SAN - Banco Santander

[jjsto]

SAN seems to get no love from any "value" guys out there.....I don't notice any gurus with positions in this stock. Any thoughts on why?

 

I thought Berkowitz was pretty high on santander at some point.  Not sure if he still has a position (possibly in some bonds) but, I remember thinking he either sold or stopped buying because there was a % limit to what he could own.  I have no links for that though. 

[FrankArabia]

thanks for the input. I'm reading about the Mexican crisis as we speak. But will also check up on the Latin American one in more detailed.

 

In Short, a devaluation leads to a flight of deposits, rocketing interest rates, and a default in assets.

 

Funny thing is, I read This Time is Different which basically chronicles this sort of stuff and for some reason, ignored it because i saw some nice banking ratios.

[PlanMaestro]

I thought Berkowitz was pretty high on santander at some point.  Not sure if he still has a position (possibly in some bonds) but, I remember thinking he either sold or stopped buying because there was a % limit to what he could own.  I have no links for that though.

 

I think he was buying commercial paper. David Tepper had a large position that he sold when the Greece stuff started, and he was very critical of the ECB at that moment (Trichet).

[PlanMaestro]

thanks for the input. I'm reading about the Mexican crisis as we speak. But will also check up on the Latin American one in more detailed.

 

In Short, a devaluation leads to a flight of deposits, rocketing interest rates, and a default in assets.

 

Funny thing is, I read This Time is Different which basically chronicles this sort of stuff and for some reason, ignored it because i saw some nice banking ratios.

 

A good book from a more recent BOP crisis (Argentina 2001) is "And the Money Kept Rolling In … and Out". The author also has a book about the Asian crisis but I have not read it.

[FrankArabia]

from what i gather at Gurufocus, Berkowitz sold out (possibly at a loss) at mid 7's and it looks as though he bought at much higher prices.

 

San is not a big position in any guru portfolios from what i gather.

[JRH]

from what i gather at Gurufocus, Berkowitz sold out (possibly at a loss) at mid 7's and it looks as though he bought at much higher prices.

 

San is not a big position in any guru portfolios from what i gather.

 

In Focused Income (FOCIX), Berkowitz had positions in both Santander and Telefonica in the May report last year that were gone by the November report (I'm not looking at the SEC filings, just the semi-annual reports, so you could find out more detail reading the filings).

 

His statements from that time period amount to a lot of talking about "selling cheap to buy cheaper" (sure enough, despite selling Santander, Focused Income got more concentrated in financials in the US), and a general agnosticism about Europe (i.e., they'll sort through it but he isn't sure of the precise narrative).

[FrankArabia]

US financials are better...they have positive things coming their way in terms of low/moderate loan growth and increase in capital repatriation....also, their capital strength is high...should have bought more JPM with proceeds from SAN sales....

[PlanMaestro]

http://www.ft.com/cms/s/0/465dafc8-1e7d-11e2-be82-00144feabdc0.html#ixzz2AYKNFqjH

 

Non-performing loans in Spain rose from 5.98 per cent to 6.38 per cent from June to September, while total domestic real estate exposure fell from €28.3bn to €26.5bn over the same period. Mr Sáenz said that he envisaged bad loans in Spain peaking by the first quarter of 2014.

 

Overall net income in the third quarter, which fell 94 per cent from the second quarter to €100m, was significantly below analyst consensus. Overall net interest income fell from €7.67bn in the second quarter to €7.49bn in the third quarter, but rose 6.6 per cent over the first three quarters compared with last year, with net operating income in the third quarter slowing from €6.22bn to €5.68bn.

 

Over the quarter this helped the bank’s core capital, a measure of financial strength, to increase from 10.1 per cent to 10.4 per cent.

 

 

 

[Ross812]

I realized I could get rid of the STD  ;)

[PlanMaestro]

Spain's Santander considers sale of US car finance unit

http://www.reuters.com/article/2012/11/22/bancosantander-ipo-idUSL5E8MM49020121122

 

Santander retains control of 65 percent of SCUSA through a holding company, while KKR & Co., Warburg Pincus, and Centerbridge Partners have a combined 25 percent stake. The remaining 10 percent belongs to Dundon DFS.

 

The spokeswoman said it was too early to talk of a timing for the initial public offering of SCUSA and that the valuation would depend on the share price at the time of the sale.

 

The Wall Street Journal reported on Wednesday Santander, which raised $4 billion in a U.S. listing of its Mexican banking business in September, was planning an offering of the car financing unit for the first half of 2013.

