Banco Santander: Record H1 Results Met With A Cheaper Valuation

Core Viewpoint - Banco Santander has experienced a frustrating period for investors, with shares underperforming broader European financials despite strong business performance and record half-year figures [1][8]. Financial Performance - Santander reported record net interest income of approximately €23.5 billion, fee income of around €6.5 billion, and profit attributable to the parent of about €6.1 billion for the first half of 2024 [4]. - The bank achieved a cost/income ratio of approximately 41.6%, the strongest in fifteen years, and a return on tangible equity (ROTE) of 15.9%, which is within the management's medium-term target range of 15-17% [4][5]. Geographic Performance - The Spanish business, contributing about 25% of H1 earnings, saw net interest income increase over 15% year-on-year to €3.65 billion, with ROTE exceeding 20% [5]. - The Brazilian business reported a nearly 40% increase in net income to €1.1 billion, with ROTE expanding by approximately 380 basis points to over 15.8% [5]. - The U.K. business faced challenges, with net profit down 23% to €630 million and ROTE declining by around 300 basis points to approximately 10.8% due to higher funding costs and elevated operating costs [5]. Cost Management and Credit Quality - Operating expenses increased by 3.5% to €12.9 billion, which is manageable given the inflation rate of around 4% [6]. - Provisioning expenses were €6.2 billion, approximately 117 basis points of total loans, aligning with the management's target of around 120 basis points [6]. Valuation and Returns - Santander's tangible book value (TBV) was reported at €4.94 per share, an increase of about 8% year-on-year, while the stock trades at a price-to-tangible book value (P/TBV) multiple of around 0.80x [7]. - The bank's management has raised 2024 profitability guidance, now expecting a ROTE greater than 16%, which translates to a P/E ratio of about 5x, indicating a 20% earnings yield [7]. - Capital returns are projected at 50% of net income, split equally between dividends and buybacks, suggesting a cash return of approximately 10% per annum for investors [7]. Market Outlook - Despite the recent decline in shares, the underlying business performance remains strong, with profitability in the Spanish market expected to face gradual pressure as Eurozone interest rates fall [8]. - The current valuation presents an attractive opportunity for investors, with potential for double-digit annualized returns from dividends and buybacks alone [8].