SAN - Banco Santander

[ExpectedValue]

I briefly looked at some numbers on this one, it seems like when you back out the value of their proportional ownership in their foreign subs, the continental Europe biz (mostly Spain really) is being valued at around 1.9x 2011 EPS.

 

Seems like the key question for anyone interested in the name would be to do the work and see what the impact of Spain's housing bubble will be like on the Spanish economy and Santander's assets.

[PlanMaestro]

Shane: One of my rules of thumb is not to invest in banks in countries with a fixed exchange rate and a large current account deficit (too many bad memories from Chile, Argentina and Mexico). Add that some American banks are really cheap and the decreasing provisions tailwind then  ... why take the headache? I am instead keeping an eye in case of a catastrophe.

 

http://online.wsj.com/article/SB10001424052702303657404576356891963275206.html

 

Tariq: It is even more discounted than that.

 

Subsidiary - ticker marketcap stake% valuation

Santander Brazil - BSBR 32B 77% 24B (that looks cheap)

Santander Chile - SAN 15B 67% 10B (that looks expensive)

Santander Mexico - TBD 20B 100% 20B (that looks fairly valued)

 

$54B while Santander Group market cap is also $54B. Add Sovereign in the US, Abbey National in the UK,  Argentina, Peru, ....  and Continental Europe is better than free. The question is how much the Spanish regulators will push for and how much the Spanish crisis will ask for.

[PlanMaestro]

http://www.ft.com/intl/cms/s/0/a04462c4-8f72-11e1-9ab1-00144feab49a.html#axzz1szINzdOv

 

The bank, which like its rival BBVA now makes more than half its profits in Latin America, said its quarterly pre-provision profit hit a record €6.28bn in the first three months. Net interest income rose 11 per cent to €7.82bn compared with the same period last year.

 

-----

 

In what Santander called a “difficult economic and financial environment”, it blamed the lower net profit on bad loan provisions, larger minorities than previously in Brazil and Chile, the reduction of its stake in Santander Consumer USA and on taxes. Provisions in the quarter rose 51 per cent to €3.13bn.

 

Santander provided a dismal outlook for its UK business, warning that mortgage lending would contract this year and profits would be lower than previously expected until 2013.

Net profits at the UK arm plunged 40 per cent in the first three months of this year, compared with the same period in 2011, falling well short of analysts’ forecasts.

 

......

 

Santander said it had already exceeded the EBA’s 9 per cent capital requirement, due by the end of June, reaching 9.11 per cent of assets at the end of March. Under existing Basel II rules, its core tier one capital reached 10.1 per cent, up from 9.66 per cent a year ago.

 

[PlanMaestro]

This has been the key to Santander's international strategy. If not #1 at least top 3 in each of its countries. Then integrate with their excellent IT systems, improve their efficiency ratio, and finally grow from there.

 

The Group’s international expansion in the last few years has enabled us to build a business portfolio which is better than those of other savings national banks. Today, we have a stronger presence in emerging markets than our major competitors. We have very strong local brands with critical mass, whilst many of our competitors have banks without sufficient scale in many markets. And this has enabled us to have a better profit mix and a more stable and recurring profit. As a result of all of that, we are in an excellent position to normalize our profit.

 

And speaking about the improvement of our business portfolio, I should refer to the acquisition that we’ve made in Poland, which will merge BZ WBK with the Kredyt Bank. This is a very good transaction for the good and consistent with our strategy and the Santander business model for several reasons. First, because we increase our weight in a high-wealth core market. Second, because it enables us to become one of the top three players in the Polish financial system, far ahead of our nearest competitors.

 

Example of how Santander integrates its new operations (Abbey National UK) :

* http://money.guardian.co.uk/abbey/0,14896,1272815,00.html

* http://books.google.com.mx/books?id=JUEqfd91zCMC&pg=PA236&dq=santander+joins+the+top+10;+abbey+leaves+the+ftse&hl=en&sa=X&ei=AbyZT9TYIOie2AWo9ciqBw&ved=0CDMQ6AEwAA#v=onepage&q=santander%20joins%20the%20top%2010%3B%20abbey%20leaves%20the%20ftse&f=false

[PlanMaestro]

Emilio Botin, one of the best capital allocators in the banking industry ever but he needs to survive the crisis in his home country.