 

The business could be worth as much as $6 billion although plans are still in the early stages, according to the WSJ.

 

[PlanMaestro]

Net promoter scores in Spain.

 

http://farm9.staticflickr.com/8352/8252662315_60bac8be25.jpg

 

http://farm9.staticflickr.com/8221/8253737570_a53648fcfc.jpg

[PlanMaestro]

Santander agrees to absorb Banesto

http://www.ft.com/intl/cms/s/0/8c050822-4827-11e2-8aae-00144feab49a.html#axzz2FL2HfClk

 

Following the completion of the deal, Santander said it would close 700 of Banesto’s 1,698 branches in Spain – which employ almost 18,000 workers and make up a quarter of their combined 6,450 domestic branches. The merger is expected to save €520m within three years.

 

The tender offer for Banesto will mark the end as a standalone brand of one of Spain’s oldest lenders and once one of the country’s most illustrious banking names. Banesto was taken over by Santander in 1994 following an accountancy scandal.

 

Santander said it would value Banesto shares, of which it controls almost 90 per cent, at 0.63 new shares of Santander for every share of Banesto – the equivalent of €3.73 each, and a 24.9 per cent premium to their closing price on Friday.

 

Spain has one of the highest number of bank branches per head of the population in the world, with one retail branch for every 1,000 people at the start of the county’s banking crisis, although this number has begun to fall. While there were more than 45 banks and savings banks – known as cajas – before the start of the crisis, this has tumbled to fewer than 15 after a wave of mergers.

 

(..)

 

Last week Santander invested €164m in equity into Sareb, Spain’s state-run bank that was set up to wind down troubled property loans made during the country’s decade-long property bubble.

 

BBVA, Spain’s second-largest lender by assets and Santander’s main domestic rival, was the only large non-nationalised bank to decline to invest in Sareb.

 

 

[PlanMaestro]

Santander drawn into Italian bank scandal.

http://www.ft.com/intl/cms/s/0/bd3732a6-6bd3-11e2-a17d-00144feab49a.html#axzz2J8s0hfT4

 

Santander has been drawn into the investigations having sold the Italian regional bank Antonveneta to Monte dei Paschi for €9bn in 2007, a costly acquisition at almost 20 times earnings that undermined the Tuscan bank’s capital strength. It later sought to bolster its capital through a series of deals including the use of structured finance.

 

Prosecutors in Siena questioned Ettore Gotti Tedeschi, the head of Santander Italy, for four hours.

 

[…]

 

The fact that Monte dei Paschi has since had to ask the Italian state for roughly the amount as a bailout as Santander made in profit from the deal has especially angered senior Italian officials.

 

 

[PlanMaestro]

If you only need one profile of Emilio Botin …

http://www.ft.com/intl/cms/s/2/57d8d5be-65bf-11e2-a3db-00144feab49a.html#axzz2Ki0sN4tD

 

“Emilio is now the most powerful person in Spain,” says one rival banker who knows him well. “He runs the country completely,” he jests.

 

[PlanMaestro]

Santander and private equity firms plan car finance unit IPO

http://www.ft.com/intl/cms/s/0/4841e60c-b733-11e2-841e-00144feabdc0.html#axzz2SfsO1sbv

[Shawn]

I think I'm going to add Banco Santander to my holdings.... I've been researching it for about a year now, I think it's about time I step in.

 

Overall ? Good price, great management, great track record. I believe in it long term.

[muscleman]

I think I'm going to add Banco Santander to my holdings.... I've been researching it for about a year now, I think it's about time I step in.

 

Overall ? Good price, great management, great track record. I believe in it long term.

 

http://www.santander.com/csgs/StaticBS?ssbinary=true&blobkey=id&SSURIsscontext=Satellite+Server&blobcol=urldata&blobheadervalue0=application%2Fpdf&blobheader=application%2Fpdf&blobheadervalue1=inline%3B+filename%3D782%5C166%5CFolleto+1T13+INGLES.pdf&blobwhere=1278693987310&SSURIsession=false&SSURIapptype=BlobServer&blobtable=MungoBlobs&SSURIcontainer=Default&blobheadername0=content-type&blobheadername1=content-disposition#satellitefragment

 

"The NPL ratio of Spain’s run-off real estate, which is not included in the above ratios, was 56.25% and coverage 87%." Do you know what this is?

 

Also what is "Gains (losses) on financial transactions"? If this is from selling some assets, it wouldn't be sustainable. I heard that they no longer have an investment banking division, so this item is a bit weird.

