SAN - Banco Santander

[muscleman]

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.

 

So most of the liabilities of SAN subsidiaries are not recourse to the parent?

[constructive]

Santander Capital Pledge Stirs Debate as Bank Trails Peers

"Santander would have a core Tier 1 capital ratio, a measure of financial strength, of 8 percent at the end of this year if Basel III rules were fully imposed"

 

"The need to raise capital buffers has already forced Santander to sacrifice future earnings by selling profitable businesses such as a stake in a Mexican bank last year."

 

Not new news, but I'm not sold on European capital ratios in general. Also in my opinion you need to have a relatively positive view on PIIGS sovereign debt to invest in European banks.

 

Do their recent divestitures impact the $23B normalized earnings? How much?

 

The bullish assumption is that they can earn their way to a higher capital ratio. But what is the probability that European credit gets worse and they need to raise more equity?

[TwoCitiesCapital]

Santander Capital Pledge Stirs Debate as Bank Trails Peers

"Santander would have a core Tier 1 capital ratio, a measure of financial strength, of 8 percent at the end of this year if Basel III rules were fully imposed"

 

"The need to raise capital buffers has already forced Santander to sacrifice future earnings by selling profitable businesses such as a stake in a Mexican bank last year."

 

Not new news, but I'm not sold on European capital ratios in general. Also in my opinion you need to have a relatively positive view on PIIGS sovereign debt to invest in European banks.

 

Do their recent divestitures impact the $23B normalized earnings? How much?

 

The bullish assumption is that they can earn their way to a higher capital ratio. But what is the probability that European credit gets worse and they need to raise more equity?

 

From your article: "Basel III has wrongly shifted the priorities of banks to the amount of capital they hold,” said Cato Stonex, a partner at Taube Hodson Stonex Partners LLP in London, which holds Santander shares. “It’s much more important for banks to focus on the quality of assets.”

 

I would tend to agree. Secondly,  what matters in addition to capital is leverage. The article puts SAN on par with DB for capital ratios but doesn't mention that DB is twice as leveraged.  Also, given Santander's reduction of real eastate exposure reduction in Spain, I'd hazard a guess that the remaining assets are probably a higher quality on average than their peers given their successful ability to navigate past crisis.

 

I agree somewhat with your comment on sovereign debt exposure.  I do think that Spain is in a better position than Italy,  Portugal,  or Greece in terms of the size and cause of chronic deficits.  I would also imagine that some of the  exposure Santander reports having is a hedge for these. Any bank holding sovereign CDS unhedged after Greece is playing it stupid and I didn't get the picture that Santander was stupid from their annual reports. Quite the opposite actually.

 

They have been raising equity for the last 3 years and I wouldn't be bothered if the raised more equity capital now. I don't want them diluting 50% of the company,  but a 10-20% offering to further solidify them and give them cash if the crisis continues would be fine with me. That doesn't hurt my expected return too much. 

 

The sale of Mexico shouldn't effect them terribly though they will earn less. It wasn't nearly as big of an impact as Brazil has.

[fareastwarriors]

Santander Sells 50% Stake in Asset-Management Arm to Investment Firms

 

 

 

http://dealbook.nytimes.com/2013/05/30/santander-sells-50-stake-in-asset-management-arm-to-investment-firms/

 

 

 

Banco Santander said on Thursday that it had sold a 50 percent stake in its asset-management arm to two investment firms, Warburg Pincus and General Atlantic, as the bank continues to raise money to bolster its balance sheet.

 

At the same time, the infusion of cash into the asset manager is meant to help it expand and compete, especially in regions like Latin America.

 

Under the terms of the agreement, Santander will reorganize the unit’s 11 subsidiaries into a new holding company, with the private equity firms claiming half. The business was valued at about 2 billion euros, or nearly $2.7 billion.

 

 

[fareastwarriors]

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%3D25%5C5%5CNota+de+prensa+Resultados+I+Semestre+ENG%2C0.pdf&blobwhere=1278695237971&SSURIsession=false&SSURIapptype=BlobServer&blobtable=MungoBlobs&SSURIcontainer=Default&blobheadername0=content-type&blobheadername1=content-disposition#satellitefragment

 

 

The Spanish lender Banco Santander posted a sharply higher second-quarter profit of 1.1 billion euros on Tuesday, as it benefited from a fall in charges tied to delinquent loans.

 

Santander, one of Europe’s largest banks by market capitalization, wrote off billions of dollars’ worth of faulty real estate loans last year, primarily in its home market, where record levels of unemployment and weak domestic growth continue to plague the Spanish economy.

