DBRS Confirms Banco Santander Ratings – Sr Long-Term Debt at "A"; Negative Trend

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Banco Santander SA (Santander or the Group). The Senior Unsecured Long-Term Debt & Deposit rating is confirmed at “A” and the Short-Term Debt & Deposit rating at R-1 (low). The trend on all long-term ratings remains Negative; the trend on all short-term ratings remains Stable.

At the same time, Santander’s intrinsic assessment (IA) has been confirmed at “A”. DBRS maintains its SA-2 support assessment for Santander, which indicates an expectation of timely systemic support in case of need. However, with the current rating for the Spanish sovereign below the “A” intrinsic assessment for Santander, there is currently no uplift to the Group’s ratings.

The confirmation of Santander’s ratings reflects DBRS’s view that the Group’s strong global franchise has more than offset the systemic risks and challenges posed by the environment in Spain. The international diversification of Santander’s franchise, with its beneficial balance between developed and emerging markets, provides the Group with a solid base for generating resilient earnings and sustains the continued generation of organic capital. DBRS views this franchise strength and earnings power as vital for Santander to withstand the challenges that are still prevalent in the Group’s domestic market. In Spain, the Group continues to operate in a recessionary environment; with high unemployment rate and deteriorating asset quality, which is likely to continue to drive provisioning requirements and put pressure on profitability.

The Negative Trend reflects the downside risks inherent in the current economic slowdown and still stressed financial markets, particularly the recessionary environment in Spain coupled with regulatory uncertainty, but also economic weakness in some other economies where the group has a strong presence. The challenge for Santander is to maintain sound profitability, to improve efficiency and streamline its international operations in the current environment.

Supporting Santander’s “A” rating level is the Group’s strong international retail banking franchise and skillful management, which contribute to operational efficiency and resilient earnings, combined with bolstered levels of provisioning and capital. DBRS views the Group’s significant international earnings, which contributed to 84% of consolidated net operating income in 1H13, or income before provisions and taxes (IBPT), as demonstrating the diversity of Santander’s franchise outside of Spain. Despite elevated credit provisions that reflect both credit deterioration and regulatory requirements, Santander continues to generate enough IBPT to absorb these provisions and strengthen capitalization.

DBRS considers Santander’s significant geographic diversification with its international franchises outside Spain as an important underpinning of the current rating level. By maintaining the Group’s rating at “A”, which is positioned one-notch above DBRS’s rating of the Spanish sovereign, DBRS reiterates its view that Santander benefits from the geographic diversification and resilient performances across the Group’s businesses. In terms of ordinary attributable profit in 1H13, approximately 8% was generated in Spain, 13% from the U.K., 25%% from Brazil and 12% from Mexico and 14% from other countries in Latin America (LatAm), with smaller contributions from Global Wholesale Banking, Santander Consumer Finance, Poland, Portugal, and the U.S. The Group additionally benefits from the regular upstreaming of dividends from each of its subsidiaries to the Parent, which offsets some of the liquidity pressures within Spain. Santander generated consolidated attributable profit of EUR 2.3 billion in 1H13 (an increase of 29% YoY).

DBRS also notes that Santander continues to position itself to successfully weather the extended economic crisis. The Group has bolstered its levels of generic and specific provisions (EUR 19 billion in 2012) to comply with regulatory requirements and cover expected future losses. Given the slowdown in economic growth, Santander has deleveraged its balance sheet in mature markets while continuing to focus on growth in emerging markets. By selectively deleveraging, the Group has improved its liquidity profile with the loan-to-deposit ratio declining to 107% at 1H13, down from 150% at the start of 2009. DBRS also notes that the Group continues to have access to wholesale markets through debt issuance by the Parent and by its subsidiaries in local markets.

After the provisioning effort of 2012, Santander is again generating capital organically. The core capital ratio based on Basel II standards stood at 11.1% in 1H13, with 78 basis points (bps) of ordinary capital generation since Dec. 2012. The increase in this ratio since the beginning of the year was achieved through profits, script dividend and the reduction of risk-weighted assets (RWAs) as a result of the deleveraging process. The Group also has a track record of generating capital through other means, such as the sale of non-core businesses and public offerings in certain subsidiaries.

While the conditions in Spain remain difficult due to the elevated level of credit problems, the sustained weakness in the economy, ongoing market concerns about Spain’s sovereign position and the continued difficulties in the Spanish banking sector, DBRS maintains its view that Santander’s broad diversity in earnings is expected to enable it to weather this level of stress. Future rating actions could be driven by further deterioration in Santander’s home market of Spain and the impact of sustained market stress within the Eurozone. Additionally, lower earnings prospects in its international subsidiaries would likely put negative pressure on Santander’s ratings, as this would reduce the benefit of the Group’s international diversification.

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 DBRS Criteria – Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Capital Securities - Subordinated, Hybrids & Preferred Securities. These can be found on the DBRS website under Methodologies

The sources of information used for this rating include the DBRS rating of the Kingdom of Spain. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This credit rating has been issued outside the European Union (EU) and may be used for regulatory purposes by financial institutions in the EU.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Rui Croca
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 11 October 2006
Most Recent Rating Update: 10 August 2012

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/

The conditions that lead to the assignment of a Negative or Positive Trend are generally resolved within a twelve month period. DBRS’s trends and ratings are constantly under surveillance.

For additional information on this rating, please refer to the linking document under Related Research.