Two economic events have taken me by surprise this year. Id now like to take a look at one stock that Ibelieve will benefit from these surprises.
Whether its been done the right way or not, the fact remains that Britain produced one of the more impressive economic recoveries in the world in 2014. Indeed growth is again forecast to remain robust in 2015. The latest report from PricewaterhouseCoopers forecasts GDP growth will remain at 3% in 2015.
Thats good for all stocks leveraged to economic growth and investment. The PwC report also shows business investment (a key ingredient for employment growth) is picking up. I expect all the banks will benefit from this.
Its also not just the UK thats responded well to some economic antibiotics. The latest figures out of the Eurozone show some surprising results. In recent months the economies of Greece and Spain have improved.
The upside for Santander
Banks naturally benefit from economic growth. Investors will likely notice that employment growth encourages consumers to take out more loans, and increased confidence levels should see higher rates of business lending too.
Even more fundamental than that, interest rates will have to rise to stem the tide of inflation. Its well known that banks reluctantly follow their central bank down in dropping interest rates, but theyre more than happy to increase borrowing rates when central banks take the lead. City analysts are now forecasting the first rate increase from the Bank of England in February or March next year.
OK so what? Well according to the bank, its net interest margin in 2013 was 2.6%. This year its expected to rise to 2.7%. Its already done the hard work of lowering customer deposit rates and has taken advantage of lower wholesale funding costs, so if it can remain prudent on keeping costs down I suspect the bank may also have some scope to aggressively follow the Bank of England higher and raise borrowing costs next year thereby improving its interest margin again in 2015 to 2.8% or greater.
So at its core, I think Banco Santander has room to improve its performance in the short to medium term, but what about returns to longer-term shareholders? A conservative measure puts the dividend yield at around 7%. Indeed given the banks unique scrip dividend option, and the potential for strong capital gains next year, investors could very well use the next couple of years to grow their stake in what will be a growing business. Indeed the bank is already showing promise. According to Banco Santander, earnings for the first nine months of 2014 rose by 32% to 4.36 billion.
While the banks non-performing loan ratio fell to 5.28%, the UK housing market is far from stable. And while Santanders biggest profit growth came from Spain where new loans rose by 1%, Moodys sights high unemployment as a potential threat to any sustained recovery in the property market in Spain.
Theres also been a recent management shake-up at Banco Santander. Ana Patricia Botn has made it clear she wants to put her stamp on her fathers bank as she gets underway in her new role as chairwoman. Jos Antonio lvarez will succeed Javier Marn as chief executive in January, while Santander will also add three new members to its board.
How many clichs do you want? Out with the old and in with the new? Nothing ventured, nothing gained? However you want to capture what Santander is doing, the fact remains that the environment in which the bank operates is changing (hopefully for the better) and Santander is changing with it. Its enough for this Fool to get a little bullish about this Spanish bank.
I suspect Banco Santander isn’t the only bank with the potential to outperform the market next year. The rest of the big banks are also in the running. The question is, which ones? As it turns out the Fools just might have the answer to that question.
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David Taylor has no position in any shares mentioned. 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.