 

 

[plato1976]

just noticed this opp -

 

I have a feeling now may be the time to establish a position here

 

btw, is the DIV really 10%+ ? no plan to cut it ? wow ...

 

 

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%3D25%5C5%5CNota+de+prensa+Resultados+I+Semestre+ENG%2C0.pdf&blobwhere=1278695237971&SSURIsession=false&SSURIapptype=BlobServer&blobtable=MungoBlobs&SSURIcontainer=Default&blobheadername0=content-type&blobheadername1=content-disposition#satellitefragment

 

 

The Spanish lender Banco Santander posted a sharply higher second-quarter profit of 1.1 billion euros on Tuesday, as it benefited from a fall in charges tied to delinquent loans.

 

Santander, one of Europe’s largest banks by market capitalization, wrote off billions of dollars’ worth of faulty real estate loans last year, primarily in its home market, where record levels of unemployment and weak domestic growth continue to plague the Spanish economy.

[TwoCitiesCapital]

just noticed this opp -

 

I have a feeling now may be the time to establish a position here

 

btw, is the DIV really 10%+ ? no plan to cut it ? wow ...

 

 

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%3D25%5C5%5CNota+de+prensa+Resultados+I+Semestre+ENG%2C0.pdf&blobwhere=1278695237971&SSURIsession=false&SSURIapptype=BlobServer&blobtable=MungoBlobs&SSURIcontainer=Default&blobheadername0=content-type&blobheadername1=content-disposition#satellitefragment

 

 

The Spanish lender Banco Santander posted a sharply higher second-quarter profit of 1.1 billion euros on Tuesday, as it benefited from a fall in charges tied to delinquent loans.

 

Santander, one of Europe’s largest banks by market capitalization, wrote off billions of dollars’ worth of faulty real estate loans last year, primarily in its home market, where record levels of unemployment and weak domestic growth continue to plague the Spanish economy.

 

I wouldn't look at it as a dividend. 80% of it is issued as new stock (shareholders can choose to receive stock or cash). Those who choose cash (20%) get the cash payout now but their holdings get diluted by the new issued share. Those who choose the shares maintain their % ownership plus a small fractional gain due to the 20% who choose cash. Think of it as a closet recapitalization and not as a dividend unless if you intend to elect for cash returns and watch your position get diluted.

 

I actually wish they would stop playing games with semantics. Call it what it is; stop paying the dividend, use your earnings to recapitalize and stop telling people you're paying a dividend.

[SharperDingaan]

If you take the dividend as stock, & then sell it for cash, there will no with-holding tax.

 

We established a position in SAN over the week.

 

We see SAN as equivalent to the average Cdn Sched-A bank; 2.5x the size, but with a capital ratio of 11.1% in line with the average 11.2% Total Tier 1 Capital of the 5 major Cdn Sched-A banks. SAN’s current price is also around the average 50bp ROA of Mediterranean banks x the average 11.25 P/E multiple applicable to the 5 major Cdn Sched-A banks. However … SAN’s 8.5% (scrip) dividend yield is 2x that of the current 4.14% average of the 5 major Cdn Sched-A banks.

 

As Spain improves, we would expect the average 50bp ROA to rise to the average 70bp ROA of most major European banks. Revaluing at 70bp ROA, suggests that we have a position at roughly a 30% discount relative to what we should have paid. However; given what SAN has survived, we think today’s SAN is a more efficient bank - & 70bp may well be too light.

 

In short; we think we have an equivalent Cdn Sched-A Bank bought at 30%+ off, & paying a cash yield of 2x what we might otherwise expect. Hardly surprizing that net of house money, we see the net risk/reward as a no brainer.

 

SD

 

[LC]

Thanks for your thoughts, SD.

 

SAN has been on my watch list since it traded in the $6.00 range. It's S.A. operations keep it somewhat buffered from the Euro problems. Much in the same way Chrysler/Brazil insulate Fiat to an extent.

[SharperDingaan]

It would seem that Americans are just about to get to know them ....

http://www.multivu.com/mnr/63910-top-25-us-bank-sovereign-changes-name-to-santander

 

SD

[SharperDingaan]

 

Very nice Q3 earnings report today.

 

Now with 1.5B of operating costs to come out as efficiency measures bite, asset quality stable &/or improving, regulatory capital increasing at 40bp/quarter, & Iberian acquisitions (assume banks) on the table, an average 70bp ROA for this bank (as is) is looking very  light.

