EUR 850.00 For Business Accounts Only

Morningstar | Santander's 1Q Run Rate Below Our Expectations for Full Year

Santander reported attributable profit of EUR 1.8 billion for the first quarter of 2019, which is 10% below its 2018 first-quarter profit. The first-quarter run rate is below our full-year expectations of 7% growth, but the year-ago quarter presented a relatively challenging base; the second quarter will face a softer base. We maintain our narrow moat rating and EUR 5 fair value estimate.

Santander's Brazilian business, which contributes 29% to group attributable profits, reported a solid 14% increase in Brazilian real attributable profits. Some of this was lost to currency translation with a 7% increase in attributable profits in euros. The Brazilian economy continues on its recovery path, supporting revenue growth and lower credit costs.

Santander's home market of Spain, which contributes 16% to group attributable profits, reported a 15% decline in attributable profit as the flattening yield curve once again pressured net interest margins.

Uncertainty around Brexit had a negative impact on Santander's U.K. operations, with revenue declining 5% and attributable profit declining 36% year on year. Excluding restructuring costs that Santander views as nonrecurring, the decline in attributable profit would have been 15%.

We support Santander's offer to minorities in Santander Mexico, where Santander currently controls 75% of the shares. We believe that Mexico has attractive fundamentals and that the acquisition will improve profitability over the longer term. Minority shareholders always bring complications to a business with regard to strategy, decision making, and transfer pricing. We continue to believe that Santander's current portfolio of businesses is not an optimal combination and that opportunity exists to streamline the group further.