 

Be wary of Santander's Mexican fiesta

http://www.theglobeandmail.com/globe-investor/investment-ideas/breaking-views/be-wary-of-santanders-mexican-fiesta/article2414067/

 

When it comes to selling assets, Emilio Botin’s timing is hard to fault. From the sale of Italy’s Antonveneta in 2007 to the IPO of its Brazilian unit in 2009, Santander’s boss has a knack for getting out at the top. Investors may want to keep this in mind as the Spanish bank gears up to list its Mexican subsidiary.

....

 

According to news reports, the Mexican unit – the country’s fourth-largest lender by assets – might be worth $15-billion (U.S.) to $20-billion. Given that Santander bought a stake from Bank of America two years ago at an implied valuation of $10-billion, that may seem rich. But the division’s prospects have improved since. Cheuvreux expects it to earn €1.2-billion next year, about double the figure for 2010.

 

Santander Gets Profit Boost in Brazil as Spanish Defaults Rise

http://www.bloomberg.com/apps/news?pid=newsarchive&refer=news&sid=a1Ul7q7TqYOI

 

Chairman Emilio Botin is so far the only winner of the three banking chiefs who teamed up last year to buy Amsterdam-based ABN Amro for 72 billion euros in the biggest banking takeover in history. Jean-Paul Votron was ousted as CEO of Fortis and Royal Bank of Scotland Group Plc, led by Fred Goodwin, has taken 5.9 billion pounds ($11.8 billion) of asset writedowns this year, about a third of which were linked to ABN Amro. "As the ABN Amro deal went ahead, it became more and more clear that the Brazilian assets that Santander had were gaining in value,'' said Peter Hahn, a London-based research fellow at Cass Business School. "Meanwhile, what Royal Bank was buying was falling off the edge of a cliff.''

....

 

Santander offset costs from the ABN Amro purchase by selling Banca Antonveneta SpA in Italy to Banca Monte dei Paschi di Siena SpA for 9 billion euros. Santander had initially valued ABN Amro's Antonveneta unit at 6.6 billion euros. The sale of Antonveneta was "a masterstroke,'' Hahn said.

 

Santander paid two times book value for ABN Amro's Brazilian assets, while RBS paid 18 times book value for ABN Amro's investment-banking and Asian operations and Fortis paid 14 times book value for the Dutch retail, asset management and private- banking arms, said Arturo de Frias, an analyst at Dresdner Kleinwort in London. Santander was the winner, said Simon Maughan, a London-based analyst at MF Global Securities Ltd. "It makes them look pretty smart and the other two a bit stupid by comparison,'' he said.

 

Botin agreed July 14 to buy Alliance & Leicester Plc of Leicester, England, for 1.26 billion pounds in stock, adding 254 branches to Santander's existing 705-branch Abbey unit. Botin made the bid the same day that Votron lost his job.

 

"You can't throw any brickbats Santander's way over quality of management,'' said Andrew Lynch, who oversees $2.5 billion at Schroder Investment Management in London. "The trouble is that its business in Spain and the U.K. is going to suffer from what's happening in the economy.''

[PlanMaestro]

Another example, from this good review of Santander and BBVA expansion from 1999.

http://fic.wharton.upenn.edu/fic/papers/99/9941.pdf

 

Santander’s only foray into the U.S. commercial banking market took place in 1991 when it acquired 13.3% of First Fidelity Bancorporation for $650 million. First Fidelity merged with First Union in 1995, and Santander sold its stake in 1997 for $2.2 billion,

 

 

A book that looks very interesting from the author

 

Building a Global Bank: The Transformation of Banco Santander

http://www.amazon.com/Building-Global-Bank-Transformation-Santander/dp/0691131252

 

And his site, that has several related papers and a database

http://www-management.wharton.upenn.edu/guillen/

 

[PlanMaestro]

Recent Botin interview with Fortune

http://finance.fortune.cnn.com/2012/03/23/banco-santander-emilio-botin/

 

What's behind Botín's success? His strategy is to acquire prominent foreign banks that have a minimum 10% market share and that are in some sort of financial straits. He buys the bank at a bargain-basement price, installs his own management team, and then gets a stock market listing for an independent subsidiary. While his European rivals were expanding into such risky areas as investment banking and unpronounceable derivatives, Botín steered clear of those businesses and did his banking the old-fashioned way: bread-and-butter consumer and business loans to high-quality risks. At the same time, costs at Santander (sahn-tahn-DARE) account for only 40¢ for every dollar of revenue, while German competitor Deutsche Bank (DB) spends 65¢, and super-efficient HSBC (HBC) spends 55¢. Key to cost savings has been Santander's state-of-the-art computer system, dubbed Parthenon, which has slashed back-office expenses at all its subsidiaries. At its Abbey National subsidiary in Britain, for example, back-office staff went from 70% of the payroll to 30%.

