DBRS Confirms Ratings of Santander – Senior at A, Stable Trend

DBRS, Inc. (DBRS) has today confirmed the ratings of Banco Santander SA (Santander or the Group), including its Senior Unsecured Long-Term Debt & Deposit at “A” and Short-Term Debt & Deposit at R-1 (low). The trend on all ratings remains Stable. At the same time, Santander’s intrinsic assessment (IA) has been confirmed at “A”. DBRS currently has a support assessment of SA-2 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. The Group’s significant international earnings, which contributed to 86% of attributable profit in 2014, demonstrate the diversity of Santander’s franchise outside of Spain. The current rating level also considers the continued headwinds facing the Group, including a still challenging operating environment with uneven economic recovery across its franchise geographies and the evolving regulatory environment. While the Group maintains a generally low risk profile given its mix of business, DBRS views Santander as having exposures to still stressed financial markets where the outlook remains uncertain.

Positive rating pressure would likely be linked to continued improvement in the position of the Spanish sovereign and the operating environment in Spain. 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 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.

From an earnings perspective, Santander’s beneficial balance between developed and emerging markets provides the Group with a solid base for generating resilient earnings and sustaining the continued generation of organic capital. While profitability continues to be pressured due to various factors, including the low interest rate environment and elevated provisioning levels, the Group continues to generate a solid level of resilient earnings. Attributable profit to the Group of EUR 5.8 billion on gross income of EUR 42.6 billion in 2014 remains substantial and returns are at the mid- to upper-end of the global peer group.

The challenge for Santander is to maintain sound profitability while further streamlining its international operations and continuing to successfully generate organic growth. As the Group further expands in certain businesses outside of retail banking, such as consumer finance businesses, providing an avenue for growth into new markets, DBRS expects that Santander will continue to manage this growth conservatively.

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. 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. Furthermore, DBRS views the Group’s capitalization as satisfactory following its 1Q15 capital raise, but notes that its fully-loaded CET1 ratio remains at the low end of the global peer group.

On May 20, 2015, DBRS announced that it will be reviewing the ratings of European banking groups that benefit from some uplift for systemic support. While Santander does not benefit from this uplift, DBRS will consider during the review period whether to change the support designation from SA-2 to SA-3, which is the category for banks in countries where DBRS has no expectation of systemic support or is not confident enough that timely systemic support would be forthcoming in times of need to add a notch for systemic support. The review period is expected to be completed in September.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

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

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

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: December 17, 2014