London-listed shares of Banco Santander (LSE: BNC) rose by 3% this morning, despite news that profits at the Spanish bank fell by 31.7% to €2,911m during the first half of the year.
In fairness, this big fall in reported profit was mainly the result of one-off costs. Underlying earnings dropped by just 8.4% to €0.22 per share, putting Santander on track to meet full-year forecasts of €0.42 per share.
A number of key quality metrics also improved. Santander’s non-performing loan rate has fallen from 4.64% to 4.29% over the last year, while the bank’s CET1 ratio of capital strength has risen from 9.83% to 10.36%.
Balance sheet strength is critical for Santander at the moment. The bank recently failed a US bank stress test and is due to be retested shortly. A second failure might threaten its US operations.
In common with most UK-listed big banks, Santander has seen earnings expectations fall over the last year. But the shares trade on an undemanding 9 times forecast earnings and offer a 5% prospective dividend yield. Santander might be worth a closer look.
Improved performance
Specialist insurer Lancashire Holdings (LSE: LRE) issued a solid set of results this morning. Return on equity — a key measure — rose to 7.1% during the first half, from 6.6% during the same period last year. However, it’s clear that market conditions remain fairly soft, with insurance premium prices under pressure. Lancashire said that on average, renewal premiums were priced at 90% of the levels seen in 2015.
Although the group’s reinsurance policy meant that it was protected from major claims losses during the first half, pre-tax profits fell to $56.6m, down from $88.6m for the same period last year.
Lancashire has a policy of returning surplus capital to shareholders rather than cutting prices to win new business. Analysts expect a total payout of 77 US cents per share this year. That’s equivalent to a dividend yield of around 9.5%.
Lancashire may still be a buy, but it’s important to understand that shareholder returns may vary widely and are unlikely to remain this high forever.
Testing new highs
One stock whose profits are rising strongly is Burford Capital (LSE: BUR). Shares in this litigation finance company rose by almost 5% this morning after Burford said pre-tax profits rose by 122% to $52.8m in the first half.
The group’s growth is being driven by strong demand for its investment capital. Burford committed to fresh investments worth $200m during H1, up from $81m in the same period last year.
The group also appears to have a decent success rate. Income from litigation rose by 110% to $64.4m last year. However, it’s worth noting that much of Burford’s growth appears to be being funded by borrowing, which has risen from $131m to $251m over the last year.
I’m also concerned that while the company’s litigation success rate appears high, a run of poor results is always possible and could crush profits.
Burford shares now trade at twice their book value, suggesting that expectations for future returns are very high. This valuation translates to a 2016 forecast P/E of 18. Personally, I’m discouraged by the downside risks here and won’t be investing my own cash.