What Should Banco Santander SA Shareholders Do Now?

Shares in Banco Santander SA (LSE: BNC) (NYSE: SAN.US) fell by 8% when markets opened this morning, as investors reacted to yesterday’s news that Spain’s largest bank is to raise €7.5bn in new capital to strengthen its balance sheet, and will slash its dividend by 66%.

If you’re a private investor who has grown used to receiving the firm’s generous €0.60 scrip dividend each year, then yesterday’s news may have been a big shock: your shares may now be showing a loss, and your dividend income has been cut by two thirds.

Overall, it seems like a good time for investors to reassess their commitment to Santander — should you stay put, or are there better choices elsewhere in the banking sector?

What’s the outlook?

Santander said yesterday that it expects to report a net profit of €5.8bn this year, 30% more than last year.

After allowing for the new shares which will be created as a result of the bank’s cash call, this equates to earnings per share of around €0.42, which is slightly below consensus estimates, and places the shares on a P/E of around 14.6.

This seems pricey compared to most UK banks:

It’s a similar story in the dividend department. Santander has come under pressure from Spanish regulators to pay a dividend that is covered by earnings.

The bank’s new payout policy of between 30% and 40% of underlying profits reflects this and means that from this year, Santander’s yield will be much lower than we’ve become used to:

Santander’s cash dividend payouts will also be subject to Spanish withholding tax.

Despite this, Santander isn’t a bad bank for long-term investors — its size and global diversity remain attractive, in my opinion, especially if you are keen on exposure to South America.

However, there could be more downside, and I believe there are more appealing options elsewhere in the banking sector.

Best bank buys?

For income investors, I believe HSBC is very attractive — it is well capitalised, globally diversified, and pays a reliable cash dividend.

For value investors, Barclays remains my pick. The UK bank’s shares currently trade around 20% below their net tangible asset value, despite a year of stable results and falling impairment charges.

Ultimately it’s your choice — and it’s worth noting that for investors with a long-term horizon, this week’s news could be a decent buying opportunity.

It’s certainly true that banks remain a complex sector for investors to understand — and there’s no guarantee that UK banks will be able to meet analysts’ bullish forecasts for 2015.