Ithas been a rocky ride forSantanders(LSE: BNC) shareholders over the past five years. Unfortunately, the banks performance has hardly improved this year. Year-to-date Santanders shares have lagged the FTSE 100 by 18% excluding dividends.
Theres really only one thing that will drive Santanders shares higher, and thats growth. The company needs to shake off the reputation thats its a low-growth, slow and steady lender, which is highly dependent upon the European economy.
Making progress
Santanders CEO Ana Botin is working hard to return the bank to growth. After taking over from her father last year, Botin has slashed Santanders dividend to preserve cash, raised capital and brought new managers with fresh ideas onto the banks board.
Whats more, a set of key targets has been laid out by Santanders management. These include loan growth ahead of a 17-strong global peer group, a return on tangible equity (ROTE) of 12% to 14%, a core Tier 1 capital ratio (financial cushion) of 10% to 11%, a non-performing loan ratio under 5% and a cost-income ratio below 45%.
The bank hopes to hit these targets by 2017 and is already well on the way.
For full-year 2014, non-performing loans fell to 5% of the groups total loan book, the cost-income ratio came in at 47% and ROTE hit 11%.
The bank wants to grow its risk-weighted assets by about 6% during 2015, roughly 35bn through more lending.
Key task
The key task for Santander from here will be to grow its Brazilian and Spanishbusiness. Indeed, these two key markets account for around 50% of the banks gross income but Brazils economy is expected to contract this year. Spains fortunes are highly dependent upon growth across the rest of the Eurozone.
With this being the case, City analysts expect Ana Botin tofocus her growth efforts on the UK and US, where growth is picking up, and theres room for organic and bolt-on expansion.
City predictions
After taking into account Santanderstargetedgrowth, City analysts believe that the banks net income can hit 9.5bn by 2017, up 40% from the6.8bn reported for full-year 2014. On a per share basis, analysts havepencilledin earningsof 56p per share for 2017.
Based on the fact that Santanders ten-year average forward P/E is just under 10, according toCity estimates, the banks shares could hit 560p sometime during 2016. Further growth is expected after 2017.
Beating the market
If Santanders shares do return to 600p by 2017, investors are set for a 28% return over a three-year period. Including dividend payouts of 14p per annum, investors could see a total return of 37% over three years, approximately12% per annum. This may not seem like much, but over the past three decades the FTSE 100 has produced an average real return of 5.5% per annum.
So overall, Santanders shares could outperform the FTSE 100 by 100% over the next threeyears if historical trends hold true.
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Rupert Hargreaves 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.