Company Reports

Narrow-moat Santander presented robust results for 2023 ahead of our forecasts. Santander's attributable profit saw a 15% increase compared with 2022, beating our forecast by 7% and contributing to an impressive 10% profit CAGR over the past decade. Despite the positive year closure, we believe future results would not be as remarkable as 2023 due to the expected decrease in interest rates. We increase our fair value estimate by 7% to EUR 5.80 per share compared with EUR 5.40 provided previously and keep a narrow moat. We believe that the shares are undervalued. Santander currently trades at 6.5 times earnings compared with 11 times the earnings average of our coverage, providing a 13% return on equity, 50% payout and stable earnings over the past decade.

Santander generates around 45% of its earnings from its highly profitable Latin American operations. The subscale returns Santander has historically recorded in Europe and the U.S. have obscured the high-double-digit/early-20s returns on equity Santander generates from its Latin American operations. Santander is confident that it can significantly improve the profitability of its European and U.S. businesses, supported by higher interest rates. We wonder if Santander could boost its profitability, release capital, and rerate its valuation by trimming its portfolio, so that it operates only in areas where it has a clear competitive advantage.

Narrow-moat Santander reported a net income of EUR 2.9 billion for the third quarter of 2023, a 20% increase year on year and 9% higher than it reported for the second quarter of 2023. Santander is well on track to reach our net income estimate of EUR 10.4 billion for 2023. While net interest income still showed healthy growth, the tailwind from higher interest rates is clearly starting to dissipate. For the first nine months of 2023, Santander's 15% return on equity aligns with its 2025 target. We, however, see limited scope for material earnings growth from current levels. Net interest margins are unlikely to expand much more, and if interest paid on deposits starts to show its long-expected increase, net interest margins could decline. Loan loss provisions have been steadily increasing, and while credit quality remains sound, we expect this trend to continue. In contrast to many of its European peers, Santander has limited scope to increase its shareholder payouts to boost profitability further.

Narrow-moat Santander reported a net income of EUR 2.7 billion for the second quarter of 2023, a 14% increase year on year and 4% higher than it reported for the first quarter of 2023. Santander is well on track to reach our net income estimate of EUR 10.4 billion for 2023. Revenue growth came primarily from the net interest income line, especially in the group's European operations, where it continues to benefit from the tailwind from higher interest rates. Loan loss provisions are tracking below our expectations and company guidance, while Santander contained cost growth well—apart from Brazil. While it was a solid set of results, we do not see a clear pathway for Santander to achieve its ambitious goal of a 15%-17% return on tangible equity by 2025. Santander reported a 14% return on tangible equity for the first half of 2023. With the tailwind from higher interest rates already starting to fade, revenue growth is likely to moderate while cost pressure is building. Reducing its capital base to boost profitability is also not an option for Santander.

Santander generates around 45% of its earnings from its highly profitable Latin American operations. The subscale returns Santander has historically recorded in Europe and the U.S. have obscured the high-double-digit/early-20s returns on equity Santander generates from its Latin American operations. Santander is confident that it can significantly improve the profitability of its European and U.S. businesses, supported by higher interest rates. We wonder if Santander could boost its profitability, release capital, and rerate its valuation by trimming its portfolio, so that it operates only in areas where it has a clear competitive advantage.

Santander offers investors a combination of emerging-market and developed-market banking exposure. This will not be to everybody's taste. Santander points to its track record of lower earnings volatility as vindication of its geographical diversification strategy, while most fund managers will point out that they can use portfolio construction to achieve the same diversification benefits. We believe that Santander could boost its profitability, release capital, and rerate its valuation by trimming its portfolio to operate only in areas where it has a clear competitive advantage. Santander's U.S. regional banking business has been a particular drag on group profitability for the better part of a decade.