 

Goodwill is 25 bn. If we deduct this from the equity, there is not much discount to the stock price.

Intangible assets and property and equipment is 17 bn. This is the first bank I saw that reports these items together, so I don't know how much is the intangible.

Other is 52 bn. What is this? This is over 60% of shareholder equity, so it had better been something good.

[TwoCitiesCapital]

I have strayed from banks ever since 2010 when I sold BofA after realizing I couldn't have any way to know what legal exposure would be, no concept of their derivative exposure, and had no expectation for housing to recover. 

 

This bank doesnt sound nearly as complicated outside of its structure. Anyone have any pointers on where to begin learning how to analyze them? All that I know is traditional measures and multiples don't typically apply to financials.  Really looking for a learning experience and a possible investment if I'm comfortable with it.

 

35% cash and bonds at the moment and this seems intriguing. 

[TwoCitiesCapital]

I spent some time reviewing the annual shareholder letters from 2006-2012 to get an idea of how the company progressed through 2008-2009 market environment. These are full of valuable information and paint a very good picture of the company's approach to the business. Below are two quotes that I took from the 2006 approach.

It can be very tempting, in a favorable environment, to generate higher income growth by relaxing credit risk standards. This is something that we are not prepared to do. For us, discipline in risks is sacred.

 

“I want to underline the idea that it is not sufficient just to be in attractive markets if one does not also enjoy a competitive presence. Our model of strong presence in key markets is a clearly winning strategy compared with the alternative model of disperse operations, without critical mass, in different markets. I believe it is very important not to confuse diversification with strategic dispersion.”

 

Here's some from 2007

“Shareholder value is created by business with customers, not by assuming more financial risk.”

In my view, the international banking sector suffered from the temptation, over the past few years, to grow more quickly by assuming more financial, market and credit risk than naturally is produced from customer relations.

 

We have always resisted entering this dynamic, one which results in assuming risk without knowing the customer. It has always been very clear to us that shareholder value is created in the medium and long term by adding value with our customers, not by assuming more financial risk. Risk is an inevitable component of our business which we must manage, but it can never be the main engine of our growth.

 

The decision not to relax our credit standards meant sacrificing some growth in the last few years compared to our more aggressive competitors. We have always been clear about the nature of the banking cycle: it is precisely when the going is good that discipline in risks (in all its forms) has to be at its firmest. .

 

The results from 2006-2010 suggested that the management was doing more than paying lip-service to conservative banking and were aware and concerned of the risk long before it was evident to other multi-national banks. It wasn't until the intensification of the European debt crisis in 2011 that results from continental Europe (largely Spain) began to seep through in a meaningful way to the holding company's results.

 

I know we've mentioned before that European Banks haven't gone through a recapitalization like American banks, but it seems to me that Santander has recapitalized itself through equity offerings over the last three years and through it's ability to generate massive amounts of cash prior to provisions for losses ($23 billion). This recapitalization and reducing exposure to troubled areas can best be seen in the following metrics:

 

-Core Capital Ratios have risen to 10.33% in 2012 from 5.9% in 2006

-Tier 1 ratios have risen to 11.17% in 2012 from 7.42% in 2006

-The stress test conducted by Oliver Wyman suggests that Santander would have a $25 billion cushion in the event of their worst case scenario.

-Loan-to-Deposit ratio in Spain have fallen to 113% from 150% in 2008.

-Spanish Real Estate exposure has decreased by 69% since 2008. About half of this reduction took place in 2012.

-Current financial leverage is around 17x

 

It seems to me that you could make a justification that the Latin American unit alone could be worth $70 billion if you put a multiple of 17 on it's earnings. This would give you the U.S. (profitable and growing), U.K (profitable, potential problems on the horizon), and Europe (negative value for now) for little to nothing. With profits temporarily depressed for the next few years resulting in depressed share price, now seems like a good time to begin building a position in a top-tiered bank. Santander generates $23 billion before provisions. Maybe provisions will be $18-20 billion dollars (worst case?) for the next 2-3 years, but then after that it just generates $15-20 billion a year post-provisions, has high growth in Latin America, plenty of room to expand in the U.S., and (hopefully) a recapitalized and slowly growing Spain.

 

My questions are:

1) Are we really concerned about the $43 billion in sovereign exposure? For a bank as focused on risk management as Santander, do we really think this wouldn't be monitored and hedged accordingly (with the interest rate derivatives and etc. on the balance sheet)? Secondly, wouldn't it be like Eric said where the Spanish sub is just dropped in the event it threatens the parent?