 

Botín's strategy often requires him to make billion-dollar decisions in the blink of an eye. In just one deal in 2007, for example, Botín bought the Italian lender Banca Antonveneta and then sold it to a competitor less than a month later for a $4 billion profit even before his check for the purchase price had cleared. Crosstown rival Francisco Gonzalez, head of Spain's second-ranked Grupo BBVA (BBVA), frequently tells reporters, "I like to sleep at night," suggesting he thinks his bank is more conservatively managed. But BBVA has also underperformed Santander (STD) because it pays far higher prices for acquisitions and has shown less skill implementing its strategy.

 

 

 

[PlanMaestro]

If you will only read one analysis of Santander's internationalization, this might be it:

 

http://itemsweb.esade.edu/exed/articulos/LRP_Internationalization.pdf

[Shane]

Thanks for all of the links plan!  I'm putting together a list of condidates for write ups and this is at the top right now.  Once the CFA is done I'm all over it!

[ExpectedValue]

I don't think the right way to analyze Santander is to simply start by looking at Santander.

 

I think you need to start by looking at the Spanish real estate bubble. It's supposed to be a lot worse than what the US had and if memory serves correct, Santander's got 27x its TBV in real estate loan exposure. So it's a matter of figuring out how bad that problem and if that forces the government to bail out the banks (and if it takes down the government). The macro in Spain is really bad with unemployment running at ~25%ish.

 

If you take the time to understand that, then you can start doing a scenario analysis on Santander.

 

Also I don't think you can automatically assume that they get bailed out by their emerging market operations. Brazil's economy is pretty tied to China and you can have a scenario where a hard landing in China whacks Brazil and in turn SAN Brazil, so you'd want to spend a bit of time understanding the Brazilian ops and the overall Brazilian macro.

[PlanMaestro]

I don't think the right way to analyze Santander is to simply start by looking at Santander.

 

I think you need to start by looking at the Spanish real estate bubble. It's supposed to be a lot worse than what the US had and if memory serves correct, Santander's got 27x its TBV in real estate loan exposure. So it's a matter of figuring out how bad that problem and if that forces the government to bail out the banks (and if it takes down the government). The macro in Spain is really bad with unemployment running at ~25%ish.

 

If you take the time to understand that, then you can start doing a scenario analysis on Santander.

 

Also I don't think you can automatically assume that they get bailed out by their emerging market operations. Brazil's economy is pretty tied to China and you can have a scenario where a hard landing in China whacks Brazil and in turn SAN Brazil, so you'd want to spend a bit of time understanding the Brazilian ops and the overall Brazilian macro.

 

Tariq, where did you get that Santander's real estate exposure is 27x TBV? Spanish real estate exposure gross including mortgages is just €91 billion (page 146). Not even total loans across the whole group is 27x TBV.

 

If this were just about the Spanish RE bubble I would be backing up the truck big time.

 

* Spanish gross (pre-allowance) construction, development and land loans that is the real bank killer is just €32B  ... that already includes REO.

* Spanish banks have counter cyclical provisioning, a decent regulatory environment, and no derivatives. So one of the worst RE bubbles did not have the effects that everyone expected.

* Most of the outrageous loans came from foreign banks (Germany) and the Cajas (similar to S&Ls).

* Santander was the first to recognize the issues in terms of provisioning + cutting costs + raising capital.

* Its credit ratios both in general and RE in particular are way better than average, while the most difficult loans already burned through.

* Santander capital ratios have been going up big time during the crisis.

* Santander Brazil capital ratios are very conservative. Brazil has a flexible exchange rate, large foreign reserves, decent regulators, and positive current account. In Latin America we have a long history of terms of trades reversal and Brazil commodity prices are at its highs and the Real has been too strong. But in these conditions, a recession would be of the standard kind.

* Goodwill in the case of Santander is a very real asset as its few publicly traded subsidiaries show. This was not about buying banks at the center of the RE issues as several in the US did. They can sell a few of them today at multiples of book value. (ie: just sold a minority participation in Chile at 3.5x book value)

* And the added benefit of the foreign profitability to navigate the issues: Santander has more than €25 billion in annual pre-tax pre-provision profits.

 

If real estate were the only issue, Santander today would be a much better buy than Wells Fargo in 1992 or 2009. Santander is a better bank and more diversified.

 

I'd say the issues are not about Spanish RE or unemployment. It is about the political pressures in Spain to push Santander to do something they do not want to do and the political stubbornness to stay in the Euro.

