DBRS Confirms Santander’s Ratings at A, Stable Following Acquisition of Banco Popular Espanol

DBRS, Inc. (DBRS) has today confirmed the ratings of Banco Santander SA (Santander or the Group), including its Issuer Rating and Senior Unsecured Long-Term Debt & Deposit rating at A and Short-Term Debt & Deposits rating at R-1 (low). At the same time, Santander’s Intrinsic Assessment (IA) has been confirmed at A. This confirmation follows Santander’s acquisition of Banco Popular Español S.A. (BPE). All ratings have a Stable trend, with the exception of the subordinated debt ratings which remain Under Review with Negative Implications pending the conclusion of a wider review of European banks’ subordinated debt.

The confirmation of Santander’s IA reflects the Group’s globally diversified retail banking franchise, resilient earnings and sustained ability to generate capital through retained earnings, which contribute to its ability to acquire and integrate a sizeable franchise such as BPE. DBRS views BPE as adding significant value to Santander’s franchise in Spain, as well as in Portugal, given BPE’s competitive strength in catering to small- and medium-sized enterprises (SMEs). This rating action also considers that this acquisition will lead to Santander’s exposure to its home market of Spain increasing to about 34%, from 24% of the Group’s total assets. Furthermore, the rating confirmation considers DBRS’s view that Santander will be able to manage the issues facing BPE and limit possible customer attrition.

BPE has significant market shares in customer loans and retail deposits that reflect its position as the sixth largest bank in Spain by total assets. The acquisition therefore will notably bolster Santander’s position in its home market with its assets in Spain growing by about 46%. BPE also has a presence in Portugal, which should complement Santander Totta’s position in this market, while further expanding its reach with SMEs.

On June 7, 2017 the Single Resolution Board (SRB) took the decision to transfer all shares and capital instruments of BPE to Santander for the price of 1 EUR. The decision to initiate resolution procedings was taken with the intent to protect depositors of Banco Popular, while also contributing to financial stability. Along with the purchase, Santander announced its plans to increase capital through a rights offering of EUR 7 billion. This additional capital will be used to offset additional provisions related to BPE´s non-performing assets (NPAs). With the acquisition, Santander is planning to add EUR 8 billion to provisions for NPAs, which will improve the coverage ratio for BPE’s NPAs to 67% from 46% at end-March 2017. DBRS views this coverage ratio as higher than many of its Spanish peers.

DBRS does, however, see some challenges for Santander in restoring the confidence of BPE customers, as concerns around its very weak capital levels drove a significant decline in market capitalisation and adversely impacted credit fundamentals in recent weeks. This resulted in some loss of deposits and impacted business momentum. DBRS expects that Santander will have the capacity to overcome these headwinds, and recoup any lost deposits while reinvigorating business momentum, given the Group’s proven ability to quickly and successfully integrate sizeable acquisitions.

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 significant adverse impact stemming from the BPE acquisition, resulting in reputational damage for Santander. Santander’s ratings could also be pressured, if the Group’s risk profile were to increase outside of current expectations, particularly within Santander’s consumer finance or wholesale banking businesses, without the appropriate increase in capitalisation. 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 EUR unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (May 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017) which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents, Bank of Spain, Fondo de Restructuracion Ordenada Bancaria (FROB), Single Resolution Board (SRB), European Central Bank (ECB) 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, Senior Vice President - Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions Group and Sovereign Ratings
Initial Rating Date: October 11, 2006
Last Rating Date: March 7, 2017

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.

For more information on this credit or on this industry, visit www.dbrs.com.