Santander's Third-Quarter 2020: Comfortably Ahead of Consensus

Narrow-moat Santander reported attributable net profit of EUR 1.8 billion for the third quarter of 2020, 18% lower than the EUR 2.1 billion it reported for the third quarter of 2019 but materially ahead of the EUR 693 million consensus of the analysts polled by Visible Alpha expected. The earnings beat was the result of loan-loss provisions coming in much lower than expected. Santander now expects a credit loss ratio of 1.3% for fiscal 2020, whereas previously it issued guidance of a 1.4%-1.5% band. In addition to paying out the EUR 0.10/share outstanding 2019 dividend in the first quarter of 2020, Santander also wants to pay out a EUR 0.10/share dividend out of 2020 earnings. The Brazilian real, U.S. dollar, and Mexican peso remain weak and force us to cut our fair value estimate to EUR 3.45/share from EUR 4.25 previously. We maintain our narrow moat rating. We continue to see value in Santander, but the market's expectations around the economic fallout from stringent set of measures imposed by the Spanish government to combat a second wave of COVID-19 infections will, in all likelihood, prevent a share price recovery in the near term. Santander currently trades at less than half its 2019 tangible book value and 6 times our depressed 2020 earnings estimate. These multiples seem very low. Even with highly depressed earnings in 2020, Santander looks set to generate a return on tangible common equity of around 6%. We estimate that Santander should be able to generate a midcycle return on tangible common equity of around 9%. Santander should trade much closer to its tangible book value to reflect this level of profitability. Our fair value estimate implies a 0.7 times price to tangible book ratio, we do not think this is demanding.