Will Banco Santander SA Ever Return To 600p?

It has been a rocky ride for Santander’s (LSE: BNC) shareholders over the past five years. Unfortunately, the bank’s performance has hardly improved this year. Year-to-date Santander’s shares have lagged the FTSE 100 by 18% excluding dividends. 

There’s really only one thing that will drive Santander’s shares higher, and that’s growth. The company needs to shake off the reputation that’s it’s a low-growth, slow and steady lender, which is highly dependent upon the European economy. 

Making progress

Santander’s CEO Ana Botin is working hard to return the bank to growth. After taking over from her father last year, Botin has slashed Santander’s dividend to preserve cash, raised capital and brought new managers with fresh ideas onto the bank’s board. 

What’s more, a set of key targets has been laid out by Santander’s management. These include loan growth ahead of a 17-strong global peer group, a return on tangible equity (ROTE) of 12% to 14%, a core Tier 1 capital ratio (financial cushion) of 10% to 11%, a non-performing loan ratio under 5% and a cost-income ratio below 45%.

The bank hopes to hit these targets by 2017 and is already well on the way.

For full-year 2014, non-performing loans fell to 5% of the group’s total loan book, the cost-income ratio came in at 47% and ROTE hit 11%. 

The bank wants to grow its risk-weighted assets by about 6% during 2015, roughly €35bn through more lending. 

Key task

The key task for Santander from here will be to grow its Brazilian and Spanish business. Indeed, these two key markets account for around 50% of the bank’s gross income but Brazil’s economy is expected to contract this year. Spain’s fortunes are highly dependent upon growth across the rest of the Eurozone.

With this being the case, City analysts expect Ana Botin to focus her growth efforts on the UK and US, where growth is picking up, and there’s room for organic and bolt-on expansion. 

City predictions

After taking into account Santander’s targeted growth, City analysts believe that the bank’s net income can hit €9.5bn by 2017, up 40% from the €6.8bn reported for full-year 2014. On a per share basis, analysts have pencilled in earnings of 56p per share for 2017.

Based on the fact that Santander’s ten-year average forward P/E is just under 10, according to City estimates, the bank’s shares could hit 560p sometime during 2016. Further growth is expected after 2017. 

Beating the market

If Santander’s shares do return to 600p by 2017, investors are set for a 28% return over a three-year period. Including dividend payouts of 14p per annum, investors could see a total return of 37% over three years, approximately 12% per annum. This may not seem like much, but over the past three decades the FTSE 100 has produced an average real return of 5.5% per annum.

So overall, Santander’s shares could outperform the FTSE 100 by 100% over the next three years if historical trends hold true. 

But don’t just take my word for it. I strongly recommend that you do your own research before making a trading decision — you may come to a different conclusion.