping an eye on to make sure things aren't getting out of hand.

 

This is my second largest position after Altius. I probably won't be increasing it much more unless if it gets significantly cheaper (fingers crossed) but I'm becoming more convinced of the value here the longer I look into it. It's a simple bank with an enviously good historical track record, strong earnings power, geographical diversification with exposure to high growth markets, and has a moat by being the low cost/high quality provider. Maybe it's not quite as sweet of a deal as Berkowitz got with WFC back in the 90s, the recent prices from $7-$9 seem like a really good deal to me.

 

 

[PlanMaestro]

http://www.amazon.com/Building-Global-Bank-Transformation-Santander-ebook/dp/B001OTZIBM/ref=tmm_kin_title_0

[SharperDingaan]

Most folks recognize that earnings improvement is largely a given, but believe the rate of increase will be only slightly better than the rate of share dilution. Add in P/E multiple fragility (Ukraine), & in the short term - the result is a wash; net earnings growth offset by a decline in the P/E multiple. There is also an expectation of significant, but unpredictable, volatility in loan performance trends over the next 18-24 months; as moratorium mortgages, & their sovereign support, unwind. The offset is the delayed UK IPO, but again - from a risk POV; largely a wash. 

 

We also find it very difficult to believe that there will not be an eventual share consolidation, at 2:1 or higher. Post consolidation we also expect continued quarterly scrip issuance, but with an offsetting buyback; to benefit both shareholders in general, & ADR holders in particular. Given the weak state, & poorer quality management of their top 10 peers, they will in all likelihood - also be overt sovereign pressure to delay as long as possible (France, Germany, Switzerland).

 

SD

 

 

 

 

[TwoCitiesCapital]

Plan or SD,

 

What do you think the probability is of a meaningful recapitalization of SAN as a result of the Asset Quality Review currently by the ECB. Obviously SAN has delevered substantially through equity issuance, retained earnings, and write offs but they're still at 16x as compared to BofAs 9.25x and JPMs 11x. We would be talking about equity dilution of some 40-80% from current levels to get them there.

 

As a background, Kyle Bass is categorically short European banks because he thinks recaps demanded by the ECB could exceed several hundred billion as opposed to the 60B he calculates as being the market handicap now.

 

Would it not better to mostly replicate exposure to SAN via its publicly traded subsidiaries and avoid potential dilution?