Santander Q1 2020: Impairments Will Get All the Headlines but Underlying Reasonable Again

Narrow-moat Santander reported underlying attributable net profit of EUR 1.5 billion for the first quarter of 2020, 27% lower than the EUR 2.1 billion it reported for the first quarter of 2019. In addition, Santander booked impairments against goodwill and deferred tax assets of EUR 12.6 billion. These impairments are noncash charges and do not have an impact on Santander's capital adequacy. Revenue for the quarter declined sharply by 13% year on year; however, currency headwinds played a role: on a constant-currency basis the revenue decline would have been 3%. Santander was unable to fully offset the revenue decline with lower expenses and the cost/income ratio (as we calculate it) deteriorated to 53% from 51% for the second quarter of 2019. Loan-loss provisions increased by 46% year on year. Management guidance is that preprovision profits should be stronger in the second half than in the first half while a 1.4%-1.5% credit loss ratio would imply that loan-loss provisions will be higher in the second half. We are likely to cut our fair value estimate somewhat and we maintain our narrow-moat rating.