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). All ratings have a Stable trend. At the same time, Santander’s intrinsic assessment (IA) has been confirmed at “A”. These rating actions follow a detailed review of the Group’s operating results, financial fundamentals and future prospects.

The confirmation of Santander’s ratings reflects the strength of the Group’s globally diversified retail banking franchise which contributes to resilient earnings and a sustained ability to generate capital through retained earnings. With a good balance between developed and emerging economies, where the Group maintains strong market shares, Santander generates significant earnings from outside its home market of Spain. The current rating level also considers the continued headwinds facing the Group, including a still challenging operating environment and the evolving and more onerous regulatory environment. While Santander maintains a predominantly low risk profile given its mix of business, the Group is exposed to potentially higher risk business activity through its consumer finance or wholesale banking businesses, as well as through its exposure to emerging market economies.

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.

DBRS considers Santander’s earnings as solid and improving. 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 6.0 billion on gross income of EUR 45.3 billion in 2015 remains substantial and returns are at the mid- to upper-end of the global peer group. Attibutable profit of EUR 2.9 billion in 1H16 is tracking consistently with 2015, despite the continued challenging operating environment.

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. Santander has a track record of successfulling integrating sizable acquisitions, with systems integration typically being an important first step for Santander when acquiring an entity, contributing to highly effective front and back end systems when completed.

Despite this, the Group is facing headwinds in the U.S., where its U.S. holding company is subject to the Federal Reserve’s stress testing exercises (CCAR). The U.S. holding company has been included within the CCAR process for the past three years, and in all years has received an objection to its capital plans from the regulators. This objection limits Santander’s ability to upstream dividends without the prior receipt of a written non-objection from the U.S. regulators. DBRS is aware that the Group is devoting significant time and resources to improving its CCAR planning processes, which is a costly effort. From a ratings perspective, DBRS is concerned that the significant challenge related to the regulatory burden in the U.S. has the potential to hinder business opportunities and growth in an important market for Santander (see DBRS: Santander Faces Headwinds in the U.S and DBRS: DFAST and CCAR – A Few Takeaways).

Further supporting its fundamental credit profile, Santander maintains solid capital levels and a conservative funding and liquidity profile. The Group reported a fully loaded Common Equity Tier 1 capital ratio of 10.4% at end-1H16, up 31 bps since end-2015. While still at the low end of the global peer group, DBRS notes that Santander’s strong ability to generate capital internally, while continuing to manage risk-weighted assets, is contributing to steady improvement. The Group’s 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.

RATING DRIVERS
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.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), and Critigal Obligations Criteria (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

The primary sources of information used for this rating include company documents 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: Michael Driscoll
Initial Rating Date: October 11, 2006
Most Recent Rating Update: July 9, 2015

The rated entity or its related entities did participate in the rating process. DBRS did have access to the accounts and other relevant internal documents of the rated entity or its related entities.