Santander Earnings: Another Robust Set of Results but Interest Tailwind Dissipating

Narrow-moat Santander BNC 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.

We still view Santander as one of the cheaper European banks we cover. We do not believe the discount it trades at relative to its tangible book value reflects Santander’s profitability and generally low earnings volatility.