Introduction

I see tremendous value in the Santander Bank stock. My view is that the banking related assets, in the Eurozone, are depressed and a few well chosen banks could be worth a lot more in the future.

Usually, banks are overpriced stocks that offer limited potential returns during normal times. Now, at the end of the worst financial crisis of the century, we can buy them at a hefty discount, which if the company has the right features will ensure a low risk deal.

Rationale

Compare the sovereign crisis to a black hole that sucks everything into its interior, only big enough objects sufficiently far from the black hole are able to avoid being sucked. Once you are sucked, there is no turning back. That is why I only see two kind of banks: the ones that were dragged into the crisis and the ones who avoided it.

Banks that suffered from state intervention are clearly banks in trouble, they had no other choice to gather capital, than to run into the state’s officers, on their knees. In my opinion, one good way to identify the best banks available, is to look to the growth of assets per share during the last 5 years (2012 – 2008). Clearly banks that were able to avoid the dilution and shrinking of their assets are in better condition to build a good balance sheet for the future. Look to the following table:

In a context of decreasing leverage and elevated capital ratios, banks that did not fulfill the capital ratios demanded by the central banks had to sell many of their best assets in order to avoid selling depreciated assets that would mean big losses. Other banks in even worse situation had to ask for government help, which led to significant dilution of shareholder’s value, you can observe this effect in the decrease of value of the assets per share in CommerzBank and Royal Bank of Scotland (RBS), visible on the previous table.

Now, let us look at the other face of this coin, what about the banks that were able to both avoid state intervention and to control the reduction of leverage (mainly because they were not that leveraged in the first place)? Well, since someone must be buying those good assets that troubled banks are selling at big discount prices, obviously the banks with enough liquidity must one of the parties enjoying those fire sales.

Conclusion

Other ratios could be found that support the same conclusions. Basically we can divide the banks in two groups: the banks that reacted and the banks with first move advantages. The banks that reacted, desperately sold their best assets to bridge liquidity constraints. On the other side that banks moved in the right time, had the opportunity to select the best assets available, to construct a balance sheet that will yield above average returns in the years to come.

The reason why Santander is a good buy also has to do with valuations. The price of the stock is clearly down, since the bank has its roots in Spain. Right now, this is a good thing, investors are neglecting a good bank just because it is a southern Europe bank. In reality, it is the biggest Eurozone bank, with interests well beyond Spain: Brazil, Argentina, UK, US, Poland, Germany are among the most important markets for Santander.

The fact that price is affected by a perception is a good opportunity to buy, with the Spanish sovereign debt yields, now well normalized, when the market starts recognizing this feat, Santander’s stock will have a great driver to make a price climb.