Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.
Today I am looking at Banco Santander (LSE: BNC) (NYSE: SAN.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.
Lending conditions remain weak
Although economic conditions are clearly far improved from those of the aftermath of the 2008/2009 banking crisis, Santander’s interims last month revealed that lending conditions — particularly in its established markets — remain weak.
On a group-wide basis, lending fell 2% during July-September, to 686.8bn euros. Lending in its mature markets dropped 6% during the period, and in particular in both Spain and the UK lending dipped 5%. Santander generates around 40% of its profits from Europe, and although the company has reduced its exposure to certain parts of the troubled region — particularly the Spanish property sector — enduring woes about conditions on the ground continue to cast a pall over future performance here.
Lock on to surging earnings
But following several years of heavy earnings declines, Santander is expected to put the pressures of its substantial write-offs and extensive recapitalisation programme behind it, and punch solid growth both this year and next.
According to current forecasts, the business is set to record a staggering 84% rise in earnings per share this year, to 42.4 euro cents, with an additional 22% advance pencilled in for 2014, to 51.8 euro cents. These stratospheric figures leave the firm dealing on a price-to-earnings to growth (PEG) reading of 0.2 and 0.6 for these years, comfortably below the yardstick of 1 which represents stunning bang for your buck.
Latin America slowdown weighs
I am a firm believer in the long-term earnings potential of emerging markets such as Latin America. Consequently, I believe that Santander’s heavy exposure to this region — currently responsible for 49% of total profits — bodes well for future earnings growth.
But in the meantime, the possible fallout from accelerating economic cooling in South America threatens to crimp financial growth there. The bank noted that it has seen “more moderate growth” here in recent times, and that in Brazil — Santander’s largest market responsible for almost a quarter of group profits — net attributable profit dropped 13% during July-September to 1.28bn euros.
A podgy dividend pick
Still, City analysts believe that this should not deter staggering earnings growth in coming years, a phenomenon which looks set to underpin sector-busting dividends.
Banco Santander’s full-year dividend for 2013 is expected to remain roughly in line with last year’s payout, at 59.8 euro cents, although this is anticipated to fall to 49.6 euro cents next year. Still, these potential payouts still carry monster yields of 9.4% and 7.8% respectively, figures that smash a prospective average yield of 3.6% for the entire banking sector out of the park.
A brilliant banking play
Although macroeconomic issues in its key markets of Latin America and Europe  remain a concern, I believe that the firm’s massive restructuring efforts of recent years are set to deliver bumper returns. Indeed, a 77% improvement in net attributable profit, to 3.31bn euros during January-September, is testament to this work. And with extensive exposure to the potentially lucrative regions of South America, I believe that investors can look forward to rolling long-term growth.