Investors in Santander (LSE: BNC)(NYSE: SAN.US)have experienced a profitable 2014 thus far, with shares in the Spanish bank rising by 13% year to date. Thats a much better performance than that of the wider index, with the FTSE 100 being up just 1% since the turn of the year. However, there could be more to come from Santander, and its share price could rise by 21%. Heres why.
One of the challenges for banks such as Santander is the weak sentiment that continues to be present in the banking sector. Indeed, todays fine for RBS, the allegations of wrongdoing at Barclays and Standard Chartereds recent fine all cumulatively impact negatively on market sentiment. Therefore, even though it is performing relatively well, Santanders share price is held back to a substantial degree by investors being cautious when it comes to investing in banks. In other words, demand for bank shares continues to be at a low ebb.
Clearly, this is unlikely to remain the case, since the banks in general are becoming increasingly profitable. They are also de-risking their balance sheets and becoming leaner, meaner and, ultimately, more profitable. All of this bodes well for sector sentiment, which could prove to be a positive tail wind for Santander in the long run.
A Low Valuation
Despite its share price rising by the previously mentioned 13% in 2014, Santander continues to offer good value for money. In fact, the market seems happy for it to trade at a premium to the FTSE 100, with Santanders price to earnings (P/E) ratio being 15.7, which is higher than the FTSE 100s P/E of 13.8.
Furthermore, Santander is forecast to increase its bottom line by a highly impressive 21% next year. This is around three times the expected growth rate of the wider market and shows that the bank could be entering a purple patch. Assuming that the market remains comfortable with Santanders rating, shares in the bank could be trading 21% higher this time next year, provided the bank is on-track to meet its anticipated growth rate. This would equate to a share price of 741p.
In addition to upside potential, Santander also pays a fantastic dividend. In fact, shares in the bank currently yield a whopping 6.6% which, when added to the 21% potential upside, means that investors in Santander could realistically target a total return that is significantly higher than 21% over the medium term. With sentiment for the sector being low and having the potential to substantially improve, Santander could prove to be a great investment over the next few years.
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Peter Stephensowns shares of RBS and Barclays.The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.