Fleeing a sinking ship – Santander

15 Apr

Soon to be torched

The tale of Abbey National is the archetype of what happened to Britain’s building societies. It demutualised in 1989, resulting a windfall payout of shares to all its members – Abbey was one of the first, and then many other building societies followed suit. Both of my parents received some free shares before buying a few more.

The Abbey National later merged with Santander in 2004 and their shares were converted into those of Banco Santander. It weathered the storm of 2007/8 reasonably well, and its management has had the wisdom to strengthen its balance sheet over the more benign past 2 or 3 years. Their core capital ratio (a barometer of the health of a bank’s balance sheet) increased from 6.2% in 2007 to 9.2% in 2011. Equally the bank made over 40 billion euros in that period and also acquired several ailing banks like Alliance & Leicester and Bradford & Bingley.

Faced with the the unraveling of the Euro and economic problems, however, Santander is in serious danger. According to their Q3 2011 report (the most recent I can find) 37% of their €734 billion loan portfolio is in Eurozone countries (26% Spain, 4% Portugal, 7% others) with another 29% in the UK (which would suffer badly from a Eurozone recession). Backstopping the bank is €78.3 billion of assets, but with loan writedowns on the cards, Santander is in trouble.

Relative to its European banking rivals, Santander is the best of a bad bunch. But with the upcoming shocks of recessions, falling house prices and losses from a Euro break-up – it is not something you would want to own.

So a couple of weeks ago I advised my parents to sell out. They both saw their shares as a long term investment, and over the years have received many small dividends. But after explaining the issues Santander faced to them, they agreed that they ought to get out. They hadn’t got around to it until Friday, when Dad got out at £4.16 a share at lunchtime and my Mum sold her’s in the afternoon for £4.10. At the close of play they were trading at £4.06.

The Titanic sank 100 years ago today, and I think that there is a rather ironic parallel between that liner and these shares. Santander’s shares will probably tick up tomorrow, with a typical “dead-cat-bounce”, but I would expect that we have got on the lifeboats, before everyone realises the severity of iceberg ahead.

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Posted by on April 15, 2012 in Trading Ideas


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