Improbable as it may seem to some, the Spanish economy is out of the emergency ward and on the mend. That should be good news for the countryâs biggest bank, Santander (LSE: BNC) (NYSE: SAN.US).
Of course, weâre not talking about a miracle resurrection — the patient has not ripped off his oxygen mask and hot-footed it out of the hospital to do 50 laps in the local swimming pool.
He is, however, brightening up, eating solid foods again, and taking short walks in the garden. Metaphorically speaking!
Why investors are looking to Spain
In short, thereâs enough green shoots to tentatively vindicate those of us who argued 18 months ago that — barring a full-on collapse of the Euro — things probably wouldnât get much worse and might actually get better.
After a long recession, the country turned the corner in the third quarter of 2013 with positive GDP growth that some dismissed as a blip. Fourth-quarter GDP growth of 0.2% showed it wasnât, however, and just this week Spainâs economy minister said the government expects the next quarterly GDP figures to be âat least the sameâ.
Three quarters of growing GDP is a trend in my book. And I think thereâs every reason to think the strength could continue, as I believe growing confidence should see more of Spainâs massive black economy go legitimate, bringing much needed revenue to the countryâs tax coffers as well as boosting the official statistics.
There are positive signs in the crucial housing market, too. While thereâs no firm data yet pointing to a solid upturn, anecdotal reports from estate agents and the like suggest things are at least not getting much worse. Prices are down at least 40% since 2007, so youâd hope so!
One sign that this isnât just self-interested propaganda from people with proper to sell is that foreign investors are starting to put money to work in the sector. Renowned hedge fund managers John Paulson and George Soros have backed Hispania, a soon-to-be-listed Spanish property fund thatâs expected to raise 500 million euros. Soros has also joined his fellow billionaire Bill Gates in FCC, a survivor of Spainâs troubled construction sector that should do well if Spain continues to recover.
Spain is a sleeping giant for Santander
All this positivity could be very good news for banking giant Santander.
The bank has had to take massive charges in recent years against its Spanish assets, which crushed its earnings. Pre-tax profits fell from âŹ12 billion in 2010 to just âŹ3.5 billion in 2012, before recovering to âŹ7.3 billion in 2013. In total, the bank set aside âŹ65 billion against its global asset base and in boosting its capital buffers over the five years of the crisis.
If Spain truly is recovering, however, then not only could the rot in Spain have stopped â it could start to reverse.
Spanish loans account for 24% of all Banco Santanderâs net loans to customers, and the percentage of non-performing Spanish loans has been steadily rising. Huge provisions were made against Santanderâs domestic asset base.
This hasnât just dented the value of those assets â it has also fuelled that profit collapse I cited early.
Even in 2013, a better year for the bank, Spain generated just 7% of Santanderâs attributable profit. That compares to 17% of total profit coming from its UK operations â more than twice the share as that from Spain, even though UK loans at 34% of Santanderâs total are only a third or so more valuable on its books.
If the Spanish loans stopped deteriorating and became as profitable as those UK loans, shareholders would enjoy a double whammy of rising profits from the Spanish assets, and also eventually writebacks that increased the carrying value of its Spanish loans.
Costa comeback
Looking to Spain for good news for Santander from here would be quite a reversal.
For the past few years youâve had to look at its global operations to understand the bank was not a one-way bet on the troubled peripheral country. Now a recovery in that country could augment profits from elsewhere â or even to offset any further weakness in Santanderâs enormous Latin American operations.
With the shares still boasting a dividend yield of around 9%, I think it is well worth considering Banco Santander as a short-term play on Spain continuing to get better, as well as for the companyâs longer term attractions as a global banking behemoth.
