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). In line with Morningstar DBRS' methodology and following the recent upgrade on the Kingdom of Spain's credit ratings, Santander's Long Term Critical Obligations Rating was upgraded to AA from AA (low) and its Short Term Critical Obligations Rating was upgraded to R-1 (high) from R-1 (middle). The trends on all credit ratings remain Stable. The Group's Intrinsic Assessment (IA) remains at A (high) and its Support Assessment at SA3. For the full list of credit ratings, see the table 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 consider 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 2024, 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. In addition, Morningstar DBRS notes Santander's higher than peers' cost of risk compared with similarly rated peers, reflecting its international footprint in many emerging markets such as Latin America, as well as the expectation that credit losses could continue to increase in coming quarters if the macroeconomic environment deteriorates because of increasing geopolitical risk.

The Group's credit ratings were previously positioned above the Kingdom of Spain because of the Group's strong credit fundamentals combined with a good level of international diversification. However, with the recent upgrade of the Kingdom of Spain, the Group's credit ratings are now positioned in line with the sovereign rating. The Group's IA of A (high) is positioned at the mid-range of the IA Range, 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 would upgrade Santander's credit ratings if the Group strengthens its risk-adjusted capital metrics and significantly improve its cost of risk.

Morningstar DBRS would downgrade the credit ratings should Santander experience a material and sustained deterioration in its profitability, asset quality, or capital metrics.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong
Santander's geographically diverse global retail banking franchise remains 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 173 million customers worldwide, and around EUR 1.8 trillion in assets at the end of 2024, Santander is the largest Spanish banking group and one of the largest European banks. The Group is well positioned in its core markets, with an aim to have a minimum market share of 10% in those markets. Core markets include Brazil, Spain, the United Kingdom (UK), Mexico, Poland, Portugal, Chile, and Argentina. Another core market for Santander is the U.S., although its market shares there are more modest. In the United States, the Group is focused on its regional presence in the northeast, as well as consumer finance, with a particular focus on auto finance. In 2023 and 2024, the Group has restructured its operations, merging both retail and commercial banking businesses into a single unit. This reshuffling has resulted in five main business units: retail and commercial banking, digital consumer bank, payments, corporate and investment banking, and wealth management and insurance.

Earnings Combined Building Block (BB) Assessment: Strong/Good
Santander posted record profits in 2024 with a net attributable profit of EUR 12.6 billion, up 14% year over year (YOY) and up 15% at constant euros. As a result, the Group´s return on tangible equity stood at 16.3%, much above 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. Loan loss provisions remained contained YOY. Profits generated outside of Santander's home market represented around 74% of income before taxes (excluding corporate centre) in 2024 with Brazil accounting for around 19%, 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 coming quarters given the still weak macroeconomic environment. Nevertheless, we continue 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. Santander´s asset quality ratios have been resilient against the uncertain economic backdrop, initially because of the COVID-19 pandemic, but more recently because of the conflict in Ukraine, inflation, the energy crisis, increased geopolitical risk, and higher interest rates. While they remain solid, in Morningstar DBRS' view, there are already indicators that point to some credit deterioration. As of end-2024, the Group's Stage 3 ratio stood at 3.0%, fairly stable since end-2020. However, Stage 2 loans (exposures whose credit risk has significantly increased) increased to 7.6%, up from 7.0% at end-2023.

Morningstar DBRS expects that Santander´s asset quality will deteriorate during coming quarters given the challenging economic environment, characterised by tighter financial conditions and weaker economic dynamics in most of their regions. In particular, Morningstar DBRS is closely monitoring the evolution of Santander´s consumer lending and its developing markets exposures. Nevertheless, Morningstar DBRS considers that Santander´s risk management capacity will support the bank´s asset quality during this period, helped by their geographical and sector diversification. In addition, Santander´s provisioning levels will be key during this environment. The provisioning levels reached 65% at end-2024, fairly stable from end-2023

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS views Santander as maintaining a solid liquidity and funding position. Santander's funding and liquidity reflect the large deposit base that funds its lending activities, together with a broad range of wholesale funding. Santander operates a decentralised liquidity management model with Group oversight, with some degree of financial independence of its subsidiaries worldwide. The Group has a large customer base, which is the Bank's main source of funding, representing around 68.2% of total funding at end-2024 compared with 63.8% at end-2023, as calculated by Morningstar DBRS. The Group's loan-to-deposit ratio was 100% at end-2024. By geography, most of Santander's subsidiaries, save for the UK and the U.S., are fully funded by deposits with net Loan-to-Deposit (LTD) ratios around 100% or below. Santander´s wholesale funding (including capital instruments), which represented around 22% of total funding as of end-2024, is well diversified by instruments and maturities. The Group also has a sizable amount of liquidity within its subsidiaries, maintaining high LCRs in key subsidiaries such as the UK (154%), Brazil (168%), and Spain (162%). The Group also reported a strong Net Stable Funding Ratio (NSFR) of 126% at end-2024 as well as NSFRs above 100% in key subsidiaries.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
Santander reported a fully loaded Common Equity Tier 1 (CET 1) ratio of 12.8% at end-2024, up from 12.3% at end-2023. The fully loaded total capital ratio stood at 17.2% at end-2024, compared with 16.3% at end-2023. These ratios continue to provide a comfortable buffer over SREP requirements for 2025 of 9.66% for CET1 (including the Pillar 2 requirement of 0.98%) and 13.92% for the total capital ratio. On top of this, this exceeds the Group internal CET1 ratio target of 12%. Santander reported a fully loaded leverage ratio of 4.8% at end-2024, which Morningstar DBRS continues to view as adequate when 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/451711.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

ESG Considerations had a significant effect on the credit analysis.

Social (S) Factors

The following Social subfactor had a significant effect on the credit analysis: Pass-through Social credit considerations. The Social factor affects Santander as the ESG factors for the Kingdom of Spain are passed through to Santander.

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

Credit rating actions on the Kingdom of Spain could have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of Kingdom of Spain are discussed separately at https://dbrs.morningstar.com/issuers/15664.

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), https://dbrs.morningstar.com/research/437781.

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 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 2024 Annual Report, Santander 2024 Report, Santander 2024 Press Release, Santander 2024 Presentation, Santander 2024 Pillar 3 Reports, and Santander 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: YES
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' trends 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/451712.

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: Marcos Alvarez, Managing Director - Global Financial Institution Ratings
Initial Rating Date: 11 October 2006
Last Rating Date: 27 September 2024

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