Citywire for Financial Professionals
Stay connected:

View the article online at

Santander and my Spanish investment dilemma

Citywire's Income Investor columnist has made a killing on Santander UK preference shares. But now could be the time to sell.

Santander and my Spanish investment dilemma

As dilemmas go, it’s rather pleasant. I bought the UK Santander 10 3/8% Preference Share at the beginning of 2012. At the time this security was yielding 10% and was clearly a risky investment, given the level of turmoil in Euroland.

Read Income Investor's guide to preference shares

Fast forward to today and I am looking at an increase of nearly 40% in the capital value, still with a ‘tasty’ current yield of around 7.7%: my earlier gamble on Spain has turned out well.

However, my home-grown ‘sell’ indicator is approaching 5, signifying that I have earned capital gains equivalent to nearly 5 years of income. That’s when I allow myself to think about selling - with the proviso that the yield is no longer attractive. But it still is - and that is my dilemma. Are there any other mitigating factors?

Essentially my purchase was a bit of a gamble on the stability of the Spanish and Eurozone financial system. Of course, Santander UK is a separate UK bank but if the Spanish parent - Banco Santander - were to get into trouble, I didn’t expect the UK branch to remain unscathed. And in that scenario, preference shareholders suffer first.

Banco Santander is Spain’s biggest bank and I believe its destiny will be made in Spain, even though it has large (and apparently successful) banking activities in South America. So how is Spain doing? Not at all well: in the last three months of 2012 Spanish GDP contracted by 4% and is expected to slump again in 2013 as government cuts and a combination of high unemployment and declining wages undermine consumer and business spending. Total unemployment of 26% and in particular youth unemployment of over 50% is just not sustainable. What is more, a financial scandal implicating the government is brewing noisily: corruption at the top implies corruption further down the political food-chain.

And how is Banco Santander weathering this storm in Spain? The picture is pretty bleak: in 2012 it made debt provisions of more than €18bn as the property downturn intensified and the number of toxic loans increased. As a result, the bank saw its profits collapse by almost 60% on the previous year to €2.1 billion – not an insignificant amount of money (revenues from divisions in Latin America, Brazil and the UK have shored up profits) but when set against the provisions, it looks like they are in a hole and still digging.

And the news in the UK is not much better: Santander UK looks like being hit by the interest-rate-swap mis-selling scandal as well as payment insurance mis-selling.

Putting all that into my risk-assessment mix, I am less confident about Santander than when I bought a year ago. So, I’m watching the price of my preference shares and when the current upward trend turns, I’m taking my chips off the table.

If you've enjoyed this article, why not visit DIY Income Investor's blog. The views in this article are the author's own, and do not constitute advice.

3 comments so far. Why not have your say?


Feb 12, 2013 at 17:00

Sell, just so long as you:

a)have a home for the released cash.

b)feel comfortable that the released cash will have a lower risk profile than Santander

As an alternative, sell about half your holding

report this


Feb 12, 2013 at 21:38

Look at the picture after the 5th paragraph at .

Even if Spain isn't doing well that only accounts for 13% of the business, roughly the same as the UK, the US or Mexico, not to mention that Santander operates each country as a legally independent and autonomous subsidiary (there is no shared capital between them).

report this

MM76 via mobile

Feb 14, 2013 at 09:12

Yeah. I'd get out. You've done well, take profits and move on.

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire Guide to Investment Trusts

In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.

Watch Now

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add to your safe senders list so we don't get junked.

Sorry, this link is not
quite ready yet