Banco Santander – A Large Bank Doesn’t Mean A Good One

SAN focuses on higher growth prospects such as Brazil and other South America countries. Since the bank does business across the world, it enjoys a more stable stream of income. Using stability to its advantage, it can take higher risks in more volatile markets. When this goes right, the bank makes a lot more money.


Source: Investors presentation

The company is also undergoing organizational structure changes, realigning the company’s mission with Europe, North America, and South America’s segment. Customer retention without a branching network is in the center of their plan.

Dividend Growth Perspective

As you can see, the dividend is everything but steady. This is because the bank pays its distribution in Euros and then, we receive it in USD. SAN pays a dividend twice a year (2 different amounts). This explains the seesaw movement.


Source: YCharts

Comparing to its banking peers, SAN is doing decent. Recently recording a ~6-7% yield while the industry average mostly hovers around 2.67%. As mentioned above, dividend stability seems to be an issue, so dividend yield will be volatile. Also, the bank offers a high yield mostly because the stock lost about 50% of its value over the past 5 years. When there is a high yield, there is a red flag.


Source : YCharts

On a payout basis, SAN records nearly 45%, meaning almost half of their available earnings are being given back to shareholders. As the figure above shows, late 2015 saw a notable spike, following revenue decline during the same period. Again, stability seems to be missing here for investors to be comfortable.

Potential Downsides

As any financial institutions with major personal loans and mortgages portfolios, credit risk is an inherent operational risk. Credit risk, on a risk-weighted asset base (RWA) racks up an impressive 86% of SAN’s risk. Looking at the figure below, even putting aside an abrupt crisis scenario aside, the company’s balance sheet is looking at solid hits. Although SAN benefits from a healthy sectors diversification, mitigating potential impacts of such events, sectors downturns tend to overlap on others. Squeezing more on liquidities can quickly harm any undergoing growth projects such as acquisition and new product development.

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Disclosure: We do not hold SAN in our DividendStocksRock portfolios.

Additional disclosure: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or ...

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