DBRS: Santander’s 2014 Results up on Core Banking Revenues and Lower Cost of Risk

Summary:
• Solid full year net income of EUR 5.8 billion supported by core banking revenues and lower cost of risk
• Income before tax (IBT) in 2014 up in all geographies in local currencies for the first time in seven years
• DBRS rates Banco Santander at “A” for Senior Unsecured Long-Term Debt & Deposit with a Stable trend

DBRS, Inc. (DBRS) views Banco Santander S.A.’s (Santander or the Group) 2014 results as solid and reflecting continued strong fundamentals, including growing earnings and improving asset quality across its franchise. Demonstrating the strength of its geographical diversification, the Group reported higher full year IBT (excluding exchange rate impact) year on year (YoY) in all geographies where it operates for the first time since 2007. Santander reported total net income of EUR 5.8 billion in 2014, up 39% YoY (for comparative purposes DBRS is considering pro-forma 2013 results after incorporating the effect of the adoption of IFRIC 21 on levy liabilities, full consolidation of SCUSA, and the sale of Santander Asset Management). The Bank’s consolidated results were negatively impacted by the depreciation of most of the currencies in which Santander operates in relation to the Euro. As a result, excluding the impact of foreign exchange rates, net profit would have increased by 49% YoY.

Net interest income (NII) continues to improve with a steady decline in the cost of funding in developed countries and loan growth in all countries where it operates but Portugal. DBRS expects NII in 2015 to keep benefitting, on one hand, from further decrease on cost of funding in developed countries, driven by the re-pricing of the deposit back book; and on the other hand, from growing lending volumes and higher prices stemming from consumer finance. Core banking revenues, comprising net interest income and fees and commissions, contributed 92% of the Group’s gross operating income in 2014, supporting Santander’s high quality, recurring revenues.

In line with the economic recovery and improved macroeconomic conditions, the cost of risk declined by 14% YoY with net loan loss provisions absorbing 47% of income before provisions and taxes (IBPT) in 2014, compared to 57% at year-end 2013. Asset quality continues to improve with the Group reporting five consecutive quarters of declining non-performing loans (NPL), mainly driven by the progress achieved in Spain and Brazil. Net NPL entries declined a notable 51% YoY with a quarterly average of EUR 2.4 billion in 2014, as compared to EUR 4.9 billion in 2013. Santander’s NPL ratio stood at 5.3%, down 47 basis points YoY, but still high when compared to its international peers. DBRS expects the level provisioning to continue to decline as economic conditions improve further, especially in Spain.

Santander increased capital in January 2015, which DBRS views as prudent, given Santander’s exposures to still stressed financial markets, as well as continued expansion in certain businesses outside of retail banking, such as the consumer finance businesses. The Group is now better capitalized, but still with a somewhat lower level of regulatory capital when compared to peers. While taking into account Santander’s lower risk profile, this level of capitalisation could potentially constrain Santander in its ability to seize future business opportunities and invest in organic growth, absent the continued accumulation of earnings or other efforts to enhance its capitalisation. The Group reported a pro-forma Common Equity Tier 1 ratio under Basel III, including the January 2015 capital raise, of 12.2% under the phased-in criteria and 9.7% fully loaded. Moreover, Santander reported a pro-forma fully loaded leverage ratio of 5.1% at end-December 2014.

DBRS rates Banco Santander’s Senior Unsecured Long-term Debt and Deposits at “A” with a Stable trend. The rating is one notch above the rating of the Spanish Sovereign at A (low) with a Stable trend. The Stable trend reflects the improving fundamentals of Santander in Spain, and the improvement of the trend on the Sovereign’s A (low) rating to Stable, combined with continued momentum in Group’s international operations.

Note:
All figures are in Euros unless otherwise noted.