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SANTANDER: 1Q’20 RESULTS AND CHANGE OF T.P. TO UNDER REVISION (ANÁLISIS BANCO SABADELL)

1Q'20 vs .1Q'19 Results
N.I.I.: € 8.487 Bn (-2.2% vs. -1.8% expected and -2.6% expected by the market consensus);
Total Revenues: € 11.814 Bn (-2.2% vs. -1.8% expected and -2.4% expected by the market consensus);
Operating Profit: € 6.237 Bn (-1.4% vs. +0.1% expected and -3.0% expected by the market consensus);
Net Profit: € 331.0 M (-82.0% vs. -1.4% expected and -11.8% expected by the market consensus);
1Q'20 vs. 4Q'19 Results
N.I.I.: € 8.487 Bn (-4.0% vs. -3.6% expected and -4.3% expected by the market consensus);
Total Revenues: € 11.814 Bn (-6.2% vs. -5.8% expected and -6.4% expected by the market consensus);
Operating Profit: € 6.237 Bn (-5.8% vs. -4.3% expected and -7.3% expected by the market consensus);
Net Profit: € 331.0 M (-88.1% in 4Q'19 vs. -34.8% expected and -41.7% expected by the market consensus);
The 1Q’20 results came in better than expected in the main activity lines (NII, fee revenues and expenses). Almost all regions fared better than expected, with only the UK and Poland coming in below the consensus estimates, with a positive surprise stemming from the strength of the US and Mexico while Brazil, as we expected, also provided a surprise. Furthermore, the recurring CoR showed a positive performance, remaining stable vs. the 4Q’19 at around 100bps vs. a slight increase we foresaw in the UK and Brazil that was not finally the case. Thus, the group reached € 1.9 Bn of recurring Net Profit (in line with the 1Q’19 and +7.7% vs. BS(e) and +14.1% vs. consensus).
Covid-19 provisions for totalled € 1.6 Bn, +20% vs. the € 1.25 Bn maximum we foresaw in 1Q’20. Thus, the company’s indication on whether this would be extrapolated to YE’20 will be key. If this is the case, the CoR’20 would exceed 150bps, above 143bps BS(e), meaning that the total provvisions’20 would stand at around € 14 Bn (slightly above € ~13 Bn BS(e)).
FL CET1 stands at 11.33% vs. our estimate (and YE2019) of 11.42%. Thus, the drop is explained by the organic capital generation (+7bps) along with the lack of a final dividend’19 payout (+29bps) not being enough to offset the negatives stemming from the regulatory adjustments (-15bps), markets (-9bps) and M&A moves (-19bps, with the most noteworthy item being the cancellation of the agreement with Allianz, -9bps). Added to this would be the adjustments to capital from the new Covid-19 provisions, which in any case only explains 2bps of the worse performance. Specifically, this adjustment is explained by the fact that the company already deducted € -900 M from CET1 due to the expected losses. Thus, of the € -1.6 Bn of “new provisions”, another € -700 M would have to be adjusted, and thus € -400 M would be phase-in and only € -300 M are directly deducted from capital.
We place our T.P. Under Revision. In our scenario of Covid-19 impact leading to a V-shaped recovery (two quarters of deep contraction with moderate recovery in the third quarter, strong recovery in the 4th and the following year, with inertia even through the second year), we will cut Net Profit/EPS’20-21e by -40%, lowering our T.P. proportionally to around € 3.00/sh., which would still leave around +50% upside, and we reiterate our BUY recommendation. In our negative scenario of more moderate U-shaped recovery (2 quarters of deep contraction with modest growth in Q3 and Q4 and strong recovery the next year and the second; recovery in 18-24 months), the additional cut would be -10%, leaving the T.P. at €~2.70/sh. (+35% upside). Since the market high on 19/02, which is when the effect from Covid-19 began to be priced in, SAN has fallen -50%, -20% vs. the IBEX and -2% vs. the sector. The conference call began at 10:00 (CET). The share price is currently rising slightly.