Tim Puls: Today, we're talking about Banco Santander Brazil, a 4-star stock, which trades under the ADR symbol BSBR. In our view, Banco Santander has established a narrow economic moat that is based primarily on a cost advantage. Its national distribution network and breadth of product offerings allow for it to create sticky customer bases that bring low-cost deposit funding to the bank.
Additionally, Banco Santander Brazil benefits from its advantageous market position in a concentrated Brazilian market, where soft price competition among major competitors allows for attractive returns for all.
Currently, ADR shares are trading around $5.50, a 35% discount to our $8.50 fair value estimate. We think that this is because investors have focused too heavily on headline metrics like return on equity, which do not fully reflect the bank's true earnings power, in our view. We prefer to look at returns on tangible equity, which at above 10% annually over the last few years is a reasonable level for such a young company.
Additionally, the bank has held excess capital since it went public in 2009, which has only added to the profitability headwinds. Over a longer-term view, as these effects become less impactful to headline return metrics, ultimately we think investors will realize the true earnings power of the bank. And investors who are willing to get in today at discounted prices will be rewarded.