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

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

KEY CREDIT RATING CONSIDERATIONS
Morningstar DBRS' confirmation of Santander's credit ratings reflects the continued strength of the Group's globally diversified banking franchise, which contributes to resilient underlying earnings and a sustained ability to generate capital. The credit ratings also take into account the Group's strong market shares in its core geographies, which are balanced between developed and emerging economies. In addition, Santander benefits from its significant scale and technology, resulting in strong efficiency levels compared with its peer group of large and diversified banks. Santander's solid funding and liquidity profile, as well as its satisfactory capital levels, also underpin the credit ratings.

While Santander continued to post record profits in H1 2024 and FY 2023, Morningstar DBRS anticipates Santander's profitability peaking in the current interest rate cycle. Morningstar DBRS expects net interest income (NII) growth to slow down significantly because of higher deposit costs in many of Santander's jurisdictions, albeit slightly offset by volume growth, along with higher credit losses in coming quarters given that the macroeconomic environment continues to deteriorate. Nevertheless, Morningstar DBRS sees Santander as well positioned to manage this challenging scenario given its business and geographical diversification as well as the Group's risk management capacity.

Santander's IA is one notch above Morningstar DBRS' sovereign credit ratings on the Kingdom of Spain (Spain), reflecting the Group's strong franchise with a high degree of international diversification and ability to generate solid and consistent earnings.

CREDIT RATING DRIVERS
Morningstar DBRS could upgrade Santander's Long-Term Issuer Rating with an upgrade of the sovereign credit ratings on Spain and with improvements in the Group's risk-adjusted capital metrics.

Morningstar DBRS could take a negative credit rating action with a downgrade of the sovereign credit ratings on Spain. Additionally, a significant deterioration in the Group's major international businesses and less benefit from its geographical diversification or a rapid deterioration in its asset quality or capital metrics would lead to a downgrade of Santander's credit ratings.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong
Santander's geographically diverse global retail banking franchise is a key strength underpinning its credit ratings. Santander follows a strategy of universal, transactional banking with a focus on consumers and small and medium-size enterprises. With around 168 million customers worldwide, and around EUR 1.8 trillion of assets at the end of June 2024, Santander is the largest Spanish banking group and one of the largest European banks. The Group is well positioned in its core markets, where it aims to have a minimum market share of 10%, including Brazil, Spain, the UK, Mexico, Poland, Portugal, Chile, and Argentina. Another core market for Santander is the U.S., although its market share there is more modest. In late 2023 and H1 2024, the Group restructured its operations, merging each retail and commercial banking business into a single unit. This reshuffling resulted in five main business units¿Retail and Commercial Banking, Digital Consumer Bank, Corporate & Investment Banking, Wealth Management & Insurance, and Payments¿and follows an effort to streamline operations to further reduce its cost base.

Earnings Combined Building Block (BB) Assessment: Strong/Good
Santander posted record profits in H1 2024 with a net attributable profit of EUR 6.1 billion, up 16% year over year and up 15% at constant euros. As a result, the Group's return on equity stood at 15.9%, significantly higher than previously reported levels. Results were driven by solid revenue growth, boosted by higher core revenues against a backdrop of higher interest rates and volume growth. This was partially offset by slightly higher operating expenses and higher loan-loss provisions, driven by the U.S., Mexico, and Argentina. Profits generated outside Santander's home market represented around 74% of income before taxes (excluding corporate centre) in H1 2024, with Brazil accounting for around 19%, Argentina accounting for 11%, and the rest equally distributed between geographic areas. Morningstar DBRS anticipates that NII growth should slow down significantly because of higher expected deposit costs in many of Santander's jurisdictions. In addition, Morningstar DBRS expects higher credit losses in the coming quarters given the still-weak macroeconomic environment. Nevertheless, Morningstar DBRS continues to view Santander as well positioned to manage this challenging scenario given its business and geographical diversification.

