DBRS Morningstar Confirms Banco Santander SA’s Long-Term Issuer Rating at A (high), Stable Trend

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

In addition, DBRS Morningstar has changed the trend on the Group’s Long-Term and Short-Term Critical Obligations Ratings to Positive from Stable.

KEY RATING CONSIDERATIONS

The confirmation of Santander’s ratings reflects the strength of its globally diversified banking franchise, which contributes to resilient earnings and a sustained ability to generate capital. The ratings also take into account the Group’s strong market shares in its core geographies, which are well-balanced between developed and emerging economies. Santander benefits from its significant scale and technology, resulting in good efficiency levels. The ratings also incorporate Santander’s satisfactory capital levels, although DBRS Morningstar notes that capital ratios remain at the lower end of its global peer group.

The change in the trend on the Long-Term and Short-Term Critical Obligations Ratings follows the change in the trend on DBRS Morningstar’s “A” Long-Term Foreign and Local Currency ratings on the Kingdom of Spain (September 20, 2019). Typically, the Long-Term Critical Obligations Rating can be up to two notches above the sovereign rating.

Santander’s IA is positioned one-notch above DBRS Morningstar’s rating of the Kingdom of Spain, reflecting the Group’s strong franchise with a high degree of international diversification and ability to generate solid and consistent earnings.

RATING DRIVERS

Positive rating pressure would likely require improvements in the bank’s underlying and statutory profitability and further improvement in the Group’s asset quality, particularly 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, wholesale banking or South America businesses, without the appropriate increase in capitalisation. A downgrade of Spain’s sovereign rating would also have negative rating implications.

RATING RATIONALE

Santander’s geographically diverse global retail banking franchise is a key strength underpinning its ratings. Santander follows a strategy of universal, transactional banking in several jurisdictions with a focus on consumers and small- and medium-sized businesses (SMEs), contributing to the resiliency of its earnings. With around 144 million customers worldwide and around EUR 1.5 trillion of assets as of end-September 2019, Santander is the largest Spanish banking group. Santander is well positioned in its core markets, where it has an aim to have a minimum market share of 10%. Core markets include Brazil, Spain, the United Kingdom (UK), Mexico, Poland, Portugal, Chile and Argentina. In the United States (U.S.), the Group is focused on its regional presence in the northeast, as well as consumer finance.

The Bank´s solid profitability is supported by its geographical diversification. Notably, the Bank is recording higher NII and loan growth driven by its business in North America and South America, whereas its business in Europe is pressured by the low interest environment and weaker economic conditions. In Europe, the Bank is now focused on improving its profitability by boosting its efficiency. As a result, underlying profitability indicators continue to improve, although these remain below pre-crisis levels. However, the Bank faced several negative one-offs during 2019, some of which were related to cost cutting exercises, and these resulted in a 35% YoY reduction in its statutory net attributable profit in 9M19. The Bank reported a RoAE of 5.1% (as calculated by DBRS Morningstar) in 9M19. However, excluding the one-off impacts the RoAE stood at 8.4%. DBRS Morningstar views that Santander is still implementing key structural actions to improve its statutory net attributable income.

Santander’s credit risk profile is highly diversified with no specific risk concentration by geography or industry. As of end-September 2019, Santander had EUR 900 billion of gross loans to customers (excluding of repos), up 4.4% YoY. Santander’s loan book is diversified across several regions, including in the UK, Spain, U.S and Brazil. Santander´s asset quality is improving in most jurisdictions, and the Group’ non-performing loan (NPL) ratio had improved to 3.7% at end-September 2019, from 3.9% at year-end 2018 (as calculated by DBRS Morningstar). Nevertheless, the Group still has higher NPL ratios in some regions, particularly in Spain which was negatively affected by the acquisition of Banco Popular in 1H17. Moreover, including foreclosed assets (FAS), the NPA ratio of its Spanish business is close to 10% (as calculated by DBRS Morningstar) at end-September 2019. DBRS Morningstar considers that Santander still needs to make further progress in cleaning its balance sheet in Spain.

Santander’s funding and liquidity reflects the large deposit base that funds its lending activities, together with a broad range of wholesale funding. Santander follows an approach in which its subsidiaries are largely autonomous in managing their own funding and liquidity, including raising wholesale funding from their own local markets. Thus, while the Group utilises considerable amounts of wholesale funding, a significant proportion is raised through its subsidiaries.

DBRS Morningstar sees Santander as well positioned to meet its Total Loss Absorbing Capacity (TLAC) and Minimum Requirement for own funds and Eligible Liabilities (MREL) requirements. Santander’s resolution strategy is that of a multiple point of entry (MPE) approach, meaning the TLAC and MREL requirements are established at each resolution entity. In May 2018, Santander announced its MREL requirement for Banco Santander SA at a subconsolidated level was 24.35% of Risk Weighted Assets (RWAs). The requirement was based on the resolution entity’s balance sheet exposures at end-2016 and should be met by 1 January 2020. As of end-September 2019, Santander meets its MREL and TLAC requirements with EUR 36.3 billion of TLAC eligible debt currently issued.

The Group reported a CET1 capital ratio of 11.3% at end-September 2019, up 19bps since end-September 2018, which provides a small cushion of 153bps over the minimum supervisory capital requirements. The fully loaded CET1 capital ratio at end-September 2019 was 11.07%, including the full impact from the IFRS-9 accounting standards. While Santander’s CET1 capital ratio remains at the low end of the global peer group, DBRS Morningstar views these levels as satisfactory given the Banks’ solid risk profile, as well as its ability to generate capital through retained earnings.

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 Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Company Documents, EBA, Bank of Spain and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 Morningstar's outlooks and ratings are under regular surveillance

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH are subject to EU and US regulations only.

Lead Analyst: Pablo Manzano, Vice President - Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director - Global FIG
Initial Rating Date: October 11, 2006
Last Rating Date: December 3, 2018

DBRS Ratings GmbH, Sucursal en España
Calle del Pinar, 5
28006 Madrid
Spain

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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