While U.S. stocks have been powered ahead in 2024 by artificial intelligence (AI), it's a different story in Europe. Across the Atlantic, the successful investing strategy was to buy “tanks and banks.”These sectors - defense and banking - were on very few investors’ shopping lists prior to the Russia-Ukraine war and the rise in interest rates.
Why European banks?
The most compelling reason to look at European banks is that the sector - after dividend payout bans during the pandemic - is rushing to shovel as much money into the hands of investors as possible this year.
The extent of the industry's largesse seems to have taken everyone by surprise. European banks will dole out around $130 billion this year, and the MSCI Europe Banks index has climbed by over a quarter since January.
Nevertheless, while the newfound optimism on defense stocks show no sign of waning, the bull run in bank stocks is being met with growing skepticism. This gives investors the opportunity to shop around for the small number of banks that are still going strong.
It makes sense to look for a banking stock that trades at a reasonable value, while having strong margins and a stable balance sheet. One such bank is Spain’s Banco Santander (SAN).
Banco Santander’s Bumper Payouts
The bank was founded by royal decree in 1857. Today, Santander has grown by acquisition to become the largest bank in Spain (measured by total assets), with an almost 40% share of the Spanish market. It is also Europe’s second-largest bank, as measured by market capitalization.
The company began a share buyback program of about $1.5 billion in February, while its total payout and dividend program puts it second behind only Italy’s Unicredit (UNCFF) as the most generous income-generating bank stock in Europe right now.
Unicredit has pledged to pay out its entire 2023 profit pool – over $9.22 billion – in dividends and buybacks. But Santander is not far behind its Italian rival. It is poised to pay out half of its 2023 profits, which totaled nearly $12 billion. This means that roughly $6 billion, split evenly between buybacks and dividends, will be coming back to shareholders.
Despite the very generous payout, Santander still trades at a very reasonable valuation. It trades on a forward price/earnings ratio of 5.7 times for 2025, making it the cheapest bank on the Spanish market. It also trades at a significant discount to the European banking sector, which trades at around seven times.
Business Is Booming
Why the cheap valuation?
The market seems to be ignoring one area in which Santander has a real competitive advantage over its rivals, and one that could generate significant growth - its exposure to Latin America.
Santander is now the leading bond issuer and syndicator in Latin America. Activity in the bank’s commodities and electricity trading has been particularly buoyant recently, and it also has a big wealth management presence in Brazil and Chile.
There is no doubt Banco Santander is doing very well. The evidence showed up in its recent record profits for the second quarter.
It enjoyed record global profits of €3.2 billion ($3.47 billion), which marked a 20% increase from a year ago, and was just ahead of analysts’ expectations. The record was driven largely by its operations in Spain and Brazil.
Net profit in Spain was €984 million ($1.07 billion) in the quarter, up 48% from a year ago and accounting for almost one-third of the global total. In Brazil, the bank benefited from falling interest rates - when rates go down, margins go up. Brazil contributed a net profit of €580 million ($629 million), up 64% from a year ago.
The second quarter follows up on a strong first quarter. Unlike many of its rivals, the bank’s first quarter results were supported by a 16% increase in net interest income — the difference between what it earns on lending and pays out on deposits — thanks to its wider global customer base.
As a result of the strong momentum within the business, Santander upgraded its 2024 targets. It is now expecting high-single digit revenue growth for the year, an increase from its previous target of mid-single digit growth.
Santander represents a good value play on the eurozone’s banking sector. Spain tends to get ignored among the economies of Europe, as do its stocks. But as far as Santander is concerned, the bank is a model of efficient management and steady returns, and should not be overlooked.
SAN stock is up 31.6% over the past year and 22.7% year-to-date, yet still trades at a cheap valuation. SAN is a buy below $5.18.
