Currently, Santander (NYSE:SAN) has been perceived as another Southern European bank. However, Santander is the biggest Euro zone bank, in terms of market capitalization, with presence in several high profile markets like: UK, USA, Brazil, Mexico, Germany, among others.

Graph 1 – Santander Profit Distribution (Source: Santander strategy presentation)

Looking to the Graph 1, we can see that the company’s profits are not dependent on a single geography. This, probably, helps to explain why this Spanish bank did not have any quarterly loss since 2007 (Source:Santander strategy presentation). On the other hand, the stable earnings base has helped the bank achieving a total capital ratio around 12.1%, which is well above the 8% minimum required.

Strong liquidity position helps business

With a stable and diversified earnings source and a strong capital position, Santander has been mostly focused in streamlining its current operations while making some acquisitions, taking the opportunity to close interesting deals. One of those deals, the acquisition of a 470 million stake in Bank of Shanghai (Source: Financial Times), perhaps signals an incursion into the Asian banking market. While other banks in trouble have been mostly selling good assets in order to boost capital ratios, Santander has been able to take an opportunistic approach to the current environment.

The opportunistic banking deals have been in Santander’s DNA for a long time. In 1993, Santander bought a significant position in the US bank First Union (Source: High Beam). In 1997, Santander sold the position at a hefty profit, just in time to buy the Brazilian Bank Banespa in the beginning of the millennium (source: New York Times). Needless to say, Brazil represented 20% of Santander’s profits in the 2013 exercise.

Since 2008, Santander has been on a spree of acquisitions. The bank took advantage of the opportunity created by the financial crisis, to buy the totality of the Sovereign Bank (Source: Bloomberg). From 2010 to 2012, Santander bought two Polish banks, which together are worth around 10% of the market share in deposits (Source: Bloomberg). As we can see in Graph 1, the US and Poland, already represent 15% of the Santander’s profits.

Building an asset base during fire sales must be good for business

Most banks were caught off guard during the 2008 crisis. The impact of the crisis was amplified by strict regulations in terms of capital levels. This meant that many banks had to sell some of their best assets in order to be able to have asset sales gains that generated positive impact on capital levels. The problem with this approach is that it resolves the capital problem in short term, but reduces the asset base quality, which means lower profitability in the long run.

Santander, on the other hand, wasn’t caught off guard. The bank always relied mostly on traditional banking and wasn’t relying too much on leverage. This way, when the storm came, Santander had the flexibility to adapt to new capital levels demands while keeping a liquidity slack to take advantage from circumstances. I am guessing that in the following years, the bank’s asset base will be more profitable than in the past.

Angles to cover

No investment is ever perfect, there are always some risks that are hard to quantify. In the case of Santander, there’s the huge influence that the Botín family still maintains in the bank. On the other hand, Emilio Botín, 79 years old, has been held as the main responsible for the huge growth that the bank achieved during the last 3 decades. Clearly, the succession plans will be a major concern, for the bank, in the following years.

Conclusion

Santander has been able to meet capital levels while maintaining the liquidity to address interesting opportunities. I believe that the deals that the bank made recently will contribute positively for a stronger balance sheet than it had before the sovereign debt crisis. I think this will be evident once the Spanish operations normalize.