Contra Guys: Santander is a Spanish bank that’s too big to fail

Benj Gallander, Ben Stadelmann, and Philip MacKellar
January 18, 2021

Our perfect record last year in this column’s picks is impossible for us to beat, and at best, coming close would be a delight. That record is an outlier, one of those things that probability dictates will rarely happen — kind of like what we’re seeing with current stock market levels and price momentum. Nonetheless, we believe our first pick this year has the potential to be an excellent choice.

Banco Santander SA (SAN-N) -3.80%decrease has been around since 1856 and is the largest bank in Spain. In addition, it is among the largest in Brazil, while also operating in Argentina, Chile, Germany, Poland, Portugal, Britain and the United States. This enterprise is so big that, in our minds, it falls into the “too big to fail” category, which is one reason it joined our President’s Portfolio last May at US$2.05 when it was battered and bruised. The purchase is reminiscent of when Bank of America (BAC-NYSE) was picked up in 2011 at US$6.76. That one has worked out charmingly. (BAC shares closed Monday at US$33.01; we sold 28.6 percent of our position at US$33.75 in December, 2019.)

Besides being geographically diverse, Santander has its hand in a multitude of pies beyond banking offering insurance, payroll management, financial advisory services, retail properties and more. Currently, it operates almost 12,000 branches, but plans are in the works to close about 1,000. That will lead to writedowns.

Along with its brethren in the financial field, Covid-19 has played some havoc with financial results. The weaker economic environment caused income and loan-loss provisions to increase year over year. Goodwill was also written off. This was somewhat counterbalanced by decreased expenses, part of which were planned prior to the crisis. The bank lost money for the first nine months of 2020 and it could have its first annual loss in more than a decade.

Meanwhile, Ana Botin, the group executive chair of Santander since 2014, was pleased with the recent quarterly results. “The recovery of our business is progressing well, and the third quarter was significantly stronger than the second,” Ms. Botin said at the time. “Revenues increased 18 percent in constant euros as activity returned close to prepandemic levels, loan loss provisions fell 14 percent and we continued to reduce costs ahead of plan.”

The European Central Bank, concerned naturally about capital ratios and the economy, restricted banks from paying dividends for the first nine months of last year. The constraint was partly lifted in December and Ms. Botin is keen to reimplement Santander’s payout. Once that happens it will probably boost the share price. Like many European companies, the dividend varies from quarter to quarter, unlike North American enterprises that are far more consistent with their divvies. In 2014, the Santander payout was regularly around 16 US cents a share, but it slid after that given the operational challenges.

Moving past those difficulties has taken time and to do that Santander touts inclusivity, sustainability and “acting in a simple, personal and fair way.” While not particularly novel, sometimes moving from complexity to basics can lead to positive results, as is happening here.

The stock currently trades around US$3.30, and our initial sell target is US$8.24. Having once traded at $20-plus leading up to the financial crisis, it is quite possible that our position will be sold in tranches, rather than dispensed in one sale. The book value resides just south of US$7. It would not surprise us to see the stock price gain momentum quickly, as it is on the radar screens of many analysts and traders.

We would love to do a road trip to Spain and Brazil and check out some of Santander’s branches more closely. But this does not seem to be a good time. Add a couple of more items for an ever-lengthening bucket list. Perhaps the profits from this choice will pay for our trips.