DBRS Comments on Santander’s Q1 2008 Results – Senior at AA
DBRS sees its ratings for Banco Santander SA (Santander or the Group) and related entities as unaffected by the Group’s Q1 2008 earnings results that were released today. DBRS rates Santander’s Senior Unsecured Long-Term Debt & Deposit at AA and its Short-Term Debt & Deposit at R-1 (high). The trend on all ratings remains Stable.
Santander reported net attributable profit of €2.206 billion for Q1 2008, up 22% from Q1 2007. The Group continued to absorb rising loan loss provisions, while maintaining solid earnings growth and profitability through the quarter. Due to its focus on retail banking and limited capital markets activities, Santander was less affected than many of its peers by continued disruption in global financial markets in Q1 2008.
DBRS views positively the fact that the Group continued to generate strong operating leverage, with operating income growing by 19.1% year-over-year, to €7.347 billion, while total operating expenses (excluding provisions) rose by 5.7% to €3.081 billion in Q1 2008. This strong operating performance enabled Santander to achieve double-digit earnings growth in the quarter, despite a significant increase in loan loss provisions.
Loan loss provisions rose by 69% over Q1 2007, to €1.135 billion. Higher provisions supported loan growth and helped build the loan loss allowance. Santander’s non-performing loans (NPL) rose by 45% year-over-year, to €7.148 billion. The NPL ratio rose to 1.16% as of Q1 2008, up from 0.82% at the end of Q1 2007. Higher NPLs reflected deterioration in asset quality and also a shift in loan mix, primarily in Latin America, towards more profitable products with higher risk premiums.
DBRS will closely monitor asset quality trends. DBRS expects Santander to continue coping with an environment of increasing credit costs, helped by the Group’s diverse franchise and resilient earnings power. However, a broad economic downturn in Europe and Latin America, where Santander’s operations are concentrated, would make it more challenging for the Group to absorb rising credit costs out of current earnings.
In Q1 2008, most parts of Santander’s diverse franchise recorded solid performance. The Group’s businesses in Latin America generated attributable profit of €729 million in Q1 2008, up 7.1% year-over-year, despite unfavourable currency movements. Attributable profit from the United Kingdom rose by 3.8% year-over-year, to €311 million. The increase would have been higher, if not for the devaluation of the pound sterling against the euro
Attributable profit declined by 7.1% in Continental Europe to €1.224 billion. This decrease was driven by lower income from European wholesale banking operations which were affected by the disruptions in financial markets.
DBRS views Santander’s capital positions as sound, with a Tier 1 ratio of 7.5% at the end of Q1 2008. Liquidity remains robust, given the Group’s strong customer deposit franchise, its continued access to wholesale funding and substantial unused discount capacity with the European Central Bank.
Santander reported a positive contribution from its acquisition of assets of ABN Amro, primarily Banco Real in Brazil and consumer finance operations in Europe. The integration of Banco Real with Santander’s existing Brazilian operations will create that country’s third-largest bank and is expected to result in significant cost synergies. Given Santander’s proven track record, DBRS expects the Group to integrate the former ABN Amro businesses successfully, as well as the recently-announced acquisitions of certain European consumer finance operations from General Electric Company and of a Brazilian asset management business from Fortis Group.
DBRS will continue to monitor Santander’s performance, as the credit environment is expected to deteriorate further. Given the Group’s strong, resilient franchise and recurring earnings power, DBRS expects Santander to absorb rising credit costs and maintain solid profitability.
Santander is based in Madrid, Spain, and reported total assets of €878 billion as of March 31, 2008.
Note:
All figures are in euros unless otherwise noted.
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