Of all the places to invest in the world, the European banking sector does not come high on the list. Over the past decade, Europe’s financial industry has lurched from one crisis to another, and while there has been some meaningful process on restructuring, risks remain.
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Indeed, even though the overall stock of bad loans for 15 Italian banks fell in 2016 for the first time in the past eight years, there are still more than €250 billion of bad loans on banks’ balance sheet in Italy alone.
However, according to Davide Serra, founder and chief executive of the $12 billion hedge-fund manager Algebris Investments, there is one European bank that has a better outlook than its peers, and that’s Santander.
Algebris Investments on Santander and Banco Popular
Mr. Serra presented his case for Santander at the 2017 London Sohn hedge fund conference held at the end of November.
Santander is almost unique amount its European (and global) peers in that it has not lost money in 200 years of banking. This makes Santander "one of the most efficient banks in the world" according to Serra.
The Spanish bank has grown through acquisitions over the past few decades by using its strong balance sheet and conservative operating structure to buy distressed peers. The latest deal saw the bank purchase distressed peer Banco Popular in June for just €1 after EU authorities declared the struggling lender was “failing or likely to fail.”
While many other banks might have balked at taking on this distressed situation, Serra argues that it is a massive opportunity for Santander. The more substantial group was essentially handed €8 billion of value for free by regulators. “Here the investment case is pretty simple. They were given for free a domestic Spanish bank, Banco Popular, by the regulator that came in and thought the numbers were wrong and basically took €7-8 billion of value and handed it to Santander almost for free,” as Serra put it.
In fact, the bank has already made a healthy profit on the deal. Last week Santander announced that it had agreed to sell a Banco Popular subsidiary TotalBank for $528 million.
To make the most out of Santander's recovery, the manager of Algebris Investments recommends buying the Mezzanine Debt of Santander, which currently yields around 6%. The debt offers more income than the common stock and provides a better risk/reward profile. While the debt of other corporates is trading at 2% or less, Santander debt looks cheap in comparison. The coupon also seems safe. Serra points out that the bank would have to lose €21 billion to be unable to meet its interest obligations -- for a bank that has never posted a loss, this seems like a safe bet.
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