If you are looking for banks trading below book value within Europe, you’re not short of choice. Unfortunately, while many banks look appealing on a price-to-book ratio, I want to stay away.

Banco Santander

In many respects, Europe is still a mess, and there is no long-term solution to many of the problems currently affecting the continent. Debt and unemployment is still rising and the continent is now faced with the possibility of a lost-generation as well as an aging work force. With that being the case, it is entirely possible to believe that many of these banks trading below book value now, could be forced to write down and divest assets in the future, further eroding book value and earnings power.

Still, despite this somewhat pessimistic view on the state of the Eurozone economy, one bank in particular has stood out as a leader within the sector throughout the crisis. Indeed, it is not just this bank’s performance that attracts me to the company as an investor, it is also the options that are available to make a play on the bank’s recovery.

The bank I am referring to is Banco Santander, S.A. (NYSE:SAN). With a net-asset-value of approximately $6.6 per share, the stock is hardly cheap on a price-to-book basis. Moreover, the bank has its roots within Spain and I believe that the company still has a portfolio of Spanish property and loans on its books, so it is likely that net asset value figure could drop lower.

Santander has performed extremely well during the past five years

However, despite its Spanish heritage, Banco Santander, S.A. (NYSE:SAN) has performed extremely well during the past five years since the financial crisis. The bank did not receive a bailout of any form during 2008, or at any point since and the company has continued to pay a dividend to investors throughout the period, returning around 24 percent (26 billion euros) of its 108 billion euro cumulative five-year profit.

Although, in comparison to the likes of HSBC Holdings plc (NYSE:HBC) (LON:HSBA) and Bank of America Corp (NYSE:BAC), Banco Santander, S.A. (NYSE:SAN) is relatively small. However, during 2012, the Santander brand was the fourth most valuable financial brand in the world, after some impressive marketing tactics, which caused the company’s brand awareness to jump from around 20 percent to more than 80 percent in a short space of three years within some markets.

Having said all that, Banco Santander, S.A. (NYSE:SAN) has recently come under scrutiny regarding its capital ratios ahead of Basel III implementation. In particular, back in March it was revealed that Santander would have a tier 1 capital ratio of only 8 percent at the end of this year, if Basel III rules were fully imposed – lower than all eight other major European banks.

Unfortunately, this warning came after significant work by the bank during 2012 aimed at bolstering capital ratios. Indeed, during 2012 Banco Santander, S.A. (NYSE:SAN) sold off many highly profitable, big ticket assets, to bolster capital but these options have now run out. This has pushed the company to debt reduction, in particular, buying back hybrid debt from investors through tender offers, which for the most part was undertaken in July.

Santander’s drive to improve its capital position through tender buybacks

This is where Santander’s Fixed-to-Floating Non-Cumulative Guaranteed Series 11 Preferred Securities (NYSE:SAN.PRF) start to look attractive. Currently offering a 10.22 percent annualized yield, the preferred stock is only trading at a 2.78 percent premium to its liquidation preference. While not risk free, these preference shares offer an opportunity to play Banco Santander, S.A. (NYSE:SAN)’s drive to improve its capital position through tender buybacks and collect a +10 percent yield at the same time. I would consider this payout relatively safe as the company still offers a 9.7 percent annualized yield on its ordinary stock, so this is likely to be cut first. Furthermore, these preference shares offer a play on the European banking sectors recovery with some-what limited risk as a return to stability within the sector should see these shares trade higher considering their above average yield.