Morningstar DBRS Confirms Issuer Ratings on Banco Santander Totta S.A. at "A" and R-1 (low), Stable trends

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on Banco Santander Totta S.A. (Totta or the Bank), including its Long-Term Issuer Rating at "A" and Short-Term Issuer Rating at R-1 (low), following the confirmation of the credit ratings on its parent, Banco Santander SA (Santander or the Parent). The trends on all credit ratings are Stable, in line with the trends on Santander's Issuer Ratings. Totta's support assessment is SA1.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the credit ratings follows the confirmation of Santander's A (high)/R-1 (middle) Issuer Ratings with Stable trends. Morningstar DBRS maintained an SA1 support assessment for Totta, which implies strong and predictable support from the Parent. As a result, Totta's credit ratings will generally move in tandem with Santander's credit ratings. The SA1 designation considers Totta's important role as a core component of Santander's international franchise and Morningstar DBRS' expectation that Santander has the willingness and ability to support Totta if required.

CREDIT RATING DRIVERS
Morningstar DBRS could upgrade Totta's credit ratings with an upgrade on Santander's credit ratings. Similarly, a downgrade of Santander's credit ratings could cause Morningstar DBRS to take a negative credit rating action on Totta. Furthermore, any indication of a reduction of support from the Parent could impact Morningstar DBRS' support assessment and potentially also have a negative impact on Totta's credit ratings.

For more information on the credit rating drivers of Santander, see the separate press release: https://www.dbrsmorningstar.com/research/440147.

CREDIT RATING RATIONALE
Totta is the third-largest bank operating in Portugal with EUR 55.9 billion in total assets and market shares of 20.4% in mortgages, 16.7% in total loans, and 12.9% in deposits at the end of June 2024. Despite its moderate size, Totta offers an extensive range of services as a universal bank including retail, corporate, and investment banking products to 1.7 million customers. The Bank conducts the majority of its operations in Portugal, where most of its branch network and employee base are. On 18 March 2024, the Bank announced the merger of Totta with its majority shareholder, Banco Santander Totta SGPS, S.A., and its subsidiary, Taxagest, for structural simplification, although this is still pending approval from the European Central Bank (ECB).

Morningstar DBRS views Totta as a bank with a strong earnings capacity, driven by a high sensitivity to the higher interest rate environment that supports its net interest income (NII), as well as high efficiency levels, driven by effective cost optimisation over the past years. The Bank reported net income of EUR 547.7 million in H1 2024, up 64.2% from EUR 333.7 million H1 2023. This was driven by NII, up 47% year over year (YOY) to EUR 862.2 million given the Bank's high sensitivity to interest rate increases. Nevertheless, Morningstar DBRS notes that the Bank's NII peaked in Q4 2024 and expects the increased contribution from NII to the revenue mix to normalise going forward. Net fee and commission income also supported results, with a slight increase of 0.5% YOY to EUR 232.3 million as a result of growth in the customer base and higher business volumes. Administrative expenses were stable YOY, and operating costs remained contained in H1 2024 at EUR 257.5 million, an increase of 0.8% YOY mainly because of staff expenses, which were up 3.7%, below inflation levels. As a result, the Bank's cost-to-income ratio improved to a strong 23.1% in H1 2024, down 7.7 percentage points YOY, which remains well positioned compared with that of its peers. In addition, return on equity further improved to 25.3% in H1 2024 from 17.6% in H1 2023.

Totta's asset quality has continuously improved over the past years, reflected in a reported NPE ratio of 1.6% at end-June 2024, down 0.5 percentage points (p.p.) from the end of June 2023 and down 1.0 p.p .since end-2020. As highlighted by Morningstar DBRS' trend change on the Republic of Portugal to Positive from Stable on 19 July 2024 (please see the press release here: https://dbrs.morningstar.com/research/436415), the Portuguese economy accelerated in Q4 2023 and Q1 2024 as the negative effects from the inflationary shock, higher interest rates, and weaker external backdrop receded. The benign economic environment in Portugal supported Totta's improved asset quality metrics, which remain among the strongest in the Portuguese banking sector. At the end of 2023, Totta's Stage 3 loan ratio was 2.1%, down from 2.6% at the end of 2022, and Stage 3 coverage levels were 89% (including Stage 1, 2, and 3). The improving economic environment has also translated into a lower Stage 2 proportion of the loan book, meaning a lower proportion of exposures whose credit risk has significantly increased. The Stage 2 ratio was 9.2% of the gross loan book at the end of 2023, down from 11.9% at the end of 2022.

Totta's stable customer deposit base in Portugal underpins its funding profile. As of the end of June 2024, the Bank was mainly funded through customer deposits (71%), followed by capital instruments and subordinated debt (9%), repossessions (8%), covered bonds (7%), euro medium-term note issuances (3%), and securitisations (2%). At the end of March 2024, the Bank had completely repaid its TLTRO III funding from the ECB following the repayment of the last tranche of EUR 0.7 billion in March 2024. The Bank has been gradually replacing ECB funding with the issuance of bonds and interbank financing as well as the gradual transfer of the rise in reference interest rates to its deposits.

Totta's capital position is solid and provides sufficient cushion for potential risks. At the end of June 2024, Totta reported a fully loaded CET1 ratio of 19.2%, up from 16.9% at the end of 2023, an increase driven by internal capital generation that offset an increase in risk-weighted assets since the end of2023. The Bank maintains ample capital buffers, well above the minimum ECB Supervisory Review and Evaluation Process requirements, which are 8.428% for CET1, 10.238% for Tier 1, and 12.5% for Total for 2024, all fully implemented.

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 the Kingdom of Spain's (Spain) sovereign credit ratings to reflect the Group's international diversification. As such, credit rating actions on Spain are likely to have an impact on Santander's credit ratings, which in turn will have an impact on Totta's credit ratings. ESG factors that have a significant or relevant effect on the credit analysis of Spain are discussed separately at https://www.dbrsmorningstar.com/issuers/15664.

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

Credit rating actions on Santander are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of Santander are discussed separately at https://www.dbrsmorningstar.com/research/440147.

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 analysis was conducted at the holding company level (Banco Santander Totta, SGPS, S.A.) because the banking level (Banco Santander Totta S.A.) results were not available at the time of the review. However, Morningstar DBRS observes that both consolidation levels are sufficiently close.

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 Santander and Santander Totta 2023 & H1 2024 Presentations, Santander and Santander Totta 2023 & H1 2024 Press Releases, Santander and Santander Totta 4Q 2023 & 2Q 2024 Reports, and Santander and Santander Totta 2023 Annual Accounts. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

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.

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

Lead Analyst: Arnaud Journois, Senior Vice President
Rating Committee Chair: William Schwartz, Senior Vice President - Credit Practices
Initial Rating Date: 18 July 2012
Last Rating Date: 2 October 2023

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