DBRS Morningstar Confirms Banco Santander SA’s Long-Term Issuer Rating at A (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) 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 ratings remains Stable. DBRS Morningstar also confirmed the Group’s Intrinsic Assessment (IA) at A (high) and the Support Assessment at SA3. 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 underlying earnings and a sustained ability to generate capital. The ratings also take into account the Group’s strong market shares in its core geographies, which are balanced between developed and emerging economies. Santander benefits from its significant scale and technology, resulting in good efficiency levels. The ratings also incorporate Santander’s solid funding and liquidity profile, as well as satisfactory capital levels.

DBRS Morningstar sees Santander’s profitability during the next quarters affected by higher interest rates, tighter financial conditions and a weaker macroeconomic environment than previously anticipated. DBRS Morningstar anticipates that Santander´s asset quality will deteriorate during coming quarters given this economic environment. In particular, DBRS Morningstar is closely monitoring the evolution of Santander’s exposures to consumer lending and Brazil. However, DBRS Morningstar sees Santander as well positioned to manage this challenging scenario given its business and geographical diversification as well as Santander’s risk management capacity. In addition, we consider that Santander will also benefit from the higher interest rates which will support the Bank´s capacity to absorb higher loan loss provisions as a consequence of the deteriorating economic environment.

Santander’s IA is positioned one-notch above DBRS Morningstar’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

An upgrade of the Long-Term Issuer Rating is unlikely in the near term, given the existing rating level of the Kingdom of Spain, and without improvements in the Group’s risk adjusted capital metrics.

The ratings could be downgraded if there is a substantial deterioration in asset quality, or if capital levels materially reduce. A downgrade of Spain’s sovereign rating would also have negative rating implications.

Franchise Combined Building Block (BB) Assessment: Strong
Santander’s geographically diverse global retail banking franchise is a key strength underpinning its ratings. Santander follows a strategy of universal, transactional banking with a focus on consumers and small- and medium-sized businesses (SMEs). With around 157 million customers worldwide and around EUR 1.7 trillion of assets as of end-June 2022, Santander is the largest Spanish banking group by consolidated assets. The Group is well positioned in its core markets, where it aims to have a minimum market share of 10%, including Brazil, Spain, the United Kingdom (UK), Mexico, Poland, Portugal, Chile and Argentina. Another core market for Santander is the US, although its market shares there are more modest.

Earnings Combined Building Block (BB) Assessment: Good
Santander reported a EUR 4.9 billion net attributable profit in H1 2022 compared to a EUR 3.7 billion profit in H1 2021. Excluding one-off items and at constant exchange rates, Santander’s underlying net attributable income in H1 2022 was up 7% YoY. This largely reflects higher net interest income and net fees (both reporting close to 7% growth YoY) which compensated for higher loan loss provisions. The Bank’s RoE (as calculated by DBRS Morningstar) stood at 11% in H1 2022, the highest level since 2010. DBRS Morningstar expects Santander’s profitability during the next quarters to be affected by the high level of uncertainty amid higher interest rates in most geographies and a weaker macroeconomic environment than previously anticipated. Nevertheless, DBRS Morningstar sees Santander as well positioned to manage this challenging scenario given its business and geographical diversification. In addition, we consider that Santander will benefit from the higher interest rates which will support the Bank´s capacity to absorb higher loan loss provisions as a consequence of the deteriorating economic environment.

Risk Combined Building Block (BB) Assessment: Good
DBRS Morningstar believes that Santander benefits from its geographically diverse global retail banking franchise, and has a sound management team with a strong risk culture that permeates the organization. Nevertheless, DBRS Morningstar notes that the Group´s operates in riskier segments than other international peers, given its exposure to non-developed markets and to consumer lending. DBRS Morningstar anticipates 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 its regions. In particular, DBRS Morningstar is closely monitoring the evolution of Santander´s exposures in auto finance, other consumer lending and in Brazil. However, DBRS Morningstar views that Santander´s risk management capacity will support the Bank’s asset quality during this period, helped by its geographical and sector diversification. In addition, Santander´s current asset quality metrics are solid, with a low Stage 3 ratio of around 3.1% and a high Stage 3 coverage ratio of 71% at end-June 2022 (using total loan loss provisions for Stage 1,2, and 3 loans).

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar considers Santander’s funding and liquidity profile remains solid. Santander’s funding and liquidity reflects the 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.

Capitalisation Combined Building Block (BB) Assessment: Good
The Group reported a CET1 capital ratio of 12.25% at end-June 2022, up from 12.11% at end-June 2021, which provides a cushion of 307 bps over the minimum supervisory capital requirements. Santander's fully-loaded CET1 capital ratio stood at 12.05% at end-June 2022 (including the full impact from IFRS-9 accounting standards). The Group has a CET1 ratio internal target of 12%. In addition, its capital position is also supported by its flexibility to raise capital through accessing the capital markets. Nevertheless, DBRS Morningstar considers that given its emerging market exposures further improvements in the risk adjusted capital ratios are required in order to drive positive rating pressure.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/403294

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

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

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (17 May, 2022)

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 June 2022) https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
and the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (4 April 2022) https://www.dbrsmorningstar.com/research/394683/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support

The sources of information used for this rating include Morningstar Inc. and Company Documents, Santander 2021 & H1 2022 Presentations, Santander 2021 & H1 2022 Press Releases, Santander 4Q 2021 & 2Q 2022 Report, and Santander 2021 Annual Accounts. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was 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]

DBRS Morningstar 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/403292

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pablo Manzano, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director – Global FIG
Initial Rating Date: October 11, 2006
Last Rating Date: October 4, 2021

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