DBRS Confirms Banco Santander Ratings at A; Trend Now Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of Banco Santander SA (Santander or the Group), including its Senior Unsecured Long-Term Debt & Deposit rating at “A” and Short-Term Debt & Deposit rating at R-1 (low). The trend on the long-term ratings has been revised to Stable from 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 globally diversified retail banking franchise with strong market shares in core geographies has contributed to resilient pre-provision earnings generation capacity and sound internal capital generation. DBRS views the Group’s significant international earnings, which contributed to 86% of attributable profit in 9M14, as demonstrating the diversity of Santander’s franchise outside of Spain. Also supporting the rating is Santander’s strong funding and liquidity profile that benefits from its position as a relevant player in local markets with each subsidiary responsible for its own funding needs.

Balancing these positives is the continued pressure on the Group’s profitability driven by the low interest rate environment and elevated provisioning levels, as well as a weaker regulatory capital position as compared to global peers. The challenge for Santander is to maintain sound profitability while further streamlining its international operations in a challenging operating environment and continuing to utilize local market capital raises to successfully generate organic growth. While the Group maintains a generally low risk profile given its mix of business, DBRS views Santander’s capital position as weaker than international peers given its exposures to still stressed financial markets, as well as continued expansion in certain businesses outside of retail banking, such as consumer finance businesses.

The change in trend to Stable from Negative reflects the improving fundamentals of the Bank in Spain, and the improvement of the trend on the Sovereign’s A (low) rating to Stable, combined with continued momentum in Santander’s international operations. DBRS views the rating as well-placed given the strength of Santander’s franchise, with its beneficial balance between developed and emerging markets, providing the Group with a solid base for generating resilient earnings and sustaining the continued generation of organic capital. DBRS views the Group as having a sound management team with a conservative risk culture that permeates the organization, contributing to a generally low risk profile and very strong operational capabilities with a successful history of managing operational risks. Despite elevated credit provisions which reflect both credit deterioration and regulatory requirements, Santander continues to generate enough income before provisions and taxes (IBPT) to absorb these provisions and build capital.

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. As the Group benefits from the regular upstreaming of dividends from each of its subsidiaries to the Parent, DBRS will continue to assess Santander’s ability to upstream these dividends given the increasing scrutiny of regulators in certain jurisdictions.

Positive rating actions could be driven by continued improvement in the position of the Spanish sovereign, combined with an improved regulatory capital position. While less likely, negative ratings pressure could arise if there is any indication of an increased risk profile, particularly within Santander’s consumer finance or wholesale banking businesses, without the appropriate increase in capitalization. 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.

DBRS also today upgraded the Preferred Securities rating of Santander Finance Preferred S.A. Unipersonal to align with DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (Criteria). Per the Criteria, the rating of these preferred shares should be a standard 3 notches below the issuer’s IA of “A”.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013).These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports, the European Central Bank, European Banking Authority, the DBRS rating of the Kingdom of Spain, Bank of Spain and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: Alan G. Reid
Initial Rating Date: October 11, 2006
Most Recent Rating Update: August 29, 2013

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