2) How is it that capital ratios can have risen by so much when financial leverage (assets/equity) has remained the same from 2006 (17x in both years)? I would have expected these to be linked in some fashion and see financial leverage dropping as capital ratios rise?

3) What's the downside I'm missing here? It seems like even if you assign an absolute 0 value to Europe and the U.K. given the problems in the European area, the value provided by the U.S. and Latin American units seem to justify the current market cap of $70 billion.

 

 

[constructive]

It seems to me that you could make a justification that the Latin American unit alone could be worth $70 billion if you put a multiple of 17 on it's earnings.

 

17x multiple sounds aggressive. If you're doing sum of the parts, why not use market values for BSBR, BSAC, BSMX, BRIO.BUE, and BZW.WSE?

 

And if you think Latin America is worth 17x earnings, maybe some of those are better deals than SAN?

[TwoCitiesCapital]

It seems to me that you could make a justification that the Latin American unit alone could be worth $70 billion if you put a multiple of 17 on it's earnings.

 

17x multiple sounds aggressive. If you're doing sum of the parts, why not use market values for BSBR, BSAC, BSMX, BRIO.BUE, BZW.WSE, HLBANK.KLS and any other publicly traded subs?

 

And if you think Latin America is worth 17x earnings, maybe some of those are better deals than SAN?

 

I don't use market prices for sum of parts unless I'm looking to an arbitrage.

 

17x multiple would be a little aggressive, but this is a high growth, underbanked area that isn't having the problems that the European market is. Also, this is only about a third of the company so even using an aggressive multiple like 17 should make the value proposition clear when you're ignoring the value of the other 2/3.

 

guess I'm having a hard time understanding where the danger is with greatly improved capital ratios, not much exposure to exotic derivatives, a management that has been focused and has executed on avoiding risk, and $23 billion being made every year that can be used to delever and recapitalize the bank. I'm new to analyzing banks but this so maybe I'm overlooking something.

 

think Wells Fargo would be a good U.S. comparable.  This would trade 50% higher if it was at the same P/B ratio but I believe its potential profitability and growth are higher than that of wells suggesting a larger premium when this clears up. 

[constructive]

I'm not arguing against SAN. But it seems to me that BSBR, the largest public sub, has similar upside (11.7x earnings, growth opportunity) and less potential downside (1.13x tangible book, less leverage, less exposure to European bonds). What do you think?

 

I don't own any of the Santander companies.

[PlanMaestro]

I'm not arguing against SAN. But it seems to me that BSBR, the largest public sub, has similar upside (11.7x earnings, growth opportunity) and less potential downside (1.13x tangible book, less leverage, less exposure to European bonds). What do you think?

 

I don't own any of the Santander companies.

 

My only worry with BSBR is personal credit growth in a country still depending on commodities. But I like their capital ratios, they should survive a normal terms of trade shock.

 

[TwoCitiesCapital]

I'm not arguing against SAN. But it seems to me that BSBR, the largest public sub, has similar upside (11.7x earnings, growth opportunity) and less potential downside (1.13x tangible book, less leverage, less exposure to European bonds). What do you think?

 

I don't own any of the Santander companies.

 

I think you lose a lot with the individual subs. You lose diversification by geography and currency. You lose most of the upside of a recovery in Europe and still retain some possible downside risk of the parent using the subs to subsidize the European exposure that's eroding capital (thinking of inter company loans, asset transfers, and etc). You're also paying a higher premium for all of that.

 

The upside is exponentially greater and the risks only a little larger (IMO) if you choose the parent.

For example, they generate $23 billion prior to provisions despite a large exposure to a recessionary Europe and a sluggish U.S. Given their track record I can be pretty certain that provisions will be significantly lower in the long term view. Let's consider 2006 as a base for the "good" years Santander could have given their limited exposure to the credit bubble in the U.S. at the time. They wrote off 22% of their pre-impairment income against loan losses/reserves. A similar write off today would result in net profits to the group of around 15 billion after taxes. This is a multiple of 5 against normalized earnings for a top tier bank. you could even argue that 5 is too high given the depressed rates the bank is currently earning due to slow growth conditions in Europe, U.K., and the U.S.

 

It seems The only way you win with the sub long term is if Europe gets worse and the parent literally cuts off the Spanish unit...and even then that might be debatable given the current pricing.

[PlanMaestro]

Most local regulators are pretty tough. These countries suffered severe banking crisis in the 80s and 90s and most learned their lessons. You can pretty much analyze the subsidiaries as independent banks.