DBRS Confirms Banco Santander at AA with a Stable Trend

DBRS has today confirmed the ratings for Banco Santander SA (Santander or the Group), including its long-term rating of AA and short-term rating of R-1 (high), reflecting the Group’s strong credit fundamentals and intrinsic strength. As the largest banking group in Spain, the ratings also incorporate DBRS’s expectation of some form of timely systemic support for Santander in the event of a stress scenario. All ratings have a Stable trend.

The Stable trend reflects DBRS’s current assessment of the Group’s franchise strength and its ability to generate solid recurring earnings, which are likely to enable it to cope with the impact of the rapid economic slowdown in most of the Group’s major markets and the sustained disruptions in the global financial markets. Santander’s intrinsic assessment (IA) at AA (low) reflects its strong credit fundamentals. Viewing Santander as systemically important in Spain, DBRS also retains its SA2 support assessment. Consequently, Santander’s AA rating is positioned one notch above its IA equivalent.

The Group is better positioned than many large institutions to weather this economic down cycle. It is generating strong recurring income before provisions and taxes from its diversified franchise. Its loan portfolios reflect both its retail banking focus and its careful risk management. Nevertheless, DBRS remains concerned that Santander is facing a period of sustained increase in credit costs across its international franchise that may be exacerbated by the abruptness of the economic slowdown. Accordingly, the Group’s ratings could come under negative pressure if credit performance deteriorates more extensively than under current modeling or significant losses emerge in the Company’s business and corporate exposures that adversely impact its reserves and threaten its capitalization.

This assessment incorporates the Group’s remarkable success in building up its well-positioned and increasingly diverse international franchise. One of the large international banking organizations, Santander has advanced its leading franchise in its domestic market in Spain, deepened its positions in various countries in Latin America, built up a significant presence in the United Kingdom (U.K.) and recently established an important regional presence in the United States (U.S.). Most of this franchise building has come through an expansion of its retail banking businesses that serve consumer and business customers, contributing to the stability and resiliency of the Group’s earnings. This assessment also takes into account the Group’s careful risk management, bolstered capitalization, solid funding and good liquidity.

By focusing more on consumers, small businesses and middle market customers, the Group has leveraged its product, delivery and marketing capabilities to generate strong revenue growth. By focusing on markets where it can achieve a meaningful presence, the Group ensures that its franchise building efforts yield resilient and recurring earnings. An important element of the Group’s success is its high level of competency in operating systems and technology, which have enabled the Group to achieve improvements in productivity and efficiency allowing Santander to consistently deliver positive operating leverage and achieve success with its acquisitions. Through careful risk management, this evolving business mix has enhanced the Group’s risk profile, which benefits from its lending to consumers and businesses diversified across countries. With limited exposure to the more stressed segments of the capital markets, reflecting a measured risk appetite, the Group has largely avoided write-downs, sustained its positive earnings and bolstered its reputation.

Over the past year, the Group has demonstrated its ability to build up its local franchises outside its home market through acquisitions. As part of the consortium that acquired ABN AMRO, Santander added ABN AMRO’s business unit in Latin America (principally Banco Real’s operations in Brazil). Santander also acquired ABN AMRO’s business in Italy (Banca Antonveneta), which it sold in Q2 2008 with a gain, demonstrating its focus on markets where it can achieve the necessary market position to be competitive. Strengthening its U.K. position, the Group acquired Alliance & Leicester plc (A&L) and Bradford & Bingley plc’s (B&B) savings business including its deposits and retail branches. Expanding its consumer finance company businesses, it acquired the Royal Bank of Scotland’s (RBS) Continental European consumer finance assets, as well as purchasing consumer credit businesses and assets from GE Capital. In an important step, the Group is significantly expanding its presence in the U.S. by increasing its ownership in Sovereign Bancorp Inc. (Sovereign) from 20% to full ownership.

Notes:
The applicable methodologies are, Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.