What Recent Earnings Mean for This Bank Stock
By Alex Bastardas - May 13, 2013 | Tickers: BBVA, SAN, DB | 0 Comments
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Finding a value stock in today's bullish market is not an easy task. Many analysts agree that, while there might be cheap individual stocks out there, there are very few sectors that are deeply undervalued as a whole. One exception would be European banks.
One of the leading Euro banks, the Spanish banking giant Banco Santander (NYSE: SAN), recently reported its Q1 2013 earnings. What do they mean for the bank? Should investors buy Santander? Or would it be better to wait for a more upbeat report?
Compared to the same quarter last year, the bank's earnings were down 26% to €1.2 billion. Due to worldwide economic conditions and rock-bottom interest rates, the bank's income fell 9% to €10.3 billion while costs fell only 1% to €4.9 billion.
By region, the bank derived 55% of its profit from its operations in emerging markets, Brazil being the biggest contributor (26% of total earnings), followed by Mexico's 13%. The other 45% came from more mature markets, mostly the United States (12%) and the United Kingdom (12%).
Despite being headquartered in Spain, operations in that country only represent 11% of the company's total earnings. Compared to Q1 2012, profit in Brazil dropped 22.3%, 18% in Mexico, 34.3% in Portugal, and 21% in Chile. The drop has been much softer (only 2.4%) in the United States. All in all, the report seems quite gloomy, and, understandably so, the stock has had a slight price drop.
However, if one compares Q1 2013 with Q4 2012 results, a different reading emerges. Q1 2013 results are actually three times better than that of the previous quarter. Specifically, in the fourth quarter, attributable profit was only €423 million (or €1.2 billion before non-recurring provisions).
Furthermore, the comparison with last year's Q1 can be misleading: The bank's president, Emilio Botín, pointed out that Q1 2012 was an exceptional quarter that accounted for a large percentage of the bank's earnings last year. He stated that while earnings in 2012 went from high to low (Q1 being the most profitable, Q4 the least), earnings in 2013 are expected to go from low to high. This could mean that earnings in 2013 will be much stronger than those in 2012. The numbers seem to back up this assertion: Q1 2013 earnings are already equal to 53% of the bank's 2012 total profit.
Bears will correctly point out that the recent earnings report shows that, for the first time, the bank's earnings are weak not due to regulatory requirements, but due to a decrease in income and margins. While income should start to pick up again as the world economy recovers (income by region is already better than the previous quarter), cost is slightly more worrying.
However, as company officials rightly point out, the cost-reducing effects of the bank's fusions in Spain and Poland have not yet been registered in Q1, but are likely to show up in the following quarters. Bank fusions in many countries will also help the bank, as there will be fewer names, and leading banks like Santander will be able to attract more depositors. In fact, even compared to Q1 2012, the bank has managed to increase its client base and deposits by almost 2%.
Valuation & competitors
So, after the earnings report, should investors buy, hold, or sell this stock? As stated earlier, the bank's earnings were actually better than those of the previous quarter, so theoretically valuation ratios are now even more attractive than they were before earnings came out. The bank is trading at a P/E of 25, which is above average, but when taking into account future earning estimates, the forward P/E is an attractive 9.29. Its P/B ratio is also low: only 0.77. Its PEG is a bit higher, at 1.20.
Compared to its direct competitor, Banco Bilbao Vizcaya Argentaria (NYSE: BBVA), which also recently reported earnings, or to Euro giant Deutsche Bank (NYSE: DB), Santander still has an edge on most valuation ratios:
P/E Fw P/E P/B PEG Dividend Yield
Santander 25 9.29 0.77 1.20 11%
BBVA 29.70 8.60 0.99 4.24 5.56%
Deutsche Bank 184.20 - 0.61 22.18 1.42%
Edge SAN BBVA DB SAN SAN
BBVA is also slightly less globally diversified than Santander, and as a result, might struggle more than its main competitor. However, it has not expanded as fast as Santander has, so its more conservative management style might be beneficial for the bank if tumultuous conditions continue.
With regards to Deutsche Bank, the German giant is still attractive with regards to book value, and, as most European banks, its stock should recover nicely. However, Deutsche Bank has had significant exposure to Greek sovereign debt, while Santander managed to stay away from it. At any rate, the prices of most European bank stocks -- especially Spanish -- are at historically low levels and should come up as bad news from Europe subsides.
Dividend
Except for the current price-to-earnings ratio, valuations are still low, and the dividend yield is still high, very high. The Bank has stated that it will maintain its €0.60/share dividend for 2013. For its ADR shareholders, that works out to a yearly yield of around 11%. The yield is clearly above average in the industry, especially when taking into account that this is a major worldwide bank with a solid dividend-paying record, not a speculative small-cap financial stock.
Bottom line
While the headlines surrounding the earnings report can be negative, especially when comparing them to those of the same quarter last year, Banco Santander remains a very attractive stock to own. Its has been so severely beaten down over the last few years, that valuation ratios and dividend yields are too attractive to ignore. The bank's global diversification and smart growth strategy, coupled with a worldwide improvement of economic conditions, should drive up earnings this year.
The worst days of both the financial crisis and the Spanish debt crisis should now be behind us, and the stock has a long way to climb. Both dividend-seeking and value investors should seriously consider buying this stock before the big institutional investors regain confidence and start driving up the stock price.
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