Santander Expects Higher Capital After Botin Boosts Profit
Santander Targets Stronger Capital as Latin America Lifts Profit
(Bloomberg) --
Banco Santander SA expects to reach the higher end of its target for capital this year as the Spanish lender seeks to dispel persistent concerns that it needs to boost its financial strength.
The bank forecasts that its phased-in Common Equity Tier 1 capital ratio -- a closely watched metric -- will rise to close to 12% this year after gaining to 35 basis points in the fourth quarter to 11.65%. The lender made the capital estimate after earnings jumped in the fourth quarter, beating estimates on rapid growth in Latin America and the sale of a unit.
While the bank’s international reach has allowed it to mitigate the effect of low interest rates in its home market of Spain, investors often point to its capital levels as an area of concern. As of the end of September, the lender had one of the lowest CET1 ratios among its European peers and the lowest surplus over European Central Bank capital requirements among 10 banks reviewed by Bloomberg.
ECB Says Six Banks Missed This Year’s Bar on Capital Ratio
Chairman Ana Botin has argued that Santander’s core capital levels are appropriate for a business focused on lending rather than more volatile investment banking. The company also points out that its earnings volatility is among the lowest among other major banks. It targets a range of between 11% and 12% for the ratio.
The shares gained as much as 4.6% in early trading in Madrid on Wednesday and were 3.5% higher at 3.67 euros as of 11:21 a.m. local time.
Spanish banks have struggled to meet ECB demands that they provide financial buffers to protect the financial sector against another crisis. Santander said that of the record 97 basis points in organic capital growth generated last year, 62 basis points were swallowed up by tougher regulatory requirements.
“We’re very confident that we’re in a good place, not just with the level but also with the buffer,” Botin said in a Bloomberg TV interview. “Generating 97 basis points of capital shows the model is working.”
In a sign that the bank is still cautious on capital, Santander said that about a third of its second dividend for 2019 will be paid in shares rather than cash. The bank is offering 0.13 euros per share, of which 0.03 euros per share will paid through a so-called scrip dividend.
What Bloomberg Intelligence Says:
A CET1 beat and capital confidence that will begin to remove solvency fears, we suspect. Along with a solid but unexciting set of full-year results, this should stem, and potentially begin to unwind, the sector’s near-20% underperformance during the past 12 months.
-- Georgi Gunchev, BI banking analyst
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Santander is increasingly leaning on Latin America’s growing economies to bolster earnings amid lackluster growth in Europe. South America and Mexico combined accounted for 42% of the group’s underlying profit for the full year while Europe delivered 47% and the U.S. 7%. The bank is investing more of its capital in the regions, buying out minority shareholders in Mexico and snapping up smaller rivals in Brazil.
Meanwhile, it’s cutting costs in Europe, shuttering branches in the U.K., Poland and Spain. Underlying profit was flat in the U.K. as net interest income fell 5%. Santander UK has been particularly hard hit by regulations that force banks to separate retail and investment-banking operations, which inadvertently created more competition in the country’s mortgage market.
In a sign that negative rates are biting in Spain, net interest income was down 11% in the bank’s home market. Profit and fees both fell 2% in the country.
The bank’s earnings were boosted by a capital gain of 711 million euros ($782 million), primarily from the sale of its custody business to Credit Agricole SA, which agreed in April to take over Santander’s main custody and asset-servicing operations. That created a joint venture with 3.34 trillion euros of assets under custody
Here are some highlights from Santander’s earnings report:
- Full year net income fell 17% to 6.5 billion euros; full-year underlying profit rose 2% to 8.3 billion euros
- Bank had record year in revenues of 49.5 billion euros
- Net interest income for the group fell 2%; fee income rose 0.2%
- CET1 ratio strengthened by 35 basis points to 11.65%; if future IFRS9 requirements are applied, the rate would be 11.42%
To contact the reporter on this story: Charlie Devereux in Madrid at cdevereux3@bloomberg.net
To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Charles Penty
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