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Is Santander’s share price a bargain or just dead weight?

Santander’s [SAN] share price has halved this year, which is no surprise given the coronavirus outbreak has put Europe’s economy under unprecedented strain.

What is surprising, however, is that since plummeting at the height of the outbreak in March, Santander’s share price has failed to make any kind of meaningful recovery. This is in stark contrast to non-banking euro stocks that have climbed since lockdown measures started to ease. 

Santander’s share price is not the only major continental European banking stock failing to gain traction since March. France’s Crédit Agricole is down over 50% since the start of the year, and Société Générale is faring even worse with a 57% decline. 

What these banks have in common is dire second-quarter earnings results and billions set aside to cover losses. Given how much they have fallen, though, is Santander’s share price a bargain along with the other European banking stocks? 

 

 

Why has Santander's share price slumped?

Santander’s share price has been hit hard by the coronavirus outbreak. In the first half of the year, the bank had to stump up a €12.6bn impairment charge, which resulted in a €10.8bn loss. Total income came in at €22bn, down 8% on the same period last year.

€22billion

Santander's total income - an 8% YoY decline

  

One saving grace was the €300m in cost efficiencies made in the first half of the year. However, that's a small drop in the ocean compared to overall losses.

Santander is more exposed than other European banks because the bank’s operations in South America, which contribute 45% to its bottom line, saw underlying profit drop 13% to €1bn as increases in revenue were wiped out by the impact of the outbreak.

In Brazil, Santander saw a 17% decline in underlying profit, coming in at €995m. The country has seen over 4 million reported COVID-19 cases, the second-highest number globally behind the USA. 

In Europe, profits dropped 54%. Spain, where Santander is based, saw underlying profit tank 64% to €251m due to lower revenues, loan provisions and billions in good-will payments.

54%

Santander's drop in profits in Europe

  

What else is hurting Santander's share price?

Santander's share price has been dogged by its relatively low capital levels since long before COVID-19. In the current economic climate, it'll need plenty of cash in the bank to convince investors it can ride out the storm. In half-year earnings, Santander said its CTER ratio stood at 11.84% and was insistent that the eye-watering impairment charges it had racked up had not affected this.

 

What's happening with European banks?

Santander’s share price isn’t the only European bank stock experiencing problems. The iShares STOXX Europe 600 Banks ETF, which tracks European banks, has slumped 25% this year. European banks have been weighed down by feeble growth levels, negative interest rates and billions in loan provisions. 

25%

iShares STOXX Europe 600 Banks ETF share price drop this year

  

With unemployment expected to hit 10%, state help drying up and an expected spike in bad loans, the pandemic is likely to continue to punish Europe's banks. Credit rating agency Fitch reckons the sector could end up paying €200bn to cover losses over the next few years. According to the ECB, it might take until 2022 for GDP in the eurozone to grow back to 2019 levels. This indicates a tough slog ahead for Europe’s economy, and its banking sector.

 

What next for Santander's share price?

Despite the gloom around European banks right now, analysts seem confident that there are some gains to be had. Of the 26 analysts offering price targets on the Financial Times, an average €2.40 target would see a 2.6% upside on Santander’s share price through 7 September’s close. 

Among other European banks, Crédit Agricole has a €10.65 target (+21.9%), while Société Générale has a €16.05 target (+18.6%).

Whether or not the banks can hit these targets will depend on the pace of any recovery in Europe’s economy. For investors with a long-term outlook, European banks could be worth investing in, given how much stocks have fallen, but there are clear risks ahead.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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