Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.
Today I’m looking at Banco Santander SA (LSE: BNC) (NYSE: SAN.US) to ascertain if it can make £8bn in profit.
Have we been here before?
A great place to start assessing whether or not Santander can make £8bn in profit is to look at the company’s historic performance. Now, it does get slightly confusing here as Santander’s financial figures are in euros, so I need to adjust the numbers before I can analyse them.
Unfortunately, Santander has not been able to make a profit of £8bn at any point during the last 10 years; £8bn is around €9.7bn. The closest Santander came to this level of profitability was during 2008, when the company reported a profit of €8.7bn for the year, or around £7.7bn.
However, since 2008 a number of problems have dented Santander’s profitability, including the collapse of the Spanish property market, the Eurozone crisis and more recently, the emerging markets crisis.
With all these factors weighing on Santander, I feel that it will be difficult for Santander to reach my profit target anytime soon.
But what about the future?
While most banks ran into trouble during the financial crisis, Santander sailed through only to find losses mounting several years later. Indeed, the bank’s income slumped to a low of €2.2bn during 2012, as loss provisions took a toll on profitability.
Still, Santander quickly bounced back from this low and the bank reported a profit of €4.4bn for 2013, with fourth quarter profits more than doubling. The bank’s previously high rate of bad debt provisions also declined, falling to €1.7bn for the year.
What’s more, Santander’s loss provisions should continue to fall as the Spanish property market recovers and investors begin to return to Spain. Although, on the other hand, 47% of the bank’s profits for 2013 came from the emerging markets of South America, which could hold the bank back for the next few years.
In particular, thanks to a low level of confidence in South American, the IMF has recently downgraded economic growth forecasts for the region. For example, during 2014 Brazil’s economy, the largest on the continent, is only expected to expand 1.8%.
Foolish summary
All in all, Santander is on the road to recovery but the bank still has a lot to do before a rerun to the glory days of 2008.
So overall, I feel that Santander cannot make £8bn in profit.