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Santander Rebounds From Giant Loss With Profit, Capital Lift

Bloomberg logoBloomberg 10/27/2020 Charlie Devereux

(Bloomberg) -- Banco Santander SA rebounded from its worst-ever quarter with a profit that beat estimates and improved capital as it seeks to convince regulators that its balance sheet is strong enough to resume dividend payments.

Net income totaled 1.75 billion euros ($2.1 billion) in the third quarter, beating estimates of about 1 billion euros, the bank said on Tuesday. The CET1 ratio, a key measure of capital strength, improved to 11.98% from 11.84% at end-June.

ECB’s Bank Payout Decision Complicated by Worsening Pandemic

The results strengthen the Spanish bank’s push to overturn the European Central Bank’s de-facto ban on paying dividends, which has driven down share prices. Santander Chairman Ana Botin has argued that the measure is harmful not only to bank stocks but also to the economy as a whole because it restricts the flow of capital and increases the cost of equity.

Banco Santander SA's Chairman Ana Botin Targets $1.4 Billion of Savings in New Strategic Plan © Bloomberg Banco Santander SA's Chairman Ana Botin Targets $1.4 Billion of Savings in New Strategic Plan

Ana Botin on April 3.

Photographer: Simon Dawson/Bloomberg

“Given the group’s current performance, the strength of our balance sheet, our liquidity profile and mix of businesses, I am confident that we will be able to resume cash dividends once regulatory conditions allow,” Botin said in a statement. Santander shareholders on Tuesday voted on a payout of 10 euro cents per share on this year’s earnings to be paid next year if the ECB lifts its recommendation.

Santander held back 2.5 billion euros for loan losses in the quarter after setting aside 7 billion euros in the first half. Santander, which posted its first loss in 163 years in the second quarter, expects underlying profit for the full year to reach 5 billion euros, compared with estimates of 3.66 billion euros.

Key Third-Quarter Figures

Net interest income EU7.77b vs 8.87b yr earlierCost of risk 1.3% vs 1.4%-1.5% in 2QBad-loan ratio 3.15%, estimate 3.47%Underlying profit EU1.75 billion, estimate EU1.02 billionAttributable profit up 249% vs yr earlierBrazil underlying profit EU550m vs est EU420m

Santander rose as much as 4.8% in Madrid trading and was up 4.3% as of 9:19 a.m. That cuts the decline this year to 52%, compared with a 39% slump by the STOXX Europe Banks Index.

The earnings once again highlighted diverging fortunes between Santanders business in Europe and its the bank’s more successful operations in the Americas. In Brazil, lending grew 20% from a year earlier with gains in both mortgages and credit cards.

Santander Outlook Brightens on Powerful Set of Positives: React

Santander generated 500 million euros of savings in the first nine months of the year and expects to reach a medium-term target of 1 billion euros by the end of 2020, ahead of schedule. It said it will achieve a further 1 billion euros of savings by the end of 2022.

What Bloomberg Intelligence Says:

Santander’s 75% net-profit beat, a stronger CET1 ratio and 1 billion euros of new cost cuts and an improved cost-of-risk target suggest consensus upgrades could be in store after the bank’s near 20% year-to-date underperformance vs. European peers.

-- Georgi Gunchev, BI banking analyst

Click here to see the full report

Santander plans to cut 3,000 jobs from its 27,000-strong workforce in Spain, Expansion reported on Tuesday. The bank will be making reductions, but that figure is “highly speculative,” Chief Financial Officer Jose Garcia Cantera said in a Bloomberg TV interview on Tuesday. “Clearly we will sit down with the unions over the next few days and start discussing adjustments,” he said.

Santander CFO Says Bank Is Set to Discuss Job Cuts With Unions

More than two thirds of the 114 billion euros in loan holidays that the bank awarded have expired with just 2% classified as impaired. That’s better than the bank expected and allowed Santander to lower its cost of risk to 1.3% from 1.4%-1.5%. The bank expects provisions to remain stable or slightly lower in 2021 and return to normal in 2022.

The bank said it plans to merge its various payment merchant and trade and consumer digital platforms such as Getnet, Ebury and Superdigital into a single company that will become one of the “largest private fintechs in the world” and will compete with other global payment platforms. The bank estimates the new entity will generate 500 billion euros in revenue per year.

The lender also confirmed plans to merge its digital bank Openbank with its consumer finance business.

Banking Rebound

U.S. and European banks have been reporting stronger-than-expected profit in the quarter thanks to a trading boom and lower provisions, with some indicating that their economic outlook is improving. HSBC said on Tuesday it expects credit losses to be at the lower end of a previously announced $8 billion to $13 billion range.

Still, uncertainty over a second wave of the Covid-19 virus persists, with Spain once again one of the hardest-hit countries.

Bank of Spain Governor Pablo Hernandez de Cos last week warned that what has so far been a health and economic crisis could spill over into the financial sector.

“It is a question of when, not if, banks’ asset quality will deteriorate in this crisis,” he said. “A resurgence in Covid-19 cases coupled with the unwinding of support measures could further magnify the crystallization of bank losses.”

(Updates with shareholder vote on dividend in fourth paragraph)

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