DBRS Confirms Banco Santander SA’s Issuer Ratings at A (high), Stable Trend

DBRS Ratings Limited (DBRS) 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 all the ratings remains Stable. Concurrently, DBRS confirmed the Group’s Intrinsic Assessment (IA) at A (high) and the Support Assessment at SA3.

In addition, DBRS has discontinued the ratings of some Santander´s subsidiaries as all of the debt has been repaid and the entities have been integrated into Santander SA. A full list of rating actions is included at the end of this press release.

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 through retained earnings. 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 streamlined systems and technology, contributing to a low efficiency ratio. The ratings also incorporate Santander’s sound capital levels, as reflected by its positive results in the recent EBA stress test, although DBRS notes that capital ratios remain at the low end of the global peer group.

Santander’s ratings are positioned one-notch above DBRS’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 be linked to a further 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 capitalisation. 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. 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 142 million customers worldwide and around EUR 1.45 trillion of assets as of September 2018, Santander is the largest Spanish banking group. Santander is well positioned in its core markets, with 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.

DBRS considers Santander’s earnings as strong and improving. Pressure on profitability is receding as various environmental factors are showing improvement, including higher interest margins (especially in Brazil and Spain) and improving economic conditions, and this is contributing to revenue growth and lower provisioning levels. Santander recorded EUR 5.7 billion of net attributable income in 9M18, up 13.1% YoY. In addition, key profitability indicators continue to improve, although these remain below pre-crisis levels. The return on equity (RoE) stood at 7.25% (as calculated by DBRS) in 9M18, up from 6.49% in 9M17. The main positive drivers for profitability during recent quarters are a lower cost of risk coupled with expense control which is reflected in a strong cost to income ratio.

Santander’s credit risk profile is highly diversified with no specific risk concentration by industry. As of end-September 2018, Santander had EUR 862 billion of gross loans to customers, net of repos. Santander’s loan book is diversified across several geographies including the UK (28%), Spain (25%), other European countries (18%), the U.S. (9%) and Brazil (8%). At end-September 2018, Santander’s non-performing assets (NPAs) totalled EUR 41.5 billion and the NPA ratio (as calculated by DBRS) was 4.6%, down from 5.5% at end-September 2017. DBRS views the Group as having a sound management team with a conservative risk culture, that contributes to a generally low risk profile and very strong operational capabilities with a successful history of managing operational risks.

Santander’s funding and liquidity is strong. The Group’s funding profile benefits from a 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 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 S.A at a subconsolidated level was 24.35% of Risk Weighted Assets (RWAs). The requirement was based on the balance sheet exposures at end-2016 of the resolution entity and should be met by 1 January 2020. The individual MREL requirements for all resolution entities within the Group have not been announced yet. DBRS expects that Santander and its subsidiaries will fully meet its MREL and TLAC requirements based on its current interpretation of the rules.

Further supporting its strong credit profile, Santander maintains solid capital levels. The Group reported a pro-forma fully loaded Common Equity Tier 1 (CET1) capital ratio of 10.93% (including the full impact from the IFRS-9 accounting standards and the sale of WiZink) at end-September 2018, up from 10.84% at end-2017. 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, should enable the Group to improve its CET1 ratio. Santander´s results in the 2018 EBA-wide stress were positive, reflecting the benefits of its highly diversified franchise and its capacity to absorb adverse economic shocks. This was illustrated in a solid phased-in CET1 ratio of 9.72% at end-2020 and a fully loaded CET1 ratio of 9.20% at end-2020 in the adverse scenario. Notably, Santander reported only 141 bps capital depletion (on the fully-loaded CET1 ratio) under the adverse scenario, compared to an average of 405 bps for the sample of banks included in the EBA-wide stress.

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 principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, company disclosures, Bank of Spain, and the European Banking Authority (EBA). DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS 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’s outlooks and ratings are under regular surveillance

For further information on DBRS 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 Limited 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
Most Recent Rating Update: April 12, 2018

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