With so many banks still vulnerable due to their exposure to the sovereign debt of the eurozone's weaker states, investing in banks' shares is risky. But some banks look more vulnerable than others, with those that originate from the zone's most troubled economies looking the shakiest. Step forward Spanish banking giant Santander. It faces an especially challenging future; not surprising given its inevitably hefty exposure to Spain, a nation suffering horrendous levels of unemployment and where a return to recession looks imminent.
- Latin America doing well
- Fat dividend yield
- Exposed to weak Spanish economy
- Credit quality looks fragile
- Capital resources stretched
- UK operation under pressure
The scale of those challenges was on display in the group's 2011 results. Fourth-quarter profit slumped to just €47m (£39m) - from €2.1bn in 2010 - as grim trading in Spain and big hikes in provisions struck. Santander's ratio of non-performing loans to total loans grew from 3.55 per cent at the end of 2010 to 3.89 per cent at end-2011; that compares with just 1.1 per cent at Swiss bank UBS. But the arrears profile in Spain alone is worse still, where non-performing loans ended the year at 5.5 per cent of the total, against 4.2 per cent a year earlier. Moreover, following the collapse of Spain's real estate market, Santander's property-related book looks especially troubled - almost 29 per cent of its loans are judged to be non-performing.
The Spanish property book explains a good deal of Santander's problems. Spain's banks have come under pressure from the country's new government to recognise more of their real estate losses and Santander, therefore, made a €1.8bn charge against its exposure in 2011. True, the lender has now raised its provisions against foreclosed properties from 31 per cent of the total to 50 per cent. But it's not clear whether that will be enough. The Spanish government reckons Spain's banks need to raise total provisions against property by a further €50bn and analysts at Espirito Santo Investment Bank estimate that Santander still faces a provision shortfall of €1.97bn.
| BANCO SANTANDER (BNC) | ||||
|---|---|---|---|---|
| ORD PRICE: | 533p | MARKET VALUE: | £48.5bn | |
| TOUCH: | 533-536p | 12-MONTH LOW: | 818p | LOW: 384p |
| DIVIDEND YIELD: | 9.4% | PE RATIO: | 8 | |
| NET ASSET VALUE: | 738p | |||
| Year to 31 Dec | Pre-tax profit (€bn) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|
| 2008 | 10.8 | 122 | 60.7 |
| 2009 | 10.6 | 105 | 63.3 |
| 2010 | 12.1 | 94 | 60.0 |
| 2011 | 10.8 | 60 | 60.0 |
| 2012* | 12.7 | 85 | 60.0 |
| % change | – | – | nil |
Normal market size: 5,000 Matched bargain trading Beta: 1.4 *Espirito Santo Investment Bank estimates (profits & earnings not comparable with historic figures) £1=€1.20 | |||
Nor does it help that Santander had to make a €600m charge against the value of its Portuguese subsidiary. Put these together and Santander's reserves of capital could struggle to absorb much more bad debt. In the summer, the European Banking Authority's stress tests identified a €15bn capital shortfall at Santander. Management says it has plugged that gap, raising cash by selling such assets as its Colombian arm and a stake in its Chilean business. But the group's end-2011 core capital was reported at 10 per cent of assets weighted for risk. That's not particularly comfortable by international standards, especially as Santander quite likely will have to make those extra provisions. The ratio at UBS, for instance, stands at 16.3 per cent.
The bank's UK operation - largely comprising what were Abbey, Alliance & Leicester and Bradford & Bingley - doesn't look great, either. The UK accounts for 34 per cent of the group's gross loans, but UK net interest income fell 12 per cent in 2011 to €4.18bn.
The bright spot is Santander's Latin American operations, where net interest income rose 12 per cent in 2011 to €16.5bn (£10.4bn). In fact, this relatively economically robust region now generates 53 per cent of the group's net interest income.
