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Santander: A new strategic plan

 

A new strategic plan in place

Grupo Santander has just unveiled its new medium–term goals once the 2016–2018 plan came to an end. The key medium–term targets are as follows:

 ROTE: 13%?15% (from 11.7% in 2018).

 Cost to income ratio: 42%–45% (from 47% in 2018).

 CET 1 fully loaded: 11%–12% (from 12.1% in Dec. 2018).

 Dividend pay–out ratio: 40%–50% (43% in 2018).

The three pillars in which the plan is based on are: (1) Improving operating performance; (2) Accelerating digitalisation; and (3) Continuing to improve capital allocation. Specifically, the management expects: (a) to increase NII and volumes at mid–single digit with fees evolution outpacing volume growth; (b) generate €.2bn of efficiencies (€.0bn in Europe) with a digitalisation and IT investment programme of more than €0bn in the coming year; (c) cost of credit at lows; and (d) reallocating capital to increase Latam weight. Due to all these drivers, ROTE is expected to improve to 14%–15% in the upper range or 13%–14% in the lower range depending on the interest rates evolution.

What about the time frame?

Although we assume that the new strategic plan is for the 2019–2021 period, the management presentations do not stablish any specific date to fill the targets, rather than "medium–term". We believe that this could be due to the two major uncertainties in the macro environment: (a) globally, the economy is slowing down or entering a new economic recession; and (b) the interest rates evolution, and mainly when short–term interest rates in the Eurozone will leave the negative territory.

All in, we consider than the lower range of these targets is under reach: according to our estimates the 2021e ROTE may improve to 13% and the cost to income ratio to 43%. The 40bp annual capital generation may require discipline in its use, although it is crucial to maintain the ratio in the desired level and cope with further regulatory requirements.