Yahoo Finance Can Banco Santander SA (BME:SAN) Survive The Next Financial Crisis?
As a large-cap stock with market capitalization of €77.69b, Banco Santander SA (BME:SAN) falls into the category of a major bank. As these large financial institutions revert back to health after the 2008 Financial Crisis, we are seeing an increase in market confidence in these “too-big-to-fail” banking stocks. The recovery brought about a new set of reforms, Basel III, which was created to improve regulation, supervision and risk management in the financial services industry. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks to vulnerabilities. Operating in EUR, SAN is held to strict regulation which focus investor attention to the type and level of risk it takes on. We should we cautious when it comes to investing in financial stocks due to the various risks large banks tend to face. Today we will analyse some bank-specific metrics and take a closer look at leverage and liquidity. View our latest analysis for Banco Santander
Is SAN’s Leverage Level Appropriate?
Banks with low leverage are better positioned to weather adverse headwinds as they have less debt to pay off. A bank’s leverage may be thought of as the level of assets it owns compared to its own shareholders’ equity. While financial companies will always have some leverage for a sufficient capital buffer, Banco Santander’s leverage ratio of less than the suitable maximum level of 20x, at 13.73x, is considered to be very cautious and prudent. This means the bank exhibits very strong leverage management and is well-positioned to repay its debtors in the case of any adverse events since it has an appropriately high level of equity relative to the debt it has taken on to remain in business. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.
How Should We Measure SAN’s Liquidity?
As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up the bank’s total assets. Usually, they should not be higher than 70% of total assets, consistent with Banco Santander’s case with a ratio of 61.61%. At this level of loan, the bank has preserved a sensible level between maintaining liquidity and generating interest income from the loan.
Does SAN Have Liquidity Mismatch?
Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. These loans may be fixed term and often cannot be readily realized, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. The discrepancy between loan assets and deposit liabilities threatens the bank’s financial position. If an adverse event occurs, it may not be well-placed to repay its depositors immediately. Since Banco Santander’s loan to deposit ratio of 92.38% is a bit higher than the appropriate level of 90%, this level positions the bank in a risky spot given the potential to cross into negative liquidity disparity between loan and deposit levels. Basically, for €1 of deposits with the bank, it lends out over €0.9 which could be considered imprudent.
Next Steps:
The bank’s liquidity and leverage ratios suggest its sensible operational risk management. This means it is well-positioned to meet its financial obligations in case of any unforeseen and adverse macro events. Keep in mind that a stock investment requires research on more than just its operational side. Below, I’ve compiled three key aspects you should look at:
Future Outlook: What are well-informed industry analysts predicting for SAN’s future growth? Take a look at our free research report of analyst consensus for SAN’s outlook.
Valuation: What is SAN worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether SAN is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements. The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
