Banco Santander Shares – Should We Buy The Fall?

Banco Santander (LON: BNC) shares are down some 20% from their recent peak over this past month or so. Is this an opportunity for us to buy into a leading bank at a cheap price? After all, the UK banks are rising on the back of those increasing interest rates so why would this bank move against the sector?

This is the sort of analysis which is leading Banco Santander to be one of the leading individual share purchases in London – among individuals trading that is. The question is whether it’s a sensible trade.

The answer is complex and depends upon views of the future. For not all banks are the same and therefore their share prices do not move in lockstep.

We’ve pointed this out before when comparing NatWest, Lloyds, Barclays and HSBC. And in more detail when looking at Lloyds Bank more specifically. Rising interest rates are good for banks. A bank lives on the difference between the interest rate it charges on loans and the one it must pay to attract deposits. The forcibly low interest rates of the past decade have compressed those margins. As interest rates are now rising – in sterling – then those margins decompress. This is feeding through to the bottom line of those British banks, the Big Four. We can actually see this in each set of quarterly results, net interest margins are increasing.

Also Read: What Do Quarterly Earnings Mean for Investors?

So, shouldn’t Banco Santander shares be benefitting from the same effect? The answer is that to the extent that Santander’s business is in sterling, where interest rates are rising, then yes. But while that’s a decent-sized business – the old Abbey National, Bradford and Bingley and so on – it’s not all that much as a portion of Santander’s total business.

Much more of that business is in euros, in Spain, Portugal and so on. So, the effect of rising sterling interest rates decompresses Santander margins less than those of the more British banks. We also see this same effect between the Big Four themselves – Lloyds is the most sterling focused of them, so is the greatest beneficiary.

OK, but euro interest rates are going to rise too, right? Well, maybe. If they do then certain countries are going to be in terrible credit problems – Italy comes to mind. So the ECB might well not raise as much as the BoE for those political reasons. It’s also true that euro area rates have been negative (Euribor has gone down to minus 0.75%) so the interest margin compression has been less than in sterling anyway.

Which gives us the real answer for the divergence of Santander and British bank share price performance – they’re, largely enough, operating in different currencies and so face different monetary policy conditions.

The real determinant of Banco Santander profits is thus European, not British, monetary policy and economic cycle. So whether this is a justifiable fall in the Santander share price, or merely an opportunity to buy in cheap, depends upon views of eurozone policy. That’s the information flow that needs to determine trading positions.