Narrow-moat Santander reported pretax profits of EUR 3.8 billion for fourth-quarter 2021, 44% ahead of the EUR 2.7 billion it reported for the same quarter a year ago. Lower loan-loss provisions were again the main earnings growth driver; preprovision profit growth was flat year on year. Excluding the EUR 750 million loan-loss provision overlay Santander released during the quarter, pretax profits increased by only 16% year on year and declined by 20% quarter on quarter. Inflationary pressure has been evident over the past two quarters, and Santander's main challenge for 2022 will be to create positive operating leverage. Higher interest rates could support net interest income, and Santander anticipates an additional EUR 1 billion cost-saving from restructuring its main European businesses. We maintain our EUR 4/share fair value estimate and our narrow moat rating.

We give Santander a Standard capital allocation rating. We do not believe that Santander has any competitive advantages in its U.S. retail banking operation or in its U.K. retail banking business. Both businesses also earn returns materially below their cost of capital. Santander, however, views these businesses as core to its operations. We believe Santander should exit these businesses. It could potentially free up capital to strengthen Santander’s weak balance sheet. In our view, Santander’s shareholder distribution policy is appropriate. We maintain our narrow economic moat rating and our EUR 4 per share fair value estimate.

Santander offers investors a combination of emerging-market and developed-market banking exposure. This will not be to everybody's taste. Santander points to its track record of lower earnings volatility as vindication of its geographical diversification strategy, while most fund managers will point out that they can use portfolio construction to achieve the same diversification benefits. We believe that Santander could boost its profitability, release capital, and rerate its valuation by trimming its portfolio to operate only in areas where it has a clear competitive advantage. Santander's U.S. regional banking business has been a particular drag on group profitability for the better part of a decade.

Narrow-moat Banco Santander had a mixed performance under the recent European Central Bank, or ECB, stress test. Its 2023 common equity Tier 1 ratio under the adverse scenario of the stress test of 9.30% is uncomfortably close to the 8.90% regulatory minimum common equity Tier 1 ratio Santander would need to keep to still be able to pay dividends. However, the 2.60% decline in Santander's common equity Tier 1 ratio under the stress test from 2020 to 2023 was the joint lowest decline of the European banks we cover. If we compare Santander's operational performance under the base- and adverse scenarios, loan-loss provisions were less sensitive than the average European bank, and the decline in revenue was similar to what its peers experienced. We maintain our EUR 4.00/share fair value estimate and narrow moat rating.

Narrow-moat Santander reported underlying attributable net profit of EUR 2 billion for the second quarter of 2021, ahead of the EUR 1.5 billion it reported for the second quarter of 2020 and the EUR 1.7 billion the analyst consensus collected by Visible Alpha expected for the quarter. Lower loan loss provisions continue to be the main driver of the recovery in earnings, but Santander will be pleased with the 6% year-on-year revenue growth. We maintain our EUR 4 per share fair value estimate and our narrow moat rating.

Narrow-moat Santander reported attributable net profit of EUR 1.6 billion for first-quarter 2021, recovering strongly from the EUR 331 million it reported for first-quarter 2020 and 20% ahead of the EUR 1.3 billion the analyst consensus collected by Visible Alpha expected for the quarter. If one adds back the EUR 530 million restructuring charge Santander took during the quarter it is close to EUR 2.2 billion net profit Santander booked prepandemic for first-quarter 2019. Preprovision profit growth was flat year on year; the improvement was solely the result of loan-loss provisions halving to EUR 1.9 billion for the quarter. The recovery was most noticeable in Santander’s developed market businesses, with its European franchise seeing attributable profit tripling and its U.S. business posting $743 million for first-quarter 2021, compared with $66 million a year ago. Santander’s emerging-markets franchise's euro performance was depressed by currency weakness, but in local currency Santander reported a 47% earnings increase in Brazil, driven by robust revenue growth and a moderation in loan-loss provisions. The Mexican business remains under pressure with elevated loan-loss provisions. We maintain our EUR 4/share fair value estimate and our narrow moat rating.

