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Banco Santander's Moat Flows Beyond Spain's Borders

Economic moats at the bank's subsidiaries are reservoirs that preserve the narrow moat at a global level.

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Narrow-moat  Banco Santander (SAN) is a leading bank in several markets largely because of its ability to leverage its competitive advantages to generate growth and earn solid returns. We don't think the market appreciates its strengths, in part because of the overwhelmingly negative sentiment surrounding Latin America, where Santander earns a significant portion of its income. In our view, concerns that defaults will rise across the board in these markets are overly simplistic. With Santander's strong asset quality relative to local peers in each of these markets, we expect the exceptional value being created in its Latin American arms to continue. Investors, too, can benefit from the bank's earnings power, as shares are trading at a 27% discount to our fair value estimate, which values the bank at only 1.4 times tangible book value, a modest price to pay for a bank of Santander's caliber. Investors can also invest directly in the Latin American operations, where we see a 24% discount to fair value for wide-moat  Banco Santander Chile (BSAC) and a 14% discount for narrow-moat  Santander Mexico (BSMX). For investors with a higher risk tolerance,  Banco Santander Brasil (BSBR) is trading at a 26% discount, primarily because Brazilian stocks have been hammered by macroeconomic weakness and political upheaval caused by a corruption scandal at the state-owned oil company, Petrobras.

Powerful Network of Retail Banks in Many Regions
With a significant market share in 10 countries, Banco Santander is one of the largest retail banks in the world, with more than $750 billion of deposits. In our view, its network of banks contains some very high-quality operations. The company was founded in Spain in the mid-1800s, but under the leadership of third-generation chairman Emilio Botin, who died in 2014, Banco Santander expanded at a large scale in Latin America in the 1990s. During the 2000s, it expanded into the United Kingdom and United States through opportunistic acquisitions. Santander has transformed all of these acquisitions over the years into highly successful extensions of its Spanish operation by imparting its expertise in retail banking, training local management teams and instilling the Santander culture of conservatism throughout the organization. Each geographic market is operated as a stand-alone subsidiary within the Santander network. In most cases, the individual units have been able to duplicate the same competitive advantages of the original Spanish bank, making the company as a whole a narrow-moat bank, but also a collection of moaty businesses in different markets.

Timothy Puls does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.