 

If Spain left the Euro today, with all its devastating consequences, Santander probably would be a backing up the truck opportunity. But since the fundamental issues are being delayed, it is difficult to be sure what Santander will have on their balance sheet when the moment comes. That is why I am waiting.

 

Remember, Santander is not new to banking crisis. It is actually a machine that feeds on them (Chile 1982, Mexico 1994, UK and Holland 2008) and has survived many (Spain 70s and 90s, USA 2008, Argentina 2000).

 

Banking Crisis 1978-1985: http://www.bde.es/webbde/es/secciones/informes/be/estfin/numero8/estfin0804.pdf

http://www.bancentral.gov.do/noticias/actividades/seminario2006-11/seminario2006-11espana.pdf

 

Banesto

http://es.wikipedia.org/wiki/Caso_Banesto

[Shane]

Thanks for the input.  I've not analyzed many banks and would need to spend a good amount of time catching up, maybe this won't be something I can find enough confidence in.  However, I do know some analysts who cover STD For one of the funds here so I can pick his brain.

 

[PlanMaestro]

Thanks for the input.  I've not analyzed many banks and would need to spend a good amount of time catching up, maybe this won't be something I can find enough confidence.  However, I do know some analysts who cover STD For one of the funds here so I can pick his brain.

 

Share!

[Shane]

I can't give out his work but If I can come up with anything I'll be sure to share it.

[ExpectedValue]

Plan, you're right, I made a mistake -- here are the notes from the talk:

 

Banco Santander

 

- currently trading at P/TBV of 90%, exposure to Brazil, trading at 7x eps

- RE Exposure in Spain = 172% of TBV

- 29% of CRE are classified as NPLs

- Residential mortgage NPLs at 2.7% of portfolio and

rising

- Brazil having increased lending while local

competitors pull back, credit quality a

question mark

- Core T1 Capital ratio of 10% doesn’t reflect

leverage of 26x TBV.

- Listed local bank structure traps capital.

[PlanMaestro]

Tariq just curious, what talk was this? (and sorry for the misspelling)

 

Plan, you're right, I made a mistake -- here are the notes from the talk:

 

Banco Santander

 

- currently trading at P/TBV of 90%, exposure to Brazil, trading at 7x eps

- RE Exposure in Spain = 172% of TBV

- 29% of CRE are classified as NPLs

- Residential mortgage NPLs at 2.7% of portfolio and

rising

- Brazil having increased lending while local

competitors pull back, credit quality a

question mark

- Core T1 Capital ratio of 10% doesn’t reflect

leverage of 26x TBV.

- Listed local bank structure traps capital.

[jrallen81]

Plan, when you are referring to (undue) political pressure on SAN, do you mean to raise dilutive equity capital or to buy sovereign bonds that may get restructured?

[PlanMaestro]

I was thinking more along the second one, the Spanish government using Santander to navigate its own issues by pushing them to buy Spanish treasuries or distressed banks. Santander may be required to increase capital, but it has the capacity to increase it with its foreign assets. But the moment they are required to use their leverage, any action can jeopardize the whole group.

[jrallen81]

That does seem to be a legitimate risk, on the other hand a counter arguement is their influence on the domestic gov't, plus it isn't like they alone are big enough to do much other than buy a tiny bit of time. I'm thinking of flushing another "speculative" investment to buy this one. hmm......

[PlanMaestro]

http://www.ft.com/intl/cms/s/0/a95c95dc-92df-11e1-b6e2-00144feab49a.html#axzz1tX0xqhyN

 

RBS, too, is struggling with its EU penalties. The forced sale of a large chunk of its small business operations to Santander is taking far longer to finalise than envisaged – and with the economy struggling and anecdotal evidence that customers may defect to rivals, the final price that the Spanish bank pays for the business will be significantly lower than would have been the case in any normal market environment. The SME sale is so far advanced, though, that there is little sense in even considering an attempt to reverse it. Not so, some of the other more punitive punishments.

[PlanMaestro]

Spain revisits ‘bad bank’ plan

http://www.ft.com/cms/s/0/5cd7af8e-9529-11e1-ad72-00144feab49a.html#ixzz1tvRtd67Q

 

Finding a way to safely write down assets and restart the property market has been a priority for the government.

The return to the “bad bank” idea came as Spain and its banks suffered a further credit rating downgrade from Standard & Poor’s, and the International Monetary Fund highlighted the continuing risks posed by some of the country’s part nationalised cajas.

