DBRS: Banco Santander’s Ratings Unchanged Following 1Q11 Results; Senior at AA, Trend is Stable
Banking OrganizationsDBRS Inc. (DBRS) has today commented that its ratings of Banco Santander SA (Santander or the Group) remain unchanged after the Group’s 1Q11 results announcement. DBRS rates the Group’s Senior Unsecured Long-Term Debt & Deposits at AA with a Stable trend. Attributable profit to the Group (net profit) was a solid EUR 2.1 billion in 1Q11 as the Group continued to generate resilient quarterly earnings. Net profit was EUR 2.1 billion in 4Q10 and EUR 2.2 billion in 1Q10.
Evident in these solid recurring earnings are the advantages that Santander derives from the business and geographic diversity of its expanding global franchise. With increased contributions from Latin America, particularly Brazil, Santander’s earnings were maintained despite weakened, but stabilised, results in its more challenged markets of Spain and Portugal. Indicative of Santander’s successful diversification, earnings from the U.K. of EUR 491 million in 1Q11 exceeded its earnings in Spain and Portugal combined. Santander continues to build out its franchise. Through the acquisition of SEB’s retail business in Germany, which was consolidated in 1Q11, it is building out its retail banking franchise in Europe. The acquisition of Bank Zachodni in Poland, to be completed in 2Q11 gives Santander a strong position in a large Eastern European market. In both these acquisitions, the Group is leveraging its successful consumer finance business that is already well established in these markets. Additionally, these expansions enhance the Group’s franchise opportunities, but also add complexity with regard to newer markets. The bancassurance alliance with the insurance group Zurich is expected to provide the Group with increased product capability to leverage its retail distribution in Latin America. DBRS views Santander as having thus far shown its ability to address such challenges and anticipates that it has the capabilities to successfully manage its continued expansion.
Gross income (net revenues) continues on a generally upward trend, reaching EUR 10.9 billion, as the Group generates a high level of recurring revenues across its franchise, while also adding to its scope through acquisitions. Revenues were driven by higher levels of activity and improving spreads. The Group’s cross-selling efforts are helping to sustain fee income, for example, through sales of securities and mutual funds. Operating costs have increased as a result of the Group’s expanded scope and its investment in its international businesses, but remain in line with revenue growth. DBRS views Santander as a very efficient banking organisation, whose capacity to generate net profit benefits from its relatively low cost-to-income ratio, which was 44.4% in 1Q11.
The Group is seeing positive credit trends across most of its businesses, although credit problems remain elevated in Santander’s home market of Spain, as well as in Portugal. Reflecting improving trends in its international businesses, non-performing loan (NPL) ratios are trending down across most of its other major business units. Overall, though, Santander’s non-performing loan (NPL) ratio was 3.61% at 1Q11, up 6 basis points (bps) quarter-over-quarter (QoQ) and an increase of 27 bps year-over-year (YoY). Santander’s provisioning expense, including other asset impairments, declined 17.6% sequentially to EUR 2.2 billion. With credit costs now absorbing 37% of net operating income (income before provisions and taxes), an improvement from 46% in 4Q10 and 51% in 3Q10, DBRS views pressure on earnings from this source as still material, but manageable.
In the face of the still challenging environment in its home market of Spain, the Group continues to deleverage as it copes with the stress on Spain’s financial system and the impact of its weak economy. Santander’s NPL ratio in Spain in its EUR 230 billion lending portfolio increased to 4.57%, up 33 bps QoQ and up 98 bps from 1Q10, although still below the sector average. Leading this deterioration is the Group’s exposure to construction and real estate, where the NPL ratio rose to 18.9% in 1Q11, up from 17.0% in 4Q10 and 11.1% in 4Q09, with a decline in exposure (i.e. a reduction of the denominator of the ratio) being an important driver of this increase. Santander continues to lower its exposure to this segment, which is down to EUR 26 billion. DBRS views Santander as appropriately continuing to build reserve coverage, now 31%, against construction and real estate NPLs (EUR 4.9 billion) and now 11% against its predominantly performing substandard loans (EUR 4.6 billion), as well as adding coverage, now 32%, for foreclosed real estate assets (EUR 7.9 billion). While still performing relatively well, NPLs in household mortgages (EUR 60 billion) also rose, up 20 bps to 2.4% in 1Q11, after declining in 2010. Across other loans, NPLs were also up, rising 20 bps QoQ to 3.3% in 1Q11.
Santander is also experiencing significant pressure in Portugal in its subsidiary Santander Totta (Totta). As the 4th largest bank in Portugal, Totta is exposed to the elevated liquidity pressure on the Portuguese financial system, the sustained weakness in the economy and increasing stress on Portugal’s sovereign position. DBRS views Totta as appropriately reducing its wholesale funding needs by reducing corporate lending and increasing deposits. While pressured by higher funding costs and credit deterioration, Totta remains profitable as it has throughout the crisis. It delivered EUR 90 million in 1Q11, largely flat to 4Q10, but down 34% from 1Q10. Totta is a modest (about 3% of total profits and about 4% of total assets), but important component of Santander’s franchise, that DBRS considers the Group as having the ability to support, if needed.
Importantly from a ratings perspective, Santander continues to bolster its funding mix, liquidity and capitalisation. Customer deposits grew by EUR 4.4 billion in the quarter, following a significant increase of EUR 109 billion in 2010, and are now funding 51% of total assets. Santander has also taken advantage of positive investor sentiment to issue medium- and long-term debt in excess of upcoming maturities, easing funding pressures in the remainder of 2011. Reinforcing its liquidity, the Group has approximately EUR 100 billion of collateral available to pledge for central bank funding. Santander also boosted its capital ratios through its management of risk-weighted assets and retained earnings, as well as through a convertible bond issuance out of Brazil to Qatar Holding. The issuance qualifies for core capital because it is mandatorily exchangeable for shares of Banco Santander Brasil, at the choice of Santander. At 1Q11, Santander’s core capital ratio was 9.66%, up 86 bps from the end of 4Q10.
Notes:
All figures in Euros (EUR) unless otherwise noted.
The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.
The sources of information used for this rating include the issuer and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.
This commentary was disclosed to the issuer and amended.
Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: 11 October 2006
Most Recent Rating Update: 9 February 2010
For additional information on this rating, please refer to the linking document below.