We’ve all heard the old adage about not throwing the baby out with the bath water. Yet it appears that people are doing just that with Banco Santander ADR (NYSE:STD).

Admittedly, shares in the Spanish bank have fallen 23% year-to-date. And investors balk these days at the mere mention of Europe, the euro, Spain or banks. Put all four of those words in the same sentence, and they run screaming for the hills.

But maybe they should stick around for the rest of the facts first.

Banco Santander is Europe’s largest bank as measured by market capitalization. And from any angle, it’s Spain biggest.

Yes, that Spain… the one with weighty sovereign debt and a 20% unemployment rate. But while some of the country’s weaker banks have collapsed, Santander looks stronger than ever.

That strength should last too according to recent so-called stress tests. The Committee of European Banking Supervisors has reviewed 91 banks in 20 countries across the continent.

And it agrees: Banco Santander looks just fine.

Banco Santander’s Aggressive Expansion

Over the past 10 years, Banco Santader’s pre-tax profits have soared. Last year, it made profits past €12 billion. That left its one-time close rival BBVA ADR (BBVA) in the dust.

It accomplished this through a decade-long, aggressive overseas expansion plan. Its charismatic chairman, Emilio Botin, led Santander into international success. Over three-quarters of its profits come from outside of Spain.

Botin says his company “is demonstrating the benefits of being a diversified bank, both in terms of geography and business lines.”

An opportunistic dealmaker, Santander recently:

• Enlarged its reach into Germany by purchasing 173 branches from the retrenching SEB of Sweden.
• It also expects to acquire 318 UK branches from the Royal Bank of Scotland. And it already owns Abbey National, Bradford & Bingley and Alliance & Leicester there.
• But it has especially targeted Latin America, where it now gets 40% of its profits… and expects to raise that to 50% by 2012.

Latin American Banking with Banco Santander

Like other large Spanish companies, Banco Santander has come to rely heavily on Latin America over troubled Europe and the U.S.

Most recently, it paid Bank of America (NYSE:BAC) $2.5 billion for the last 25% of its Mexican operations. This unit has a 13% share of the Mexico’s loan and deposit markets.

Santander views the country as one of the most resilient in the region and sees now as a great time to get into it. With the second largest economy in Latin America after Brazil, Mexico is showing signs of a strong recovery from last year’s 6.5% contraction.

Santander’s head of Latin American operations, Francisco Luzon, believes the company is on the lookout for even more acquisitions there. He predicts the region’s banking system becoming “the best in the world.”

Luzon says that Latin America learned a lot from three or more decades of “financial crises, weak regulation and poor economic policies.” But in this latest round of global woes, it stood out as an island of “strong regulation and prudence.”

Because of that, Banco Santander has bought into Mexico, Argentina, Uruguay, Chile and Brazil. In each, it has a strong presence with market shares ranging from 10 – 20%.

And now it’s looking into Peru and Columbia as well.

Banco Santander Takes on Brazil

Of course, it has the most invested in Brazil. Last year, it raised $8.8 billion with the public floatation of its Brazilian business – Banco Santander Brasil ADR (BSBR) – which became 2009’s largest IPO.

Brazil has some of the most profitable banks in the world thanks to the very high interest rates they charge both consumers and businesses.

In May, individuals paid an average 41.5% annual interest rate and companies paid 27%. That’s accepted largely because credit is still relatively new and scarce in the country.

Hyperinflation dogged Brazil for years, causing banks to mostly lend to the government. That didn’t matter much to average Brazilians anyway though, since they were too poor to borrow in the first place.

Interest rates were infinite, so today, anything below that rate induces people to borrow. Such conditions make under-banked Latin America perfect for financials to scoop up.

Banco Santander knows that, and is profiting from the area even now. Investors who quake in their boots at the words “Spanish bank” should take a second look.

Good investing,

Tony Daltorio

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