Santander has made a highly strategic move with its recent acquisition of ailing lender Banco Popular, refocusing on its Spain business as economic growth accelerates. And it’s stock market performance is reflecting this positive story.
In June, Santander bought Popular for a symbolic one euro. It later launched a successful €7.1 billion rights issue. This was to cover the capital and provisions needed to strengthen the latter’s balance sheet.
Carax Alphavalue says Spain’s biggest bank “has recovered its 2015 summer highs for more than six months.” It sees a further 20% upside in the stock price.
The bank was right not to be too exposed to Spain in the middle of the financial crisis and becomes Spanish again thanks to the Popular addition precisely when the Iberian economies pick up.
Yesterday, Economy Minister Luis de Guindos said the government will raise its GDP growth forecast for this year, currently at +3%. His comments came after news the economy expanded 3.1% in Q2’17 year-on-year. This was the highest level since Q2 2008.
According to Carax Alphavalue, the combined Santander-Popular is trading at a premium of over 100 bp in terms of its return on economic capital. So it is outpacing the average level at which Eurozone, Japanese and US banks are trading. The analysts flag “several potential factors” behind this higher expected return in Santander’s case. These include the fact it is “still on track” with management’s annual excess capital generation commitment of 40 bp, as reflected in its second half earnings report.
With regard to the Brexit risk, Carax Alphavalue says this is diluted, explaining that:
The acquisition of Popular has rebalanced the group towards Spain which will contribute to results at a level close to the UK’s and Brazil’s (around one fifth each) as of 2019 when the bulk of cost savings will kick in.
The analysts also highlight that Brazil is “under control” and seen returning to positive growth in 2017 after two years of recession.
In 2016, Brazil was the single largest contributor to the group’s earnings with €1.8bn, up 15% yoy, and corresponding to a healthy 14% RoTE despite an adverse economic environment.
Carax Alphavalue recognises that the resolution of Popular is not risk free for Santander. It notes that “all execution and legacy risks, including legal risks, have been transferred to Santander with no escape door.”
The recent announcement of a compensation plan for Popular’s retail customers who had invested in the group, be it in equity or subordinated debt, has confirmed that asset quality is not the single issue.
But even if the accretive effect of the acquisition may take time to be confirmed, the strategic rationale is clear, Carax Alphavalue says.
While the operation secures SAN’s domestic leadership, increasing its overall market shares in loans from 12.3% to 19.5%, it strengthens its presence in richer regions and more than doubles its position in the sought-after SME segment, making it the undisputed market leader with a 25% market share.
