Banco Santander SA (SAN)

A Spanish-based bank. Has 13% market share in Spain, and over 4000 branches there. Some people buy this as a way to play a recovery in Spain. However, they have more exposure to the UK from a profit perspective. If looking to invest in Spain, there are local banks that would be a much better way to play an improving Spanish economy. The outlook is that they are consolidating their business in Brazil and spinning off the UK business. Hopefully, Spain and all the Latin American countries they are exposed to, have bottomed from here, and you get better ROEs. (See Top Picks.)

The difficulty with many of the European banks is simply that business in Europe is really bad. This bank has been using some of their capital to buy back the ownership of some of the regional banks that they spun off a while back, so that they can start to enhance some of their earnings again. This is a good retail operation. It is just the environment that they are working in right now is not the place to be. Until Europe recovers, European banks are probably just going to sit there, struggle and go sideways.

The issue he has is the regulatory rule that was put in place by the Spanish government which basically said they would guarantee the deferred tax asset. (When you make a loss, you get to carry the loss forward and shield your profits.) A lot of Spanish banks are not paying dividends. If you are not paying dividends or tax, you can build up your capital reserves. It is an artificial financial engineering structure that has enabled the banks to move higher. It has cured the balance sheets and stops the requirement of issued capital but hasn’t cured the credit issues that got in the way that caused the problems. If you want global banks, HSBC Holdings (HSBC-N) is better.

Largest bank in Europe, but their major exposure is Spain as well as Latin America including Brazil and Argentina. High dividend yield which is supporting the share price. Not a cheap stock. Not that well situated compared to other banks that he is looking at. A rock solid bank and the dividend looks solid as well. 8.4% dividend yield.

This bank did not take any government money through all the bailout in Europe. In the last 5 years, it has been a buyer of other banks. Positioned in Europe at about 40%, 10% in the US, but very big in Brazil and Mexico. Likes the mix between developed and emerging-market exposure. Growth should come as Latin America turns around. Yield of 8.48%.

The banks in the peripheral regions have recovered fairly well over the last 18 months. The general feeling is that things are improving in the peripheral regions of Europe. This bank has a lot of exposure, not just in Europe, but in Latin America. Not sure that this is not already reflected in the price of the stock and he would worry that the expectations may have gotten ahead of reality.

(Market Call Minute.) He would be cautious of companies that have exposure to Latin America. It would benefit if there was additional easing in Europe. There may be better names.

Met management about 6 months ago and came away with the impression that there are a ton of potential write-offs on their loan book, but they weren’t taking them. If compared to what the US did, they took the pain followed with the medicine on top which resulted in a big recovery in the US. Spanish have not done that and really have not received any government funding of any significance. If they don’t deal with the bad loans on the books, longer-term this will ultimately cause the Spanish banks to turn into Japanese zombie banks. 7% dividend yield. The UK would be a better place to look for banking recovery stories.

Would prefer a local bank in Spain for a Spanish bank. There are less than 10 Spanish banks left standing. Now you have a consolidated industry, plus in an economy that was on its knees until about 6 months ago. Prefers others for global banking exposure.

Spanish bank with a lot of Latin America exposure as well. Great yield. Has never taken any government money and hasn’t cut the dividend. Has a big operation in Brazil. Has flexibility because it does have international operations. Very big in the UK and in northern Europe as well. Thinks it can reach the Basil requirements with no problems.

(Market Call Minute) More equity raises ahead of them and prefers others.

The challenge you have with the Spanish banking sector is that they are not selling down their troubled assets. The real estate is staying on the books. This is a direct analogy to the Japanese banks when they went into their 20 year hole. If you don’t clean up the balance sheet, you can’t lend and consumers can’t be reset to a new level. Very, very tough situation.

Hold a core position in these European banks. Trim on the rise and then hold the rest. Did not take European TARP money. You just need a slight turn in the Spanish market and this one will benefit.

Fantastic run. This is a dash to the trash, a Spanish bank. Has been a recovery but non-performing loans in Spain continue to go up and housing has bottomed but not going up.

The Spanish economy has bottomed and is unlikely to get much worse. A Spanish headquartered bank but has businesses across Europe as well as in the US and a significant exposure to Latin America. The problem is its emerging-market exposure. Also, the dividend of about 11% is too high and it will have to be cut. Would rather focus on other banks in Europe. (See Top Picks.)