DBRS: Santander NI Recovery in 2013; International Franchise Continues to Support Group Performance

Summary:
•Net Income increased 90% YoY driven mainly by a reduction in provisions and capital gains from financial operations
•Brazil, UK and Mexico were the main contributors to profits; the slow recovery in Continental Europe, particularly in Spain, still weighs on performance
•A reduction in lending activity in mature economies drove a decline in Net Interest Income
•DBRS rates Banco Santander at “A” with a Negative trend

Banco Santander (Santander or the Group) has today reported a profit of EUR 4.37 billion for 2013, a 90% increase from 2012. This improvement has been driven mainly by a reduction in loan loss provisions and some gains from financial operations, although the proceeds of the latter have been mainly absorbed by restructuring costs and balance sheet strengthening. Net Interest Income (NII) deteriorated 13.3% year-over-year (YoY), following a slowdown in lending activity in mature markets and low interest rates. The evolution of the exchange rates also had an impact, if we exclude this effect the decline in NII would be 5%. On a positive note, the ongoing decline in NII has started to show signs of reversing in 2H13, mainly due to a reduction in the cost of funding. The level of deposits has shown some stability, with the Group achieving a considerable increase in mutual funds activity.

In emerging economies the Group continues to show a good increase in activity, both for loans and deposits (both up 14% in 2013). Results in 2013 continue to demonstrate the importance of the Group’s strong international franchise and the mix between mature and emerging economies. Latin America and Poland contributed 53% to the Group’s attributable profit, with the remainder being generated in continental Europe and the UK. Overall, bottom-line profitability fell across most business units, with the UK, Poland and Santander Consumer Finance being the exceptions. Despite the decline in bottom-line profitability in some of the emerging markets economies, DBRS Ratings Limited (DBRS) recognizes the positive impact that the geographic diversification continues to have on the Group’s performance.

Deteriorating asset quality remains a concern; Spain continues to be the jurisdiction where the Group is registering a deterioration in asset quality driven mainly by the reclassification of restructured loans. Brazil, where the non-performing loans (NPL) ratio improved, and the UK where it stabilized, contributed to partially offsetting the negative impact of Spain. DBRS also notes that the increase in the Group NPL ratio to 5.64% from 4.54% is partly driven by a decrease in lending activity.

The Santander Group continues to show a strong liquidity profile with the reduction in lending activity further improving the commercial gap by EUR 23 billion in 2013. The loan-to-deposit ratio for the Group was 109% at 4Q13.The Group maintains a strong liquidity buffer of EUR 150 billion and has repaid most of its European Central Bank (ECB) long-term refinancing operation (LTRO) funding in 2013, maintaining only a negligible EUR 5.5 billion in some of its subsidiaries.

DBRS considers the capitalisation of the Group as adequate. The Core Capital ratio was 11.7% in 4Q13 with organic capital generation of 138bps over the year. The Group’s phased-in Basel III Core Capital ratio was 10.9% and CRD IV leverage ratio was 4.9%.

DBRS rates Banco Santander’s Senior Unsecured Long-term Debt and Deposits at “A” with a Negative trend. The rating is one notch above the rating of the Spanish Sovereign at A (low) with a Negative trend.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]