DBRS Comments on Banco Santander SA Q3 2009 Results; AA Rating Unchanged

DBRS commented today that its ratings of Banco Santander SA (Santander or the Group) remain unchanged after the release of the Group’s Q3 2009 results. DBRS rates Santander’s Senior Unsecured Long-Term Debt & Deposits at AA with a Stable trend. Santander continued to deliver strong operating results, reporting attributable profit to the Group of EUR 2.2 billion in the quarter, compared to EUR 2.4 billion in the prior quarter and EUR 2.2 billion in Q3 2008. The Group generated solid recurring earnings through higher net interest income, expense control, successful integrations and business diversification in a difficult operating environment. Net operating income, or income before provisions and taxes (IBPT), was EUR 5.9 billion in the quarter, which helped Santander to absorb elevated provisions and asset impairments of EUR 2.6 billion.

Indicative of the strength of the Group’s increasingly geographically diversified franchise, net interest income continued to drive revenue growth, increasing 3.1% quarter-over-quarter and 24.5% year-over-year. Higher volumes in some businesses and the benefit of acquisitions supported revenue growth. The Group has also focused on maintaining spreads in a difficult environment by growing sight (checking or current) and other low cost deposits, while reducing the cost of time deposits. Nevertheless, spreads are down significantly in Continental Europe, except Santander Consumer Lending. Contributing to Sovereign’s breakeven quarter, spreads have improved in 2009. Santander has benefited from increasing volumes and sustained increases in spreads in the U.K. and Brazil, although spreads turned down in Brazil in Q3 2009. Elsewhere in Latin America, spreads have generally been declining.

Across its franchise, Santander continues to demonstrate its expertise in expense control by reducing its expense ratio to 40.8% in the quarter, down from 45.0% in the prior year’s quarter. DBRS views the Group’s ability to efficiently manage its businesses across its expanding international presence as not easily emulated. It is important to note that in the past year the Group has demonstrated success with its sizable acquisition of Banco Real in Brazil and acquisitions in the U.K. DBRS sees Santander as already having some success in a challenging situation with Sovereign after gaining control earlier this year.

On a consolidated basis, operating expenses increased 7.3% versus Q3 2009 due largely to the Group’s various acquisitions. Nevertheless, revenue growth increased IBPT by 27.1% over the same time period to EUR 5.9 billion, or 2.3 times the level of provisions and asset impairments. NPL ratios continue to climb in most of Santander’s businesses, making the additions to reserves appropriate. DBRS views Santander as having the ability to continue to absorb this elevated level of provisioning, as the Group maintains ample reserves, including both specific and generic reserves, as well as collateral for its non-performing loans. Additionally, the Group has allocated a certain portion of extraordinary gains to add to its pool of generic reserves.

The Group is benefiting from the geographic diversification of its businesses as approximately 49% of the Group’s attributable profit in 9M’09 is from Continental Europe, 16% from the U.K., 20% from Brazil and 15% from other countries in Latin America. This excludes the small loss for Sovereign. The Santander Branch Network and Banesto in Spain, which account for 27% of the attributable profit over the same time period, have managed to sustain relatively strong earnings, as the impact of the credit deterioration was partially offset by use of some of the generic reserve. Additions are expected to raise the generic reserves in Spain from EUR 2.45 billion to EUR 3.85 billion, back to their level at the end of Q4 2008. The conditions in Spain remain difficult with stress in the current environment from the elevated level of credit problems, the sustained weakness in the economy and the continued difficulties in the Spanish banking sector that could affect the financial markets. More broadly, while signs of economic recovery are generally stronger in Latin America than in the Group’s markets in Europe and the U.S., high levels of unemployment and elevated doubtful loans are still adding stress to the Group’s ability to generate solid recurring earnings.

Appropriately in this environment, Santander continued to strengthen its capital ratios in Q3 through retained earnings, increasing core capital to 7.7%. On a pro-forma basis, including the capital increase from the Santander Brazil IPO, the core capital ratio stood at 8.4%.

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.