Santander: Way too cheap!

Santander is one of the cheapest bank stocks in the world!

The Bank is well diversified with operations in EU, UK, Latam and US, has a 16% capital adequacy level, a significant fintech platform (17% of earnings), efficiently run, an ROE of 12% and earnings growth of 10% plus a 6% dividend/share buy back yield and yet trades at 5.5x PE YE22.

What is the market afraid of? In a word Brazil, this subsidiary is 20% of earnings, has seen a jump in bad debt on rate increases, plus a slow growth economy while a polarized political situation adds fuel to the fire. However, Santander Brazil trades 7.2x PE with a ROE 19% and management is very accustomed to the Brazil operating environment after 20+ years.

The other “risk” is if it acquires and overpays for Citibank’s Mexico operation, Banamex, and issues shares to acquire it. However, at 1.5x P/BV or US$6bn its 12% of Santander’s market cap while odds are it goes to a Mexican national.

At 5.5x PE it seems these risk factors are very much in the price and in my view severely discounted. 

Santander share price drivers   

1) Higher rates in USA, Latam, UK and eventually in the EU, push lending spreads, revenue, and EPS. With rate sensitivity of 100bp adding +$1bn in EU revenue, $250m UK and $200m US. EU/UK is the real driver for the shares in my view.

2) FinTech: It has a significant digital consumer lender and bank across EU and UK that grows 10% and is 17% of consolidated earnings.  

3) Cost control: The bank has a long track record of productivity with an efficiency ratio of 44% (SGA/Revenue) which can cushion wage inflation impact.  

4) EPS growth: Thus, the combination of higher net rates on loans, modest loan growth, fintech growth and cost control should lead to 10% earnings growth.   

5) ROE and excess capital: Santander has a 16% capital ratio that can support far higher loan growth but brings down ROE to 12%. This is a store of value in a higher growth environment.

6- Divided/share buyback: Given excess capital the bank is paying out 40% of earnings for a 6% yld and may be able to increase this.

7) Valuation: At 5.5x PE YE22 it’s one of the cheapest banks in Europe, USA and Latam.  All the above suggest that Santander should trade closer to 10x PE or near 100% upside.

Tables and Charts

The first is the significant underperformance the stock has had vs global peers and even Latam equities. The second is a table showing a few US/EU peers plus a PE/ROE indicator, the lower the cheaper one is paying for a point of ROE. The third is a table with Santander’s listed subsidiaries that shows how much more valuable they are vs the parent. The last two charts show earnings and ROE breakdown per operating geographies. EU/UK has the lowest ROE and the real driver for the shares.

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