Banco Santander SA (SAN)

This hasn’t turned a corner yet. They are doing fine in Britain. Spain is still an issue. They are having problems in the US, Mexico and Brazil. This is emerging markets, and this is a common theme of many companies out there, especially the banks. You get a slowdown because of the rising US$. The net interest income growth is negative. Efficiency ratios are good and have their costs under control. The nonperforming loans are a little high, which has to do with Spain and Brazil. Trading at 12X earnings. He would be looking at Barclays (BCS-N) which wants to turn itself around and get its BBB credit rating back and are selling off assets in a big way. Tier 1 capital is starting to rise in a big way so it is becoming more profitable. There is also a Swedish bank, Svenska Handlesbanken (?) which has branches in Sweden, Norway, Finland, England, Lithuania, Latvia and Estonia. Their business model uses the steeple effect, where head office will give them the product, but it is up to the branch managers to climb to the top of the steeple and whatever they can see in 360° is their territory. They end up with having better margins and better efficiencies because the branch managers have to be accountable for their actions. Dividend has been growing at a 15% clip per year. A rise in interest rate will be beneficial for them.

European & Latin American bank. The idea is that if it works in the US, then it will be copied in Europe, where banks are dirt cheap. This theme has longer to go than the US financial theme. (Analysts’ target: $4.27).

About 25% in Brazil. Thinks European banks are in a position where the American banks were a few months ago. US banks have followed through and have been wonderful in the last couple of months, and the good European banks are ready to follow through.

Looking at the 10-year bond market, we are getting a steeper yield curve, which is good for banks. There was a tremendous run in US bank shares, and that is starting to show up in international markets. Bank stocks have been very, very cheap and unloved. Regulation, in particular, has been swinging harder and harder towards banks, and is now starting to swing back. Earnings are starting to improve. This company has very big exposure to Latin America, but ultimately that should be a good thing. A very well-run bank, but trades at valuations that are close to where it was during the sovereign debt and the financial crisis.

Since they have a ton of branches in both Spain and Britain, they have BREXIT going for them. He likes what they are trying to do on the retail side, but they are highly leveraged, about 50% higher than Canadian banks. There isn’t any real catalyst that is going to get the stock price to move, unless they really start to see net interest margins start to run. They are running around 3% right now, which is not too bad, but compared to the US banks it isn’t there yet.Since they have a ton of branches in both Spain and Britain, they have BREXIT going for them. He likes what they are trying to do on the retail side, but they are highly leveraged, about 50% higher than Canadian banks. There isn’t any real catalyst that is going to get the stock price to move, unless they really start to see net interest margins start to run. They are running around 3% right now, which is not too bad, but compared to the US banks it isn’t there yet.

The euro is going to affect how this security trades. This has significant exposure to emerging markets, and he has a negative view about them. Also, he is not comfortable that they have properly provisioned their loan book. In Spain, there is increasing competition to originate loans, and loan spreads are being competed away.

This is doing a lot of juggling, because Brazil, Mexico, Britain and Spain are all scrambling. More of a retail bank, so you do get the benefit of the doubt in that they do have good branches. They are trying to move to the digital space, just like we are seeing in Canada. The problem they are having in Spain is new elections as well as real estate issues with bad debts. Brazil is a problem. Mexico could be a problem, from the standpoint that if Trump does not want to do business with Mexico, it will have a drag on their operations. Britain has had the drop in its pound, so their currency risk is going to pick up as well. They are highly leveraged at about 126%. The stock is probably going to stay down here for a while.

A behemoth bank, domiciled originally in Spain, but has global operations. When the US lowered interest rates, ultimately the rest of the world followed. As the US exported capital, hot money moved to different markets. When the US starts to raise rates, capital will flood from other markets. Ultimately there is an expectation that we will see higher rates across the globe when the US raises rates. This bank has big operations in Europe and in south America. An interesting company. Good governance and didn’t blow up during the crisis. He thinks there is more upside here.

They have a growing franchise in the southern US as well as being in all of Latin and South America. There is good growth compared to a retail franchise in Canada, for example. The issue they face is that there is a cloud over the Euro banking system regarding capital ratios. This is hurting them. Their dividend is safe. It is going to take a long time for people to feel comfortable with European banks. It is not an expensive stock, at or below book value. Until you see a better environment in Europe it will be in that cloud. Low rates in Europe are hurting banks there.

He owns this in order to be ready for when reforms go through in the EU and things start to get better. Although a Spanish bank, more sales come out of England than they do out of Spain. It is also very big in Brazil. European banks have been hindered because there is a reform coming to the banking system. There has been a little apprehension about the BREXIT, because so much of their business is done in the UK. Their operations are good and they have a reasonable dividend. (See Top Picks.)

Orange (ORAN-N) or Banco Santander (SAN-N)? This got hit in the last couple of days. Goldman Sachs said it was going to cost them a fortune because of BREXIT and their profits would go way down. However, the CEO said she didn’t expect a lot of impact. Pays a nice dividend and constantly makes money. If he were buying either, it would be this one.

This just got trounced in the past couple of days. It has been on his list for quite a while. He is watching it very closely. They have a lot of problems in Brazil, and have a lot of business in Britain. It pays a nice dividend. Thinks Europe is a good play.

A Spanish bank, and like most banks it trades at a very low multiple, about 8X next year’s earnings, and about .5X BV. About 75% retail, 20% wholesale and 5% asset management. 20% of their business is Latin America, and about half of that is Brazil. The rest of it is North America, UK, Europe and Spain. Over the long-term, Brazil and Latin America will be high growth areas. This is one of the banks you want to own because of its franchise value in the high growth areas.

(A Top Pick April 30/15. Down 37.39%.) European banks and financials globally got creamed last year. He kept this, because he couldn’t see any fundamental reasons to abandon ship. If you own, continue to hold as Europe is going to get better. The dividends are safe.

Doesn’t own any of the Spanish banks, but is starting to get more constructive, more so than he has been in 5 years. Looking forward he can see some optimistic opportunities for Spanish banks.