SPANISH stocks had a torrid time last week. After Spain’s government debt was downgraded a notch from AA+ to AA, the Ibex 35, the Spanish stock market index, fell 4 per cent. But while domestic woes are far from resolved – unemployment is now more than 20 per cent – Spain’s biggest bank looks like a paragon of virtue.
Santander sailed through the credit crisis and unlike many of its European and American peers, it did not report one quarter of losses. The bank also had a strong start to 2010. Net profits, reported at the end of last week, were €2.2bn, beating expectations, and almost 6 per cent higher than they were in the first quarter of 2009. These results have excited bank analysts: RBS and S&P Equity Research both have the stock as a buy.
The bank’s biggest asset is the fact that it’s not too reliant on its home turf to deliver profits. While 40 per cent of its revenues come from Europe, its largest market is actually Latin America where 43 per cent of revenues are generated (see chart). Of its Latin American exposure, 60 per cent is generated in Brazil, one of the powerful Bric economies.
Its exposure to Brazil holds the most promise for future growth, says Marco Troiano, banking analyst at S&P Equity Research who has a strong buy recommendation on the stock: “The private sector is not as leveraged as Europe and most people in Brazil still do not have mortgages. This offers huge potential for Santander because the rapid expansion of the middle classes should drive mortgage growth.”
Troiano isn’t as excited by Spain’s other large bank BBVA, on which he has a hold recommendation. Its largest market outside of Spain is Mexico where it generates 25 per cent of profits, but, says Troiano, Mexico doesn’t hold as much promise as Brazil: “The Mexican economy is driven more by what is going on in the US, and there are still problems there, which makes it less attractive.”
Contracts for difference (CFD) traders should consider a relative value trade benefiting from Santander’s strong outlook. Its big push into the UK after it acquired Abbey and Bradford & Bingley looks to be paying dividends, and it now appears better placed than some of its rivals in the UK retail banking sector, such as Barclays. Spanish banks were resilient during the subprime crisis due to the Bank of Spain’s anti-cyclical provisions, which meant that Spanish banks built up more provisions during the good times that then helped them to stay in the black during the worst of the financial crisis.
This allowed Santander to jump ahead of its peers and grow its UK business while UK banks are just getting back on their feet. For example, Barclays’ profits for the first quarter of this year jumped by 47 per cent, but, crucially, 80 per cent of its profits were generated by its investment banking arm. Although its loan impairment rate is improving, without a strong boost to its retail banking unit Barclays would be lagging behind its Spanish rival.