DBRS Comments on Banco Santander SA Q1 2009 Results; AA Rating Unchanged

DBRS commented today on the Q1 2009 results of Banco Santander SA (Santander or the Group). DBRS rates Santander’s Senior Unsecured Long-Term Debt & Deposit at AA and its Short-Term Debt & Deposit at R-1 (high). The trend on all ratings is Stable.

Demonstrating its broad based franchise strength, Santander generated profits attributable to the Group of EUR 2.1 billion for the quarter, maintaining a relatively stable pace when compared to EUR 1.9 billion in the prior quarter and EUR 2.2 billion in Q1 2008. For revenues, the Group reported solid growth in gross income largely driven by net interest income, which jumped 15% quarter-over-quarter and 22% versus the prior year’s quarter; this increase benefited from the consolidation of acquired entities, loan growth and the effective management of customer spreads. Although the spread earned on deposits declined slightly, the spread earned on customer loans increased by 40 basis points (bps) quarter-over-quarter, so that the overall customer spread of 4.65% declined only marginally from Q4 2008 and was up slightly from a year earlier.

Net operating income also increased on a linked quarter basis by 19% to EUR 5.4 billion, as the Group controlled costs and held operating expenses virtually flat quarter-over-quarter, even with its integration efforts. Operating efficiency improved to 43.2%, down from just over 45% in the prior quarter. This level of income has enabled Santander to more than offset the rising cost of credit and the build-up in loan loss reserves, while absorbing acquisitions and making divestitures.

With the economies across Santander’s footprint still slowing, the resulting weakening of credit quality was evident in the rapid escalation in the Group’s non-performing loans (NPLs). These NPLs increased 34% quarter-over-quarter to EUR 19.0 billion. The NPL ratio is now 2.49%, up 125 bps from a year ago. At EUR 1.8 billion, charge-offs remain elevated and, appropriately, the Group continues to add to reserves, with a net addition of EUR 2.3 billion in the quarter. Provisioning is up 73% or EUR 944 million from last year. This increased provisioning takes into account not only deteriorating asset quality, but also factors in loan growth, including the growth of products with a higher risk premium. Santander’s total reserve coverage ratio has declined to 80% from 133% in the year ago quarter. At 46.9%, the Group’s specific coverage ratio (i.e. excluding generic provisions) has remained relatively consistent at a level that takes into account the extent of collateral and the Group’s careful risk management. Santander’s capitalization is solid, with a Tier 1 capital ratio under Basel II of 8.9% and a core capital ratio of 7.3%.

The Stable trend reflects DBRS’s current assessment of the Group’s franchise strength and its ability to generate solid recurring earnings, which should enable Santander to cope with the impact of the rapid economic slowdown in most of its major markets and the sustained disruptions in the global financial markets. With its broad diversified franchise and successful integration of acquisitions, the Group is better positioned than many large institutions to weather this economic down cycle. Nevertheless, DBRS remains concerned that Santander is facing a period of sustained increase in credit costs across its 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.

Note:
All figures are in euros unless otherwise noted.

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.