Fear in the market hit a new level last week. The collapse of Silicon Valley Bank led to the second-largest bank run in US history. With investors unsure of what’s next, many fear a stock market crash. As with all emotional sell-offs, there are likely to be some quality companies now trading at appealing price levels. So, do Santander (LSE: BNC) shares fall into this category?
Here’s what happened
Most of the fear last week centred around US regional banks, primarily serving retail customers and technology companies. Investments made in treasury bonds declined in value due to rising interest rates, since higher returns could be guaranteed elsewhere.
With funding needed urgently, some banks were forced to sell these at a steep loss. This sparked fears among customers, who raced to withdraw funds. Over the weekend, the regulator intervened to protect customer balances. Banks are now having their operational sustainability questioned.
What about the big banks?
The financial sector in the US and beyond has continued to see a sell-off this week. However, larger banks tend to have larger cash reserves and diversified operations. This means they’re typically more able to weather economic downturns.
Santander (LSE:BNC) is certainly a large financial institution. With 160m customers globally, the company offers services including current/savings accounts, mortgages, corporate finance, insurance products, wealth management, corporate banking, and investment banking.
The value of such banks can be difficult to analyse with traditional metrics. However, these can be helpful when comparing them against competitors. To calculate the fair value of Santander, it can be helpful to use the discounted cash flow calculation, which establishes a suitable share price based on the present day value of current and future earnings. Based on this calculation, and the current price of 283.5p the company is trading slightly below fair value of 294p.
With a price-to-earnings (P/E) ratio of 6.2 times, Santander is slightly cheaper than the wider financial sector at seven times. Based on forecast earnings, the company may have further growth ahead, with a fair P/E ratio of 7.8 times.
The company has a sustainable approach to loans, with 71% of these considered to be low risk. This indicates to me that it has high standards of risk management.
Despite this approach, 3.3% of loans provided by Santander are considered very risky, with a low likelihood they’ll be paid back. Most banks aim to keep this below 2% of their overall loans. This doesn’t currently pose a major risk, but if the economy worsens, the bank may have problems.
An additional concern is the recent trend of insider selling. This is where the leadership team members are selling more shares in the company than they’re buying. This can be normal during economic downturns, but can also suggest low confidence.
Will I buy?
After last week’s events, I expect regulation to become a hot topic in the financial sector. This could dent profits, making banks a less compelling investment. Yes, larger companies — those considered systemically important — may have the weight to influence the next chapter of regulation. But profits could lag previous years for some time.
I consider Santander to be a quality company. However, with so much uncertainty ahead for banks, I see investments in other sectors yielding better returns. I won’t be buying its shares for my portfolio.
