Banco Santander: Europe's Brazilian Bank

When I look across the banking landscape in Europe, there is one bank that stands out as most willing and likely to take advantage of the single market in Europe and also emerging markets opportunities around the world, and this bank is Banco Santander (NYSE:SAN).

I like Banco Santander for a number of reasons. Firstly, its base is in Spain and as that economy turn the corner, the drag on its share price due to investor perception of the country and the bank will diminish thus making its share price far more buoyant going forward.

This is currently the case as its profits rose in Q1 to 1.6 billion euros which has increased its shares price by 1.2% and thus outperforming its domestic peers.

Unlike many of its European competitors such as Deutsche Bank (DB,) Credit Suisse (CS), and UBS, one can clearly see the effects of SAN's restructuring on the balance sheet as crucially it has improved its solvency significantly by lifting its Common Equity Tier 1 ratio (CET1); the market agrees that it can achieve 11% or over by 2017.

While I agree that the CET1 is important from a risk perspective, particularly when one considers the global market risks, I believe that its influence has had an unduly negative impact on the share price.

Banks needs to constantly strike that balance between risk and return and in this case, I believe that in this season of lower interest rates, Banco Santander made the right call by first going after revenue and profitability rather than purely managing risks; furthermore, they have phased in the increase of CET1 gradually in order to continue to invest in revenue growth.

It is a myth that CET1 needs to be at 12% or above for all banks because each bank is different, their markets are different and thus there can be some room for individual discretion when it comes to determining the optimal level of CET1 for banks.

It is not necessary for Banco Santander to have more than 10% because their core business is very diversified across geographical region so there is already a built in risk management function in their core business structure. They are already the most European bank in the EU and also have a significant global presence in the emerging markets, particularly in South America where they intend to expand their operations significantly.

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