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SANTANDER: 2Q’20 RESULTS (ANÁLISIS BANCO SABADELL)

2Q'20 vs. 2Q'19 Results
N.I.I.: € 7.715 Bn (-13.8% vs. -13.4% BS(e) and -14.1% consensus);
Total Revenues: € 10.704 Bn (-13.3% vs. -13.6% BS(e) and -15.2% consensus);
Operating Profit: € 5.628 Bn (-13.7% vs. -15.8% BS(e) and -19.7% consensus);
Net Profit: € -11.129.0 M (€ 1.391 Bn in 2Q'19 vs. € 944.4 M BS(e) and € 782.0 M consensus);
2Q'20 vs. 1Q'20 Results
N.I.I.: € 7.715 Bn (-9.1% vs. -8.7% BS(e) and -9.4% consensus);
Total Revenues: € 10.704 Bn (-9.4% vs. -9.6% BS(e) and -11.4% consensus);
Operating Profit: € 5.628 Bn (-9.8% vs. -11.9% BS(e) and -16.1% consensus);
Net Profit: € -11.129.0 M (€ 331 M in 1Q'20 vs. 944.4 BS(e) and 782.0 consensus);

The 2Q’20 results are very complicated, slightly better than expected in PPP (thanks to trading revenues and lower costs). However, what is most positive is that CoR remained flat in 2Q’20, in line with the company’s guidance’20 of between 140bps-150bps. On the bottom line of the P&L statement, an impairment of around €-12 Bn was accounted in goodwill (due mainly to US, UK and Poland) and DTAs (mainly in Spain). We are surprised at the company’s intention of paying out a mandatory scrip dividend DPS’19 of € 0.10/sh. and keeping reserves for the dividend’20 in its 2Q’20 results at -6bps (€ 400 M or around 30% of Operating Net Profit in 2Q’20).
We think capital has a complex reading. In 1Q’20 the fully-phased-in figure reached 11.58%, in in 2Q’20 it has risen to only 11.60%, as +34bps organic growth was recorded (although backed by securitisations, mainly), -6bps from the dividend reserves, -7bps from a one-off (mainly from goodwill stemming from the -5bps from the Ebury deal, which was already known) and -19bps from markets and others (of which, -8bps is from markets and -6bps from pensions). Added to this is +24bps from CRR regulatory adjustments (+11bps from SMEs supporting factor and +13bps from dynamic IFRS factor). Thus, the company has managed to come close to the high end of its guidance’20 range of between 11-12% at the year-end, although we insist that it is thanks mainly to the CRR adjustments (without which the company would have had to generate organically, and net of any adjustments, some +20bps/quarter vs. around +10bps “structural” average). With all this in mind, FL CET rose +13bps vs. 1Q’20 to 11.46% (backed by securitisations). In 2H’20 positive adjustments would have to be added from the Puerto Rico deal (already known, between +4bps and +5bps) and software (between +10bps and +20bps)
As for its core divisions, only UK performed substantially worse than expected by the consensus (-47.3% in Operating Net Profit). Thus, Brazil came in +3.5% above expectations, Spain +29%, SCF around +71%, Mexico +14.2% and US +231.5%. The positive reading would come from the fact that 1H’20 Operating Net Profit totalled some € 2.7 Bn vs. € 1.9 Bn consensus in 2H’20, meaning that, if commercial activity recovered somewhat (following the Covid-19 lockdowns), we might see estimate upgrades. BUY. Target Price: € 3.00/sh (upside 42.69%). Conference call at 10:00 (CET).