Santander offers investors a combination of emerging-market and developed-market banking exposure. This will not be to everybody's taste. Santander points to its track record of lower earnings volatility as vindication of its geographical diversification strategy, while most fund managers will point out that they can use portfolio construction to achieve the same diversification benefits. We believe that Santander could boost its profitability, release capital, and rerate its valuation by trimming its portfolio to operate only in areas where it has a clear competitive advantage. Santander's U.S. regional banking business has been a particular drag on group profitability for the better part of a decade.

Narrow-moat Santander reported attributable net profit of EUR 277 million for the final quarter of 2020, materially lower than the EUR 2.5 billion it reported for the fourth quarter of 2019. If one excludes items of a capital nature, Santander produced an underlying, fourth-quarter 2020 net profit of EUR 1.4 billion, which is still 30% lower than what it reported for the same period a year earlier. Currency weakness had a material impact on the results, on a constant currency basis underlying profit for the final quarter declined by 18% year on year. The 30% decline in the value of the Brazilian real had an especially profound impact. We will revisit our model in due course, but we maintain our fair value estimate and narrow moat rating for the time being.

Narrow-moat Santander reported attributable net profit of EUR 1.8 billion for the third quarter of 2020, 18% lower than the EUR 2.1 billion it reported for the third quarter of 2019 but materially ahead of the EUR 693 million consensus of the analysts polled by Visible Alpha expected. The earnings beat was the result of loan-loss provisions coming in much lower than expected. Santander now expects a credit loss ratio of 1.3% for fiscal 2020, whereas previously it issued guidance of a 1.4%-1.5% band. In addition to paying out the EUR 0.10/share outstanding 2019 dividend in the first quarter of 2020, Santander also wants to pay out a EUR 0.10/share dividend out of 2020 earnings. The Brazilian real, U.S. dollar, and Mexican peso remain weak and force us to cut our fair value estimate to EUR 3.45/share from EUR 4.25 previously. We maintain our narrow moat rating. We continue to see value in Santander, but the market's expectations around the economic fallout from stringent set of measures imposed by the Spanish government to combat a second wave of COVID-19 infections will, in all likelihood, prevent a share price recovery in the near term. Santander currently trades at less than half its 2019 tangible book value and 6 times our depressed 2020 earnings estimate. These multiples seem very low. Even with highly depressed earnings in 2020, Santander looks set to generate a return on tangible common equity of around 6%. We estimate that Santander should be able to generate a midcycle return on tangible common equity of around 9%. Santander should trade much closer to its tangible book value to reflect this level of profitability. Our fair value estimate implies a 0.7 times price to tangible book ratio, we do not think this is demanding.

Globally, Santander is one of the few banks that have successfully acquired and integrated retail banking operations across borders. Santander’s integration strategy is to keep the front-end, client-facing activities firmly under the control of local managers with good insight into the opportunities and risks of their home markets. The back-end processing and systems of the business is where Santander sees the opportunity to integrate operations and achieve cost savings. The firm has a record of bolting on acquisitions to a common platform and extracting synergies.

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.

European banks have never been this cheap. Ever. Even at their 2008 nadir, investors believed European banks were worth more than they do today. The average multiple of European banks fell by half after the 2008 global financial crisis, which was justified as their profitability was also halved. There is no indication of such a step change in profitability happening now. It seems investors are fretting about the prospect of large-scale asset impairments, which may force banks to once again pass the cap around for a capital injection. We published an Observer, "Impact of Coronavirus on Credit Quality, Capital Adequacy, and Profitability Is Manageable; European Banks Remain Undervalued" on July 6 to explore the valuation, credit quality and capital adequacy of European banks in more detail.

The Federal Reserve released its 2020 stress tests results, which includes U.S. divisions of European banks Barclays, BNP Paribas, Credit Suisse, Deutsche Bank, Santander, and UBS. Despite the more severe assumptions in this year’s test, the European banks’ U.S. divisions fared well overall, with the lowest Common Equity Tier 1 ratio for banks we cover at 10.8% for BNP Paribas in the severely adverse scenario. This looks adequate to us and supports our belief that U.S. exposure, although it varies for the European banks, will not be a stumbling block in this crisis.

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.