DBRS Upgrades Santander’s Senior Ratings to A (high), Stable Trend

DBRS, Inc. (DBRS) upgraded the ratings of Banco Santander SA (Santander or the Group), including the Long-Term Issuer Rating to A (high), and the Short-Term Issuer rating to R-1 (middle). The trend on all the ratings remains Stable. Concurrently, DBRS upgraded the Group’s Intrinsic Assessment (IA) at A (high) and confirmed its Support Assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS
The upgrade of Santander’s ratings follows DBRS’s upgrade of the Kingdom of Spain to A, with Stable trend on April 6, 2018. Santander’s ratings continue to be positioned one-notch above DBRS’s rating of the Spanish sovereign, reflecting the Group’s strong franchise with a high degree of international diversification and ability to generate solid and consistent earnings. The upgrade of Santander’s long-term ratings considers that, given Santander’s strong franchise position in Spain, the Bank’s fundamentals are expected to continue to benefit from further improvements in Spain’s economic environment and sovereign position. DBRS also sees Santander as benefitting from its significant scale, which benefits the Group’s efficiency, and will likely contribute to more cost savings as Santander further leverages its technology to cater to digital and mobile banking customers.

RATING DRIVERS
Positive rating pressure would likely be linked to improvement in the Spanish sovereign rating coupled with continued improving trends in the bank’s earnings and risk profile. 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.

RATING RATIONALE
With an excess of EUR 1.4 trillion of assets, Santander ranks in the top 10 European banks by asset size. The Group has strong market shares across its ten core geographies, located throughout Europe and the Americas. Santander benefits from the resilient performances across its businesses. The Group regularly upstreams dividends from each of its subsidiaries to the parent, contributing to diversity of earning streams at the Spanish-based parent bank.

DBRS considers Santander’s earnings as strong and improving. Pressure on profitability is receding as various environmental factors are showing improvement, including higher interest rate margins (especially in Brazil) and improving economic conditions, and this is contributing to revenue growth and lower provisioning levels. Santander recorded EUR 6.6 billion of net attributable income in 2017, up 6.7% YoY. Higher core revenues, lower impairment charges and capital gains from the sale of Allfunds offset the integration costs of Popular and the negative goodwill of Santander Consumer US. Underlying profit in constant Euros for 2017 showed double digit growth for Santander’s main operating regions, except for Poland.

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 successfully integrating sizeable acquisitions, with systems integration typically being an important priority for Santander when acquiring an entity, contributing to highly effective front and back end systems when completed. Following the Blackstone transaction, Santander’s non-performing assets (NPAs) totaled EUR 44.6 billion and the NPA ratio (as calculated by DBRS) at end-2017 remained in line with 2016 at 5.1%.

Funding and liquidity is strong and benefits from a large deposit base that funds its lending activities, together with a broad range of wholesale funding. Santander also benefits from its position as a relevant player in local markets with each subsidiary responsible for its own funding needs. DBRS sees Santander as being well on track to achieving its TLAC target of EUR 33 billion to EUR 40 billion by 2019 given its issuance of approximately EUR 27 billion of debt securities, of which EUR 19 billion were TLAC eligible debt during 2017.

Further supporting its strong credit profile, Santander maintains solid capital levels. The Group reported a fully loaded CET1 capital ratio of 10.84% at end-17, up 28 bps since end-2016. 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 RWAs, is contributing to steady improvement. IFRS-9 impact is estimated to be around 20 bps in its CET1 fully-loaded capital.

The Grid Summary Grades for Banco Santander SA are as follows: Franchise Strength – Very Strong/Strong; Earnings – Strong; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Strong.

Notes:
All figures are in EUR unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (May 2017) which can be found on our website under Methodologies.

The primary sources of information used for this rating include SNL Financial, company reports, Bank of Spain, European Banking Authority (EBA) and European Central Bank (ECB). 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: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: October 11, 2006
Most Recent Rating Update: December 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.