The majority of my portfolio was invested in the Financial sector during the first half of 2024. In June, the weight of the Financial sector was reduced, and new positions were opened in the Real Estate, Utilities and Telecom sectors.
Today the portfolio still contains a few banks. Let’s take a closer look at one of them, Banco Santander, and analyse why it is in the portfolio despite macro trends which are turning less positive for the banking sector.
$SAN.MC (Banco Santander SA) is a large global bank serving 168 million customers. The majority of its business is lending to individuals and businesses. Interest income makes up 75% of revenues. 25% of the profits are made in Spain, 25% in the rest of Europe, 25% in North America, and 25% in South America.
Santander is an average-quality bank. Its return on equity, a measure of profitability, hovered between 6 and 7% for most of the 2010s. More recently, as interest rates increased, the bank’s return on equity almost doubled to 12%.
Improved profitability and capitalisation have allowed the bank to increase shareholder payouts. Santander pays a 5% dividend, and there is a 5% buyback on top. In total, investors are paid 10% a year to hold the stock.
So why is Santander valued at only 6x earnings, when the historical average is 9x?
It does not seem there is anything wrong with the bank’s recent operational performance. Revenues are increasing, costs are under control, and shareholders are being rewarded. Instead, to explain the low valuation, we must turn to macro factors: fears about lower interest rates, an upcoming recession or a financial crisis.
It can however be argued that Santander will be resilient in many adverse macro scenarios. The bank is less interest rate sensitive than many other European banks. It did well in the European Banking Authority’s 2023 stress test. And credit spreads indicate that a financial crisis is currently not an imminent concern.
As interest rates decrease, the profitability of Santander will decrease. But if euro interest rates settle at around 2% as I think they will, Santander should stay more profitable than it was in the 2010s. A longer-term, normalised return on equity of 10% would support a share price just below €6 today. With the shares at €4.33, more than 30% upside may be available.
2024 performance
@triangulacapital +35.9%
SWDA.L +12.3%
Portfolio changes
Verizon was replaced by Orange.
