Santander progress yet to show up where it counts

Tangible progress. Builders rarely get paid when a job is only half done. Santander’s Executive Chair Ana Botín probably knows the feeling: her bank has hit ambitious targets set out in 2023 but is still trading below where she would like it to. The tricky question is whether that reflects investor concerns about looming risks in some of the $65 billion global lender’s biggest markets, or regarding her year-old strategy itself.

Botín is taking a bold punt on the benefits of globalisation. Unlike rivals like BNP Paribas and Citigroup, which have retrenched in recent years, she reckons she can boost sales and slash costs by forging closer ties between far-flung parts of the bank. For now, the plan appears to be working. On Tuesday, Santander reported record fourth-quarter net profit of 2.9 billion euros, a 28% year-on-year increase. That better-than-expected performance lifted the bank’s return on tangible equity to over 15% for 2023, compared to 13.4% the previous year. It also means she is already hitting the bank’s 15% to 17% 2025 target set out a year ago.

The problem for Botín is that her bank still trades on 80% of the value of its 2023 tangible assets, whereas its operational performance implies it should be valued above them. There are two potential reasons why, both of which might make it harder to maintain the current decent performance.

The first, better from Botín’s point of view, is that shareholders may be nervous about a fall in interest rates in Europe. Santander makes over a third of its net operating income there, but that might be affected if net interest margins come under pressure. Another issue is that the bank has extensive operations in Latin America, whose recent performance has been variable. In 2023, the region’s return on tangible equity fell from nearly 19% the year before to 14.4%, leaving it well below its 19% target for 2025.

Less good for the Santander boss would be if shareholders just don’t really buy the wider stay-global strategy. When Botín announced her new plan last February, Santander traded at 80% of end-2023 tangible book value as judged by analyst estimates compiled by LSEG. Right now, it’s trading on more like 70% of the same metric for 2024. If investors were paying attention to Botín’s meaningful progress and liked the general direction of travel, you’d expect them to be more generous. Until they are, her overhaul will remain incomplete.