Santander First-Quarter 2020: Robust Results but Overlay Adds More Loan-Loss Provisioning Confusion

Narrow-moat Santander reported attributable net profit of EUR 331 million for the first quarter of 2020, 82% lower than the EUR 1.8 billion it reported for the first quarter of 2019. Analysis of the results is complicated by a EUR 1.6 billion additional "overlay" loan-loss provision that Santander booked to provide additional cover for the expected impact of the coronavirus on asset quality. Based on Santander's disclosure of what it views as its underlying earnings--which excludes the overlay provision--attributable profits would have been 2% higher. Revenue declined by 2% year on year, however currency headwinds played a role, on a constant currency basis revenue would have been 5% higher. Costs were well controlled, with the cost to income ratio, as we calculate it, improving to 50% from 52% during the first quarter of 2019. We maintain our narrow-moat rating and EUR 4.25 per share fair value estimate.