 

But with officials stating clearly that no public money would go into any “bad bank”, unlike other examples in Europe, analysts have been sceptical that lenders will be incentivised to mark down troubled assets to realistic levels.

If no additional money is raised, aside from relatively small contributions from the Spanish banking sector, then Spain will struggle to find the capital cushion needed to provide provisions for lenders marking down assets, these analysts

 

[PlanMaestro]

Doubts spread to Spain’s big banks

http://www.ft.com/cms/s/0/7a382258-9933-11e1-9a57-00144feabdc0.html#ixzz1uJL2N1DT

 

In both cases, seemingly needless losses have been inflicted on thousands of investors, most of them individual bank customers, who bought shares in the banks. Crucially, the manoeuvres did nothing to resolve the underlying problems: the sector’s combined €340bn of exposure to real estate developers when the property market is in free fall; and a conviction among investors that Spain cannot afford a bailout.

 

Those doubts now weigh on the perception even of Spain’s big banks – Santander and BBVA – despite the fact that the bulk of their earnings comes from high-growth economies in Latin America and they are better insulated from Spanish property losses than local rivals, particularly the regionally-minded cajas, or savings banks, that have found themselves in the most trouble.

.....

 

As one analyst in Madrid puts it: “Bankia was the big problem. If that’s being resolved, that’s a positive.” Nervousness remains, however, about how extensive a Spanish bank bailout will need to be. Bankia is the biggest troubled bank but there are others. This has been one of the fundamental reasons behind the market’s distrust of Spanish government debt – yields on Spanish 10-year sovereigns are still up at 5.84 per cent, after edging above 6 per cent in recent weeks

....

 

The most bearish commentators believe that the injection of any more government money into the banking sector will exacerbate the vicious circle linking government and bank finances. Already the state-funded bailout vehicle Frob has injected nearly €15bn into the banks. Links have been intensified from the other direction too, with a large proportion of Spanish banks’ three-year emergency European Central Bank money used to buy Spanish government debt.

.....

 

But even if Spain finds a sustainable route to fund this bailout, that is just a first step. Restructuring experts believe Spain must ultimately follow the example of other countries that have been through similar crises – from Japan to Sweden to Ireland – setting up one or more “bad banks” to work through non-performing loans. That would force the banks to mark assets down to realistic levels. Some Madrid bankers now accept it would be wise to draft in a third party assessor to judge asset valuations across the sector and help determine the real capital hole – even if that demands more provisioning and more capital injections.

 

[PlanMaestro]

Plan, looks like a great company but I fear it has a long way to go down yet on Eurozone panic, which IMO is just getting started.  I'd like to pick up shares at a quarter of book rather than half.

 

Would certainly agree with the statement. Even more, I would not buy it even at half the price because in a concentrated strategy there is no space for guesses. But events can follow.

[PlanMaestro]

 

http://www.ft.com/cms/s/0/574c9640-99d1-11e1-8fce-00144feabdc0.html#ixzz1uO81h4CK

 

Spain is preparing to force its banks to set aside tens of billions of euros in additional provisions against property loans as part of a fresh restructuring plan for the country’s embattled lenders.

 

As part of a plan to be announced on Friday, which would involve further public money being injected into Bankia, the troubled savings bank, the Spanish government is likely to announce fresh provision requirements that could total more than €30bn across the sector, officials said.

....

 

 

The news sent shares in Spanish banks sharply lower in afternoon trading on Wednesday, with Caixabank falling 7.9 per cent and Banco Popular off 7 per cent. Santander and BBVA each dropped by 5.7 per cent. Bankia dropped 6.85 per cent.

....

 

Bankia and its parent company BFA have a combined property exposure in Spain of €51.5bn, the largest of any bank in the country, including Santander, the eurozone’s largest lender by value, which has an exposure of €32bn, according to CA Cheuvreux.

 

 

 

[PlanMaestro]

Santander UK plays down Spanish risk

http://www.ft.com/cms/s/0/dbf24e4c-9eb5-11e1-9cc8-00144feabdc0.html#ixzz1v3ofxiwP

 

Rating agency Standard & Poor’s recently gave Santander UK a higher credit rating than its Spanish parent. “In our view, its financial prospects are linked to the UK environment in which it operates, rather than the fortunes of the wider group,” it wrote in an accompanying note.

 

Santander operates around the world using a subsidiary model, meaning that operations in the UK - and across similar units in Latin America - are ringfenced with their own capital and day-to-day financing.

 

UK regulators would have the power to block any excessive transfer of dividends, capital or liquidity from Britain back to Spain.