How Solid is Banco Santander’s International Business?
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Nearly every analyst writing on Banco Santander (NYSE: SAN) hints that the giant international bank may be the baby in Spain’s bathwater. Banco Santander is headquartered in Spain but the majority of the bank’s business comes from outside Europe, and Spain only accounts for 12% of its total profits, plus the stock boasts a yield around 13%. Banco Santander’s international business and solid management has ensured that the bank is better capitalized and exposed to less risk than other Spanish banks. However, commercial banking isn’t exactly a sun-dappled stroll anywhere these days; can Banco Santander’s subsidiaries really compensate for Spain and the rest of Europe’s mess?
Santander Brazil (NYSE: BSBR) makes up 27% of Banco Santander’s profits and is by all appearances a healthy and profitable business. However, several items in the 2012 Q1 report come off as red flags. First, the report continually emphasizes decent twelve month results but the reported quarter results are pretty weak. For example, net interest income rose 18% in twelve months but only 3% in the last three, and the credit portfolio expanded 18.5% in twelve months but less than 1% in the last three. To be fair, most of the bank’s cost savings came in the last three months and of the 6% rise in fee profits, two thirds came in the last three months. Still, the report points to a slowing business and a hasty and as yet incomplete reaction to Brazil’s slashed interest rates, which are at historic lows.
The Santander UK Q1 report starts by announcing that profits were 41% less than in Q1 2011. The report tries to soften the news by painting a downright dismal picture of the UK economy: GDP growth projections of less than 1%, flat interest rates, rising unemployment and flat lending and deposit rates. The report argues that given the situation, Santander UK is doing fine; it turned a profit in an adverse market, has a low risk portfolio with no subprime loans and it is reassessing its customer relations strategy. While this may be true, it is a discouraging picture for a subsidiary that accounts for 19% of Banco Santander’s profits.
The Santander Mexico unit continues to churn out impressive growth rates – net income was up 19% in the first quarter and loans were up 25%, among other things – across the board, making the subsidiary one of Banco Santander’s and Mexico’s most profitable. However, the subsidiary still accounts for only 10% of Banco Santander’s overall business and the Q1 report warns that the Mexican market is decelerating slightly. This unit can only compensate for dismal performance in other markets if it sustains its phenomenal growth rates, which the Q1 report seems to see as unlikely.
Banco Santander does business in a number of other countries, but each makes up well under 10% of the company’s overall profits. The smaller subsidiaries are a mixed bag: Portugal will be a liability for Banco Santander for at least a couple more years. Santander Chile, on the other hand, keeps cranking out steady, upward trends on deposits, interest income, market share, funding and profit, but it counts for only 6% of the bank’s overall profit. The rest of Banco Santander’s Latin American and European holdings are small and volatile, but it will be interesting to watch the bank’s U.S. moves.
The Bottom Line
Any way you cut it, buying banks is risky. Banco Santander is diversified across regions and markets, well-capitalized and has a reputation for quality and caution, at least in comparison to its Spanish peers. However, there are glaring warning signs in all of the bank’s major subsidiaries that business is headed into either slow or choppy years, depending on the country. Save Chile and Mexico, which together account for only 16% of overall profit, no subsidiary appears able to carry the group. While Banco Santander’s international business is profitable and diversified, it is not profitable or stable enough to compensate for the mess in Europe and make this stock a clear buy.
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