Yahoo Finance Have You Considered These Important Risk Metrics For Banco Santander SA (BME:SAN)?
With a €72.18b market capitalisation, Banco Santander SA (BME:SAN) falls in the large, commercial bank category. A common risk large financial institutions face is credit risk, measured by the level of bad debt it writes off. During the Global Financial Crisis, large financial institutions with commercial banking arms lost billions of dollars in equity due to their lending portfolios’ exposure to the turbulent credit market. This led to investors losing trust in these once stable financial stocks. Since the level of risky assets held by Banco Santander impacts the attractiveness of the bank as an investment, I will take you through three metrics that are insightful proxies for risk.
View our latest analysis for Banco Santander
How Much Risk Is Too Much?
If bad loans comprise of more than 3% of Banco Santander’s total loans, it is seen as engaging in risky lending practices above the prudent level. Loans that are “bad” cannot be recovered by the bank and are written off as expenses which comes out directly from its profit. Since bad loans make up 3.97% of its total assets, which is above the prudent level of 3%, it faces a high chance of default. Given that most banks tend to be well-below this threshold, Banco Santander faces a much higher risk level and shows below-averagebad debt management.
Does Banco Santander Understand Its Own Risks?
The ability for Banco Santander to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does Banco Santander understand the risks it has taken on? With a bad loan to bad debt ratio of 65.97%, Banco Santander has under-provisioned by -34.03% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
Is There Enough Safe Form Of Borrowing?
Banco Santander profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to the relatively stable interest rate and amount available. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Banco Santander’s total deposit to total liabilities is within the sensible margin at 71.9% compared to other banks’ level of 50%, it shows a prudent level of the bank’s safer form of borrowing and an appropriate level of risk.
Next Steps:
Although Banco Santander’s level of deposits to liabilities level is sufficient, it has taken on risk through high levels of bad debt and poor provisioning for their repayment. This may lead to lower than expected profits for Banco Santander. This possibility of an undesirable impact on cash flow lowers our conviction in Banco Santander as an investment. We’ve only touched on operational risks for SAN in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three relevant factors 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.
