Santander/BBVA: almost there
There is a case for owning the big Spanish banks
You’re a European income investor with a lacklustre portfolio. If it’s tracking the regional MSCI index you’ve already shed 10 per cent this year. Where to go?
The periphery looks cheap. But Greece is too wild and Italy looks shaky. Ireland is already pretty expensive. What about Spanish banks? Down 20 per cent this year on average, in spite of operating in the eurozone’s fastest growing economy, they stand to benefit from solid recent economic data, too. The biggest retail banks, Santander and BBVA, have both fallen in line with the index, and now trade at a discount to book value (0.7-0.8 times). Their expected dividend yields are in excess of 5 per cent, and they have cost to income ratios well below the European average.
One major difference between the two lies beyond Europe — in Mexico (BBVA) and Brazil (Santander), their biggest countries by earnings. Conventional wisdom would opt for Mexico, which accounts for two-fifths of BBVA’s total profits. It’s a growing economy whose largest trading partner is the resurgent US. Net profits grew there by nearly a tenth last year. Santander Brazil’s performance is in a way more impressive. Tighter cost-control helped it grow pre-tax profits even as the country endured its worst recession in a generation.
The gloom pervading the global economy demands a measure of safety, both in terms of capital and the sustainability of payouts. Here is where the case for buying starts to wobble. BBVA reported a core tier one capital ratio of 10.3 per cent at the end of 2015. Santander’s is a fraction less, the lowest for any major European bank. This did not stop it boosting its cash dividend by four-fifths last year.
Even with exposure to one of South America’s fastest-shrinking economies Santander looks a lot like an investible bank. A pity management make it difficult by splashing cash on dividends instead of building up its capital buffer.