Santander's full year results for 2012 showed pre-provision profits rising by 2%. However, provisions against real estate exposure and non-performing loans rose by 50% to €18.8 billion, which Santander said was thanks to ‘the strength of the bank’s earnings.’
Woodford said in his monthly update to investors in the Income fund this statement was ‘an explicit acknowledgement that the lack of capital in the banking system means that banks can only recognise existing losses if they have the profitability to do so.’
The manager, who has long been negative on banks and has a zero weighting to the sector, said their ongoing deleveraging and write-down of assets, along with the ‘hostile’ regulatory environment, rendered their medium-term profit outlook unpredictable.
High conviction holdings take a hit
While the bank sector has led the recent market rally, Woodford said the Income fund had still managed to deliver a ‘respectable’ performance over the last month, despite two of his largest holdings – Imperial Tobacco and AstraZeneca – taking a hit to the share price.
Imperial Tobacco’s shares dropped 4% at the end of January on the back of its interim management statement, in which it said ‘the macro environment continues to be challenging; towards the end of the first quarter and into January, market trends have worsened in a number of key markets including in the EU and Russia.’
Woodford said: 'Despite the initial negative share price reaction, we are actually, if anything, feeling more positive about the long-term outlook following these updates.’
He added: ‘But if tobacco companies are having a tough time in Europe, think how bad things must be for everyone else!
‘We do not believe that a recovery in Europe is imminent – for Imperial Tobacco or anyone else – but at least Imperial Tobacco has a response which should protect shareholders.’
He said the company was bringing forward a cost-cutting programme in Europe, so that although first half profits will be slightly lower, full year results should not be affected.
‘Analysts still expect the company’s earnings to grow by 7% this year, the dividend by even more,’ he added.
AstraZeneca meanwhile has seen the appointment of its new chief executive Pascal Soriot, who said in the firm’s recent results performance was good last year, despite it be being a period of ‘significant patent expiry and tough market conditions globally.’
Woodford said: ‘We heard more about his grasp of the business and what he intends to do during the post-results conference call which left us with a sense of increasing confidence in the long-term outlook for the business.
‘Only three months in and he has already made some significant changes to the senior management team and has a clear view on what the business needs to do to return to growth.
‘We have long believed that AstraZeneca is a structurally and profoundly undervalued company but it has been unclear what the route to realising that value was. With a new management team and a renewed sense of purpose, commitment and decisiveness, the route to value realisation is becoming much clearer.’
Selling out of Vodafone
He said this was because the company had reduced its forecasts for revenue growth on the back of on-going weakness in its core southern European markets, while the cash flow cover of the dividend had fallen to ‘uncomfortably low levels.’
Woodford added the company announced a share buy-back rather than the ‘hoped-for’ special dividend from Verizon Wireless. The manager also has reservations about the company’s ability to maintain its margin on data revenues.
Over the last month, Invesco Perpetual Income has returned 5.04% versus the FTSE All Share’s 6.37%. Over three years to the 15 February, he has delivered 42.2% versus the benchmark’s 39.5%.