Risk Combined Building Block (BB) Assessment: Good
Morningstar DBRS considers that Santander benefits from its geographically diverse global retail banking franchise and has a sound management team with a conservative risk culture that permeates the organisation. These factors contribute to strong credit risk management capabilities. Nevertheless, Morningstar DBRS considers the run rate of the Group's cost of risk as higher than its international peers, given its exposure to emerging markets. Santander also operates in riskier segments (e.g., consumer and auto lending) compared with other retail banks. Morningstar DBRS expects that Santander's asset quality will deteriorate over the coming quarters amid the challenging economic environment, characterised by tighter financial conditions and weaker economic dynamics in most of its regions. In particular, Morningstar DBRS is closely monitoring the evolution of Santander's consumer lending and developing markets exposures. Nevertheless, Morningstar DBRS considers that Santander's risk management capacity will support its asset quality during this period, helped by its geographical and sector diversification. Additionally, Santander's asset quality ratios have been resilient against the uncertain economic backdrop initially caused by COVID-19 but more recently as a result of the conflict in Ukraine, inflation, the energy crisis, and higher interest rates. While they remain solid, Morningstar DBRS views that there are already indicators pointing to some credit deterioration. As of the end of June 2024, the Group's Stage 3 ratio stood at 3.0%, fairly stable since the end of 2020. However, Stage 2 loans, which are exposures with a significantly increased credit risk, increased to 8.1% from 7.0% at the end of 2023.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS believes that Santander's funding and liquidity profile remains solid. 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. The Group has a large customer base, which is its main source of funding, representing around 68.8% of total funding at the end of June 2024 compared with 63.8% at the end of 2023 as calculated by Morningstar DBRS. The Group's loan-to-deposit ratio was 102.7% at the end of June 2024. The Group also has sizable liquidity within its subsidiaries, maintaining high liquidity coverage ratios in key subsidiaries such as the UK (142%), Brazil (155%), and Spain (159%). The Group also reported a strong net stable funding ratio (NSFR) of 123% at the end of June 2024 as well as NSFRs above 100% in key subsidiaries.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
Santander reported a fully loaded CET 1 ratio of 12.5% at the end of June 2024, up from 12.3% at the end of 2023. The fully loaded total capital ratio stood at 16.7% at the end of June 2024 compared with 16.3% at the end of 2023. These ratios continue to provide a comfortable buffer over the European Central Bank's Supervisory Review and Evaluation Process requirements for 2024 of 9.6% for CET1 (including the Pillar 2 requirement of 1.74%) and 13.9% for the total capital ratio. This also exceeds the Group's internal CET1 ratio target of 12%(Q2 2024 Presentation, page 7/54). Santander reported a fully loaded leverage ratio of 4.7% at the end of 2023, which we continue to view as adequate compared with international peers. Santander also comfortably meets its total loss-absorbing capacity requirement and the Minimum Requirement for Own Funds and Eligible Liabilities. Nevertheless, while Morningstar DBRS considers Santander's capital position to be supported by its highly diversified franchise and capacity to absorb adverse economic shocks, further improvements in the risk-adjusted capital ratios are required to drive positive credit rating pressure given the Group's emerging market exposures.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/440145/.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Social (S) Factors
The following Social factor had a significant effect on the credit analysis: passed-through social credit considerations. Santander's IA is one notch above Spain's sovereign credit ratings to reflect the Group's international diversification. As such, the credit rating actions on Spain are likely to have an impact on Santander's credit ratings. ESG factors that have a significant or relevant effect on the credit analysis of Spain are discussed separately at https://dbrs.morningstar.com/issuers/15664.

There were no Environmental/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781.

Morningstar DBRS notes that the above press release was amended on 8 October 2024 to incorporate the phone number of the issuing office.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024), https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The following methodology has also been applied:
-- Morningstar DBRS Global Corporate Criteria (15 April 2024), https://dbrs.morningstar.com/research/431186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Morningstar Inc. and company documents. Other sources include the Santander 2023 Annual Report, Santander H1 2024 Report, Santander 2023 and H1 2024 Press Releases, Santander 2023 and H1 2024 Presentations, Santander 2023 and H1 2024 Pillar 3 Reports, Santander 2023 Sustainability Report, and Santander 2023 and H1 2024 Excel Series. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/440143/.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Senior Vice President - European Financial Institution Ratings
Rating Committee Chair: William Schwartz, Senior Vice President - Global Fundamental Ratings, Credit Practices
Initial Rating Date: 11 October 2006
Last Rating Date: 28 September 2023

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