Banco Santander SA Could Lose 25% Of Value This Year

Banco Santander (LSE: BNC) (NYSE: SAN.US) announced a massive cash call on Thursday, which pushed the stock down 10% on Friday. The shares are unlikely to recover any time soon, in my view, as I expect investors will have to digest more bad news about the banking industry in weeks ahead…

No Bargain

Is Santander a bargain opportunity right now? I don’t think so.

I’d rather buy the bonds than the bank’s shares. The €7.5bn rights issue was widely expected, but the sale took place at the bottom of the suggested price range, which determined a significant loss of shareholder value today after trading was suspended on Thursday. The bank also slashed the dividend by two-thirds.

Santander’s current equity valuation simply implies that investors still focus on growth, rather than risk. The market seems to believe the bank will pursue acquisitions to grow its business, although Santander said inorganic growth is not on the agenda. 

Monte Dei Paschi di Siena (MPS), a troubled Italian bank, has often been suggested as a possible target. That’s complete nonsense, in my view. MPS stock rose significantly this week, but Santander denied it would acquire it. 

Some analysts have also suggested that Santander could target US expansion; forget about that, capital is just needed to shore up the balance sheet of the bank, whose core ratios are now broadly in line with those of its European rivals. 

Valuation

While some analysts estimate that the cash call should have no impact on Santander’s valuation, or Santander should even benefit from the fundraising, it appears clear that the bank has become financially stronger, but I am convinced its geographical mix is a massive headache, and large write-downs could be just around the corner.

According to analysts at Royal Bank of Canada, following the cash call Santander will report: a 10.9% Basel 3 core tier 1 ratio (previously 10%); a BV growth of 24% (previously 11%) for 2016/2014; an ROTE of 13.7% (previously 16.9%). Once the dilution for the right issue is factored in, RBC analysts estimates Santander will trade at 1.4x 2016e TBV. 

Don’t worry if you are not familiar with book value, return on tangible equity and tangible book value, the downside is still 25% or more for shareholders, in my view, based on trading metrics.

A Better Option 

If I were to embrace risk and  invest in the banking industry, I would rather consider Standard Chartered (LSE: STAN), which announced a promising cost-cutting plan this week, and whose stock has risen by about 6% since mid-December, when I suggested the shares could double in value over time if bold action is taken and a change of management occurs. 

Based on fundamentals and forward trading multiples, Standard Chartered trades at a 35% discount to Santander, and although I appreciate Standard Chartered faces a long journey to recover from its past mistakes in Asia, I am not convinced Santander deserves such a massive premium, particularly since most of its business is generated in Latin America and Continental Europe, where tough trading conditions and low investment are likely to persist for years, and will combine with higher credit risk and sovereign risk, as well as higher provisions.