 

Most would also expect that that growing regulatory capital ratio is going to be used on some sizeable acquisitions - when they arrive.

 

Good on them.

 

SD

[gary17]

SD

Thanks for your insights on SAN - I am wondering if you are comfortable with a large position in SAN with the big question mark on the Euro in the backdrop.

thanks 

[SharperDingaan]

Not a big deal for us.

 

Over our longer time horizon the Cad/Euro rate should even out, & in the interim we just get more shares than we otherwise would via the DRIP. We could also simply margin the position with Euro denominated debt; business that SAN itself might offer at the structural level to its ADR holders .. especially as their US business needs to grow, & this is quality business.

 

SD

[CorpRaider]

Noticed they've been running ads the last two weeks in Barron's.

[SharperDingaan]

Must be doing well when the competitors are whining about the dividend ...

http://sharecast.com/news/broker-snap-analysts-raise-doubts-over-santander-dividend-post-q3-results/21249084.html

 

" In regards to dividends, the Swiss bank says it has strong reservations about the dividend policy, given the 8% annual share increase attached, which makes it difficult for the stock to look cheaper even in 2015 estimates. Also on this front, Renta 4 says it expects dividend policy to be conditioned to earnings recovery, Basel III compliance, and the removal of risks at the regulatory level. "The market should force the company to return to a cash dividend. The current payout of €0.60 would be difficult to maintain if conditioned to earnings recovery," it said."

 

Of course the fact that most recipients are choosing stock over cash, SAN is well over Basel III requirements, & that the Swiss Bank cannot persuade shareholders to take its stock (because maybe it has a Basel III compliance problem, as well as its LIBOR fixing problem?) over its cash ... has nothing to do with it  ;)

 

SD

 

 

 

[phil_Buffett]

SD what are you thinking about the ongoing Dilution?

 

i dont like that they have every Quarter more Shares outstanding.

[SharperDingaan]

Does not bother us at all.

 

Roughly 80% of the dividend voluntarily gets paid as scrip; at 11B shares o/s capital increases by 5.3B - even if they do not make a cent. And they are currently making a LOT of money every quarter; even after multi billion write downs - every quarter. Does not mean that investors actually want the scrip; most will simply be selling their scrip as soon as it is received - to avoid the withholding tax that would otherwise be paid if you accepted cash.

 

There is dilution only if you take cash, or sell your scrip; but you are getting a slightly smaller part of a slightly stronger bank. You also benefit by NOT being a German bank, as it would be a sign of weakness were they to issue scrip. But if one of the PIG banks can do it - it is great news! - as it means less bailout cost for the German people.

 

At some point they will start buying back what they issue to avoid the dilution. When they do, the game will change - & very rapidly.

 

SD

 

[krazeenyc]

SD what are you thinking about the ongoing Dilution?

 

i dont like that they have every Quarter more Shares outstanding.

 

You're not really getting diluted -- you're just not really getting a dividend either :D

[SharperDingaan]

Aaah .. but optically it is very clear that you are getting a dividend, & it is very big! 

 

.... and if a PIGS bank can do this clever trick, why cant a Swiss or German one do it as well,

.... apparently it is not possible if you need the money to pay for your corruption fines  ;)

 

SD

 

 

 

 

[SharperDingaan]

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/10452434/Bank-shares-Buy-today-for-7-income-in-2015.html

 

Back of the envelope, it would seem SAN’s dividend is far smarter than it looks …..

 

9M’13 attributable profit of 3310, annualizes to 4413. 12M’12 profit was 2298; 2013 increase of 92%.

9M’13 share count of 11092; at .6 euro, divs are 6655 - 80% DRIP (5324), 20% Cash (1331)

Dividend cash payout of 30% (1331/4413)

 

But what if …. 12M’14 attributable profit increases by just 50% to approx 6619? It has been up 90% YoY so far.

Suddenly there is about enough cash to buy back all the DRIP shares being issued. No further dilution.

SAN’s cash yield exceeds its rivals, & all are now pricing with emphasis on growing div streams.

 

SAN UK is projected to pay out divs at 50%; if the whole group did this, attributed profit would need to be around 13310. An ROA of 80bp on the existing asset base – the same as for the average major European bank. All assuming ZERO growth in assets, & ZERO recognition of the annual 6.6B growth in capital – net of dividends.

 

Nothing but tail winds ….

 

SD

 

[no_free_lunch]

Based on their website, it sounds like the dividend defaults to shares (as opposed to cash).  Anyone have experience with this, is that really the case for investors in North America?

