DBRS Confirms Ratings of Santander – Senior at A, Stable Trend

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

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 Group maintains strong market shares in its core geographies, which are well-balanced between developed and emerging economies. Santander’s international contribution to earnings is very significant, with 85% of attributable profit in 9M17 generated outside of Spain. DBRS notes that earnings generated through Santander Consumer Finance (SCF) in Spain are included within this international contribution, as SCF does not disclose a country breakdown. DBRS also sees Santander as benefitting from its significant scale, which benefits the Group’s efficiency, and will likely contribute to more cost savings as Santander further leverages its technology to cater to digital and mobile banking customers.

DBRS sees Santander’s ratings as constrained by Spain’s sovereign ratings due to its still substantial links with Spain in terms of total risk exposures and market perception. Following the recent acquisition of Banco Popular Español SA (BPE), the proportion of loans to Spanish borrowers has increased to 30% of the total loan book, up from about 20% prior to the acquisition. The Group also maintains a sizeable portfolio of Spanish government bonds at approximately 61% of total equity at end-June 2017. However, DBRS sees the Group as less constrained by the sovereign than most peers due to its high degree of geographical diversification, resulting in a rating that is one-notch above DBRS’s rating of the Spanish sovereign. The ratings also consider the Group’s exposure to potentially higher risk business activity through its consumer finance businesses, particularly its subprime auto lending business in the U.S., as well as its sizeable presence in emerging market economies.

DBRS considers Santander’s significant geographic diversification with its international franchises outside Spain as an important underpinning of the current rating level. Santander also benefits from the resilient performances across the Group’s businesses. The Group regularly upstreams dividends from each of its subsidiaries to the parent, contributing to diversity of earning streams at the Spanish-based parent bank. Positively, Santander’s U.S.-based subsidiary received a non-objection to its capital plan in its most recent DFAST/CCAR exercise, which allowed for upstreaming of dividends to the parent after a prolonged period where this was prevented by the regulators.

DBRS considers Santander’s earnings as strong and improving. Pressure on profitability is receding as various environmental factors are showing improvement, including higher interest rate margins (especially in Brazil) and improving economic conditions, and this is contributing to revenue growth and lower provisioning levels. Net attributable profit to the Group of EUR 5.1 billion on gross income of EUR 36.3 billion in 9M17 remains substantial and returns are at the mid- to upper-end of the global peer group.

DBRS views the Group as having a sound management team with a conservative risk culture that permeates the organization, contributing to a generally low risk profile and very strong operational capabilities with a successful history of managing operational risks. Santander has a track record of successfully integrating sizeable acquisitions, with systems integration typically being an important priority for Santander when acquiring an entity, contributing to highly effective front and back end systems when completed.

Funding and liquidity is strong and benefits from a large deposit base that funds its lending activities, together with a broad range of wholesale funding. Santander also benefits from its position as a relevant player in local markets with each subsidiary responsible for its own funding needs. Following a period of deleveraging, the Group’s loan-to-deposit ratio has improved, standing at 109% as of 3Q17. At the start of the year, the Group provided an estimate for its TLAC needs of approximately EUR 33 billion to EUR 40 billion prior to the 2019 deadline. DBRS sees Santander as being well on track to achieving this target given its issuance of approximately EUR 16 billion through September 2017.

Further supporting its strong credit profile, Santander maintains solid capital levels. The Group reported a fully loaded CET1 capital ratio of 10.8% at 3Q17, up 24 bps since end-2016. 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, is contributing to steady improvement.

As detailed in the following rating table, DBRS has also assigned Issuer Ratings to BPE and its subsidiary Banco Pastor, S.A. (Pastor). Concurrently, DBRS has upgraded the long-term ratings of Banco Popular Portugal S.A following DBRS rating action on Banco Santander Totta S.A. (see separate press release on Banco Santander Totta S.A.).

RATING DRIVERS
Positive rating pressure would likely be linked to improvement in the Spanish sovereign rating.

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 capitalization. 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.

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 applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (May 2017) which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial, company reports, Bank of Spain, European Banking Authority (EBA) and European Central Bank (ECB). DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski, Senior Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: October 11, 2006
Most Recent Rating Update: July 14, 2017

The rated entity or its related entities did participate in the rating process. DBRS did have access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com.