Banco Santander Target Price: $7

We are continuing our Sell rating on Banco Santander Central Hispano SA (STD: 9.38 0.00 0.00%) as well as our $7 target price.

Santander reported 2009 first quarter net earnings of 2.1 billion, down 4% year over year but above our estimate, as net revenues were higher than anticipated. Net interest income (NII) rose 22% year over year to 6.2 billion on a higher volume of loans and better lending spreads. In addition, NII benefited from the acquisitions of Sovereign, Alliance & Leicester, and GE.

Negatively, loss provisions increased 73% year over year on a deterioration in asset quality. Nonperforming loans to total loans worsened, rising to 2.49% from 1.34% a year ago. Total noninterest expense was well controlled and fell 4%, below the rate of net revenue growth, with the result that the efficiency ratio improved 140 basis points. Per-share results were affected by the November 2008 issuance of 1.599 billion new shares through a rights offering at a price of 4.50 per share for a total capital increase of 7.2 billion.

We are lowering our 2009 EPADS estimates to $1.33 from $1.36 due to expectations for higher loan losses. Santander has a large exposure to the property market, both in Spain and the UK, where it is now the second largest bank as measured by share of the mortgage market. The 2008 full-year dividend maintained at 0.65 (US$0.83) per share.