[SharperDingaan]

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

[TwoCitiesCapital]

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/10452434/Bank-shares-Buy-today-for-7-income-in-2015.html

 

Back of the envelope, it would seem SAN’s dividend is far smarter than it looks …..

 

9M’13 attributable profit of 3310, annualizes to 4413. 12M’12 profit was 2298; 2013 increase of 92%.

9M’13 share count of 11092; at .6 euro, divs are 6655 - 80% DRIP (5324), 20% Cash (1331)

Dividend cash payout of 30% (1331/4413)

 

But what if …. 12M’14 attributable profit increases by just 50% to approx 6619? It has been up 90% YoY so far.

Suddenly there is about enough cash to buy back all the DRIP shares being issued. No further dilution.

SAN’s cash yield exceeds its rivals, & all are now pricing with emphasis on growing div streams.

 

SAN UK is projected to pay out divs at 50%; if the whole group did this, attributed profit would need to be around 13310. An ROA of 80bp on the existing asset base – the same as for the average major European bank. All assuming ZERO growth in assets, & ZERO recognition of the annual 6.6B growth in capital – net of dividends.

 

Nothing but tail winds ….

 

SD

 

I think the one thing to keep in mind is that $4.5B that your projecting would only be enough to buy back one years worth of shares and would only do it if all excess cash was used to initiate the buyback. This doesn't include the last few years of 6-10% dilution and would also mean no cash dividend. 

 

I agree with in general though.  The dividend was a shadow recapitalization of the firm that took advantage of investor sentiment being more positive towards dilutive dividends then dilutive stock offerings.

 

Secondly,  I also had mapped out normalized earnings between $13-16B. Can you provide me the back-of-the-envelope calcs you used since your approach was different than mine?  I'm curious because your way seems more precise.  Also, it looks like you excluding the 4.5B in dividends to come from BSBRs recapitalization plan. What about a potential spinoff of the UK branches that's been tossed around?

 

I do think we're going to be in a great position in a few years though having purchased a world class bank with a long term cost advantage operating in high growth environments for a single digit P/E. Crazy!

Based on their website, it sounds like the dividend defaults to shares (as opposed to cash).  Anyone have experience with this, is that really the case for investors in North America?

 

I'm in the states. Every quarter my account gets cash dividend credited to it, which is immediately debited and replaced with shares. I use Scottrade btw.You pay no withholding tax by byd oing this. You can opt every quarter to receive cash but then you pay 25% Spanish withholding tax in top of any applicable U.S. taxes and you dilute your position. The incentives are totslly against doing this if you're a long term holder. 

[no_free_lunch]

Thanks.  I agree 100%, the main thing is for me to avoid the withholding tax.  I am fine with share dividends as it's all the same.

[JPerez]

Used to own the shares for years but i got tired of waiting for the turnaround that never happens.

Outstanding shares have gone from 6.2 Billion in 2007 to 11 Billion today and they are going up 200 million every quarter with the script dividend.

There is no good option with their dividend you either take the cash (By the way that is what Emilio Botin does every quarter) pay the withholding and get diluted or take the shares which leave you in the same place you were as you will own about the same % of the company because everybody else is doing the same.

The dividend is clearly unsustainable, they couldn't pay it all in cash even if things turn around, it would take 6.6 billion euro a year and raising every quarter. I believe they could earn 10-12 billion a year if the conditions are back where we were in 2007 but even in this scenario such a dividend wouldn't be sustainable because they have done IPOs in most of their subsidiaries so the only way they can get their hands on the cash flows of their foreign subsidiaries is through the dividends paid by those subsidiaries.

Don't get me wrong, I think if the economy turns around in Europe and interest rates rise they could be worth 90-120 billion euro which divided by today's outstanding shares would give an upside of 8-11 euro per share.

They are also very efficient, the banking system in Spain is very advance technologically and they have expertise in emerging markets. They base their strategy in having efficiency ratios below 50% ideally close to 40%, being on the top 3 banks in the countries where they have presence, cross selling of multiple products per client (they are very aggressive in this front) and a good risk management.

The thing that made me dump the shares was the constant unfulfilled promises that we were at the bottom of the cycle, they starting saying that in 2010 and things kept going downhill until this year and specially the fact that despite the profits and script dividends they seem unable to increase their book value which has gone down in the last 3 years. Besides a lot of the book value is intangibles, tangible book value was 41 Billion the last quarter for 1.2 Trillion in assets.