No news is good news

Once again, the group managed to beat expectations driven by stronger top-line momentum. The new divisional breakdown enables the group to show that the corporate lending and advisory business, which is seen as a growth lever, represents a large segment.

Confirmed guidance

The second quarter results were in line with the group’s full-year guidance and enabled the management to reiterate its aggressive long-term financial targets.

Confirmed guidance

The first quarter demonstrated the rationale of geographical diversification. Indeed, if the operating performance came in line with the group’s full-year guidance, this was achieved thanks to European (+40% of earnings) and Mexican (+10%) operations which offset a weaker performance in the US (10%) and Brazil (20%).

Mid-term profitability objective at hand

The quarterly profits came in line with expectations, confirming the high predictability of the group’s earnings. Management disclosed upbeat guidance for 2023 which should see the group meeting its mid-term profitability objective and exceeding by a comfortable margin its cost of capital.

No surprise, as usual

The group posted another strong set of results, thereby confirming its best-in-class and highly predictable profitability. This is what enabled the management to state that the group should be able to absorb future cost inflation and potential cost of risk increases through increased revenue generation.

Resilient earnings but limited equity generation

The quarter showed relatively stable operating trends. On the other hand, capital generation was depressed by heavy, albeit non-recurring, equity adjustments.

Confirmed full-year guidance

No news should be good news. SAN reported another strong quarter as low revenue margins continued to be compensated by a benign cost of risk. Unsurprisingly, the management confirmed its 2022 RoTE objective.

Upgraded guidance

The group beat consensus estimates on provision recoveries but also on stronger revenues. Management expects such an enviable performance to be repeated this year and to be improved in 2023, although we lack the assumptions supporting such a demanding objective.

Strong earnings generation failed to percolate into equity

The group posted a mixed set of results as the strong quarterly earnings generation failed to translate into equivalent equity accumulation. Activity levels were disappointing. However, management saw signs of recovery which should become visible in the next quarter.

CET1 ratio setback not an issue

The group’s profitability improved further, boosted by provision recoveries. The CET1 setback was driven by non-organic items and does not show any weakness as pending stress tests will show.

Faster cost of risk normalisation

The quarterly results were supported by improved macro-economic perspectives which translated into faster cost of risk normalisation amplified by some provision recoveries. On the other hand, the top line continued to suffer from interest rate cuts and lockdowns.

Ongoing restructuring and reaffirmed digital ambitions

The fourth-quarter results were impacted by strong restructuring charges as the group continues to reposition itself to take profit from the digital transformation as perfectly illustrated by management’s update on the group’s strategy which confirms that Santander is well-positioned to emerge as a potential future winner. In the meantime, the group is committed to delivering decent returns in an uncertain environment.

Almost back to normal

The third-quarter results and management’s guidance, supported by the accrual of a dividend, confirm that the situation is almost back to normal for this well-managed and diversified group. Within this context, it is easier to understand management’s recent comments about its lack of interest in domestic consolidation.

Operation of truth

The 5% reduction in the TBV/sh is reversible while goodwill impairments did not come as a surprise as confirmed by the group’s depressed P/BV ratio. The same thing as regards DTA adjustments which reflect management’s view that profits will not return to normal levels for two or three years in spite of a rapid top-line recovery. However, capital generation should remain at enviable levels if FX headwinds disappear.

Sovereign risk revival remains the group’s weakness

As expected, the Q1 results were impacted by the anticipation of the COVID-19 impact. Annualised loan provisions are commensurate, albeit lower, with our full-year projections. It is tempting to conclude that, from a macro-economic perspective, the worst is already largely priced in. Unfortunately, we continue to be wary about a potential sovereign risk revival be it in emerging countries or within the Eurozone. Within this perspective, the group’s double exposure to both LatAm and Spain does no

Morning Note – 22 April 2024

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Witan

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