Banco Santander’s decision to cut its British branch opening hours strikes a gloomy opening note for the banks’ first-quarter bulletins this week.
The past four years have been a time to forget for bank shares and inflation, recession and Ukraine have made it a miserable start to this year. Santander, based in Spain but with a London quote, has fallen more than most since 2018, from 507p to 262¼p.
Banks thrive on economic activity, because that promotes borrowing. But, as David Smith pointed out in his Sunday Times column, “the world economy has lost its mojo”. The International Monetary Fund has cut its January prediction of 4.4 per cent global growth this year to 3.6 per cent. Advanced economies are expected to grow only 3.3 per cent, emerging and developing countries by a slightly more encouraging 3.8 per cent. Even worse, the IMF expects the global growth rate to settle down at 3.3 per cent a year for the next five years or so.
The consolation for banks is that interest rates are rising, which fattens their profit margins. They’ll simply not have so many loans to profit from.
Analysts expect Santander to unveil first-quarter earnings per share of 13 cents, up from nine cents a year ago and only 1.4 cents early in 2020 when the pandemic struck. There are two main reasons: its unusual international spread, particularly in South America; and, ironically in view of its branch cutback, its dependence on individual customers rather than corporations.
Santander pitched its tent in this country 18 years ago by buying most of the operations of three building societies: Abbey National, Alliance & Leicester and Bradford & Bingley. Apart from Barclays, personal or retail business is the banks’ biggest source of net income, but none matches Santander, where last year retail, wealth management and insurance accounted for 90.1 per cent of total interest and fee income. Profits from these areas are being increased by nudging customers from branches to apps and websites.
Retail sales volumes fell 1.4 per cent in March as consumers cut spending in the face of higher energy bills. That is bound to have continued, but it will not save many people from maxing credit cards and asking banks for loans.
Spain is the group’s fourth biggest territory, after Brazil, the United States and Britain. Mexico is fifth. According to Joaquín Maudos, professor of economic analysis at the University of Valencia, Spanish banks are unusual in expanding abroad through ring-fenced foreign subsidiaries, rather than directly from head office. This strategy is more costly, but more profitable.
Customers in South and Central America will face problems this year, but Santander contends with less competition outside Britain and North America. Asia is the obvious gap in its range, but this is coming under the microscope.
Santander also stands to gain from the completion of the European Banking Union, whenever that might happen, as it would introduce a common deposit guarantee scheme and create conditions that should stimulate cross-border mergers. The Spaniards would see themselves as predators, but the group’s shares are spread widely enough to leave it open to a hostile approach, unless the Madrid government stepped in.
The shares have, like those of other banks, struggled in the first four months of 2022, though not on the scale of the pandemic two years ago. Several American hedge funds are said to be tucking away Santander shares, attracted by its 6.61 price/earnings ratio and 3.16 per cent dividend yield.
Covid payout restrictions, coupled with a quick economic recovery, have left banks with plenty of spare capital. Much of that cash should find its way to shareholders, subject to the looming upheavals.
ADVICE Buy
WHY An attractive alternative to mainstream banks that should benefit from its concentration on consumer business and smaller markets
Rank Group
Quek Leng Chan prided himself on being a Mayfair whale, one of those ultra-high-rollers in the casinos around London’s Berkeley Square, yet the Malaysian property billionaire has placed few bets more expensive than the £300 million he has tied up in Rank Group, the bingo and gaming company.
Rank began in the 1930s as a film-making and cinema operation intended to be an outlet for the vast surplus cash that Joseph Rank was generating from baking. It had a few hits, such as Laurence Olivier’s Henry V and the Carry On series, but was transformed in 1956 when it formed a 50-50 venture to distribute the wildly successful Xerox photocopiers outside America.
After Xerox bought out Rank in 1997, the company struggled to find a new identity, buying Mecca dance halls and bingo clubs. Quek’s Guoco Group bought a controlling 56 per cent of the shares in 2011 at about 150p and was sitting on a profit until the end of February. Last week Rank issued a profit warning, squeezed by the working-from-home trend, a dearth of overseas tourists and belt-tightening prompted by rising inflation. It expects operating profits for the year to the end of June of £47 million to £55 million, rather than the £55 million to £65 million indicated previously.
In the first three months of the year, net gaming revenues at its Grosvenor casinos were down 14 per cent on pre-pandemic levels and Mecca raked in 25 per cent less. Rank shares have fallen 13 per cent since the warning to 109¾p. The firm is contending with upstart competitors set on dragging bingo out of the “fags and headscarf” era by surrounding it with flashing lights, robot dancers and the like. Rank’s answer so far: Bonkers Bingo at £10 a head. Analysts at Numis and Shore Capital still like the shares, pointing to a modest 8.7 price/earnings ratio, but headwinds look likely to continue well into 2023.
ADVICE Sell
WHY Pressure on discretionary spending is not easing soon
