A Pure Bank Is A Profitable Bank

By Gregory S. Davis | May 30, 2008 AAA

Spain is known for the flamenco, a rhythmic musical genre often paired with strong and intricate moves of expert performers. Spain's Banco Santander (NYSE:STD) has been performing its own inspired movements by focusing on building deposits and staying away from complicated derivative securities. While U.S. financials like Citigroup (NYSE:C) and Countrywide (NYSE:CFC) have been slogging through mounds of bad debt, Banco Santander has been moving to its own melody.

Who is Banco Santander?
Banco Santander, one of the largest banks in the Euro zone, is a global financial services firm that has remained profitable by focusing on deriving revenues from retail banking services. Banco Santander generated 84% of its earnings in 2007 from retail banking. Net interest income, fees and insurance produce recurring streams of revenue for Santander and have kept it out of the credit debacle. Santanders local competitor Banco Bilbao Vizcaya Argentaria (NYSE:BBV) (try saying that fast three times) has a very similar focus although it is focusing most of its business in Spain, Portugal and Mexico. Santander has a larger footprint than BBV in Latin America with operations in Mexico, Chile and Brazil.

What's New?
Santander was one of three banks including the Royal Bank of Scotland (NYSE:RBS) and Fortis to complete the acquisition of Dutch bank ABN AMRO last year. As a result of the deal Santander assumed control of Brazil's Banco Real. The Brazilian Banco Real acquisition makes Santander the second largest bank in Brazil in terms of deposits and the third largest in terms of loan origination. Santander views the growing middle class and an improving Brazilian economy as future drivers of growth for its banking services.

Santander's geographical diversification of revenues from Europe, its largest market, Latin America and the UK helped it generate a 31% increase in net operating income for the first quarter of 2008 over the prior year. Latin America, Santander's fastest growing segment, represented 42% of its operating income during the quarter.

Valuation
Santander has a bank policy in place that requires a 50% payout of ordinary profits as dividends. Santander's high dividend yield of 7.8% and its very low price-to-earnings growth (PEG) ratio of 0.59 constitute strong signals for value investors. Remember, a PEG ratio below 1 suggests that the stock is undervalued based on expected future earnings growth. Santander also has a forward price-to-earnings (PE) ratio of 9, which is comparable to BBV's PE of 8.7, but it is worlds apart from Citigroup's PE of 42. Other global players with reasonable PE ratios include HSBC (NYSE:HBC) with a PE 12.3 and JPMorgan Chase (NYSE:JPM) with PE of 14.4. (To learn more, read Move Over P/E, Make Way For The PEG.)

Sticking to What You Know
When media outlets attempted to describe the CMOs and Super SIVs that lead to the credit crisis, the explanations may have left many investors asking for a repeat of what they just heard. Santander prefers to keep its method of generating revenue simple and direct. By focusing on building deposits and expanding into fast growing emerging economies, Santander has found a rhythm that has led the bank to profitability.

For a simple breakdown of these complex structured products, read The Barnyard Basics Of Derivatives.

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