EUR 850.00 For Business Accounts Only

Morningstar | Santander Reports Solid Underlying 2Q Results

Narrow-moat Santander reported attributable profit of EUR 1.4 billion for second-quarter 2019. This however includes a net non-recurring restructuring charge of EUR 700 million, underlying profit, which excludes the restructuring charge, of EUR 2.1 billion and is 5% stronger than the corresponding figure reported for second-quarter 2018. Solid revenue growth of 3% year on year was the driving force behind the results. Dollar and Mexican peso weakness offset Brazilian real strength; thus currency translation had a limited effect on the results at a consolidated level. While we have not factored in the EUR 700 million in our model, Santander is expecting a capital gain of EUR 700 million in the fourth quarter that will offset the second-quarter charge. We maintain our narrow-moat rating and our EUR 5 fair value estimate. Capital will remain a focus area for investors as a common equity Tier one ratio of 11.3% remains among its European peers. We do however highlight that Santander's superior profitability is a result of generating capital organically at a faster pace than most of its European peers. Currently Santander is trading at a forward P/E of 8.2, which looks cheap compared with the average P/E of about 10 over the last 10 years. Santander is trading in 4-star territory.

Santander's Brazilian business, which contributed 36% of group attributable profits for first-half 2019, reported a strong result with a 22% year-on-year increase in Brazilian real attributable profits. Robust customer activity supported revenue growth with loans increasing 9% year on year and customer funds by 11%.

In Santander's Spanish home market, which contributed 17% to group attributable profits, net interest income held up well in a continuing challenging rate environment but fee income disappointed with a 7% decline. Management indicated the fee weakness was in the corporate and investment banking business and not the core retail banking business.

Santander U.K. continues to be a drag on the group, revenue declined by 8% year on year and with stable costs, pre-tax profit pulled back by 17%. In contrast with Santander's European businesses its UK operation has seen the cost of deposits increase by 0.06%, while the yield on its lending book pulled back 0.11%, with a resulting 0.17% decline in its spread to 1.98%.

Management has reorganised the business into three reporting units of Europe, North America, and South America. Whereas previously the U.K. and the U.S. were standalone segments in their own right, the U.K. will now report with what was previously the Continental European business. Meanwhile, Mexico moves from the Latin American division to join the U.S. in a new Northern American division and the remainder of the Latin American business is now known as the South American division. These types of reorganisations are a favourite pastime of banking executives worldwide. We are not always convinced that such reorganisations have much effect on the day-to-day operations of the bank involved. We hope Santander continues with its excellent disclosure of each of the main jurisdictions it operates in and does not use the reorganisation as an opportunity to obfuscate.

It is interesting the U.S. and the U.K. were both integrated with other business units. We think it is a signal to the market that these two businesses are core to Santander. We have always advocated that Santander looks to exit the U.K. and the sell-off or spin-off of its 70% interest in Santander Consumer Finance US. If a signal was intended, we would view the reduced probability of Santander exiting the U.K. and the U.S. as negative.