Sareb: A Well-Kept Spanish Secret

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In accordance with the Spanish government, Sareb, or the so-called "Banco Malo," is a banking entity that will manage the toxic credits of Spanish banks in the future. It is envisaged that the Sareb comes into operation before the end of the year with 60,000 million Euros in real estate assets. Currently, this future entity has 2,000 million Euros from private capital. This is a requirement that it needs to meet for its implementation.

Banks or insurance companies such as Santander (NYSE: SAN), Mapfre, and Mutua Madrileña have said that they will participate in the Sareb. Meanwhile,  international groups with a presence in Spain, such as the European insurer AXA Group, are also looking to invest in the future Sareb. The operation theory of this future "Banco Malo" says that the lenders put toxic loans and real estate on the market with a discount and in exchange receive bonds with a state guarantee. This situation could help to clean up the accounts of banks such as Santander and BBVA (NYSE: BBVA). But, could it threaten the future dividends of Banco Santander and BBVA? Many investors of these companies are asking this question. In the memory of many investors are the temporary elimination of dividends on the part of the Spanish telecommunications giant Telefonica S.A. (NYSE: TEF)

Is buying Banco Santander and BBVA shares a good strategy for long-term?

I do not think so. Based on what has happened with other European banks, you could see that it is not a good strategy. For example, at the beginning of this year ING Groep NV (NYSE: ING) decided to eliminate its dividends to their investors until they returned all the public aid received. A possible rescue of Spain from the European Union could impose similar conditions to their national banks such as Banco Santander and BBVA. For this reason, I think it is more interesting to invest in banks that are not exposed to the European crisis debt, like Bank of America (NYSE: BAC)​.

To reach a fundamental conclusion, we are going to compare the financial situation of the banks mentioned.

<table> <tbody> <tr> <td><strong>Key Statistics</strong></td> <td><strong>Banco Santande</strong>r</td> <td><strong>BBVA</strong></td> <td><strong>ING Groep NV</strong></td> <td><strong>Bank of America <br /></strong></td> </tr> <tr> <td>Market Cap</td> <td> $72.07B</td> <td> <span>$41.56B</span></td> <td> <span>$35.55B</span></td> <td> <span>$114.62B</span></td> </tr> <tr> <td>Enterprise Value</td> <td> $44.14B</td> <td> $44.27B</td> <td> $-18.14B</td> <td> $140.83B</td> </tr> <tr> <td>P/E</td> <td> 8.25</td> <td> 14.72</td> <td> 186.80</td> <td> 29.54</td> </tr> <tr> <td>Forward P/E</td> <td> 9.49</td> <td> 8.99</td> <td> 5.91</td> <td> 10.96</td> </tr> <tr> <td>Profit Margin</td> <td> 6.19%</td> <td> 9.47%</td> <td> 5.79%</td> <td> 6.75%</td> </tr> <tr> <td>Revenue</td> <td> $38.73B</td> <td> $20.75B</td> <td> $59.43B</td> <td> $80.66B</td> </tr> <tr> <td>Cash</td> <td> $479.22B</td> <td> $144.56B</td> <td> $362.26B</td> <td> $625.35B</td> </tr> <tr> <td>Debt</td> <td> $451.30B</td> <td> $147.27B</td> <td> $308.56B</td> <td> $647.09B</td> </tr> <tr> <td>Short Interest (as of Nov 15, 2012)</td> <td> 13.05M</td> <td> 4.08M</td> <td> 6.15M</td> <td> 203.82M</td> </tr> </tbody> </table>

Based on the ratio enterprise value, we can see that Banco Santander and ING Groep N. V. are too overvalued by the market. Furthermore, BBVA and Bank of America could be undervalued. But, this valuation and the P/E ratio do not include the uncertainty of a possible rescue to Spain. In this situation, BBVA and Banco Santander could be affected by the paralysis of their dividends.

Therefore, the fundamental assessment of Bank of America would be that making a long term investment is attractive. We would have to wait to settle the uncertainty of the creation of Sareb in Spain and how it might affect the situations of Banco Santander and BBVA. For this reason, Bank of America has a buy recommendation.


JorgeAura has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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