Banco Santander, S.A. (ADR) (SAN): An Undervalued Investment Opportunity

With the advent of The Bank of Nova Scotia (USA) (NYSE:BNS)ing crisis triggered by the collapse of the Spanish property bubble, Banco Santander, S.A. (ADR) (NYSE:SAN), Spain´s largest bank, has seen its share price plunge in value by 36% since the crisis began. This sell off was triggered by investor fears over the quality of the bank´s assets and its exposure to the sovereign debt of those nations on the periphery of the European Union that found their economies in complete disarray. But I believe that this sentiment-based sell down has created a value opportunity for patient long-term, risk-tolerant investors, and in this article I will explain why.

While Banco Santander, S.A. (ADR) (NYSE:SAN) is domiciled in Spain, it is not solely a Spanish bank, it is a global banking group with considerable  exposure to Latin America. In both the Spanish and Latin American markets its key competitor is Spain´s second largest bank Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA), while in Latin America it also faces considerable competition from Canadian domiciled The Bank of Nova Scotia (USA) (NYSE:BNS).

At the chart below illustrates, for the first quarter 2013 Banco Santander, S.A. (ADR) (NYSE:SAN) only derived 11% of its attributable profit from Spain, whereas 51% came from Latin America.

Source: Banco Santander, January to March 2013 Financial Report.

Whereas for the same period Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA) derived 37% of its attributable profit from Spain and 45% from Latin America indicating that it has greater exposure to the issues that have engulfed the Spanish economy. Banco Santander, S.A. (ADR) (NYSE:SAN)´s other foreign Latin American competitor The Bank of Nova Scotia (USA) (NYSE:BNS), for the same period ony derived around 5% of its attributable profit from Latin America, but I am expecting this to increase as Scotia Bank focuses on building market presence and revenue in Latin America after its purchase of a 51% controlling stake in Colombia´s eighth largest bank, Banco Santander, S.A. (ADR) (NYSE:SAN). Interestingly, Banco Santander was unable to successfully penetrate the Colombian market and sold its Colombian business to Chile´s CorpBanca (ADR) (NYSE:BCA) in late 2011.

While Banco Santander, S.A. (ADR) (NYSE:SAN)´s dependence upon Spain for its profitability is low, its single largest asset exposure is Spain, with 26% of the bank´s assets located there, while only 23% of the bank´s assets are located in Latin America.

Source: Banco Santander, January to March 2013 Financial Report.

This indicates that the bank´s Latin American operations are giving it a bigger bang for its buck, when it is considered that 23% of the bank´s assets are generating 51% of its attributable profit. But also illustrates that the bank still has a considerable portion of its assets at risk from the ongoing economic and financial problems being experienced by Spain.