EUR 100.00 For Business Accounts Only

SANTANDER: VIRTUAL MEETING WITH THE COMPANY (ANÁLISIS BANCO SABADELL)

Highlights from the meeting held today with Santander’s Investor Relations department (Fernando Donoso and Carlos Berastain):
 Outlook’21. The company has stressed the main ideas mentioned in the FY2020 results:
- Total Revenues: Overall, in all revenues figures we should expect around mid-single-digit growth, led by NII and Fee Revenues, where the company has emphasised that not all the potential improvement would be priced in, especially in the consensus estimates for mature markets. That is, there could still be some leeway, given that the consensus expects no growth in both items in 2021 (vs. around -2.5% BS(e) and +1% BS(e), respectively).
- Costs: Likewise, we should expect the bearish trend to have been maintained, bearing in mind the restructuring costs. Thus, the savings announced in the 2019 Investor Day of € -1 Bn have been added to those announced in 2020, another € -1 Bn (around -10% of the cost base in Europe; 4.7% on the consolidated level) that have associated restructuring costs of some € -1.7 Bn (€ -1.1 Bn already on the books in 2020). In other words, in 2021 the cost base in Europe should be reduced by around € -9.5 Bn (-9.5% vs. 2020, in line BS(e)) and the 2022 cost base by around € -8.5 Bn (an additional -10.5% and vs. -3.5% BS(e)). On the consolidated level the consensus estimates a -4% drop in 2021 (-4.5% BS(e)) and flat performance in 2022 (vs. -2% BS(e)). There is room for improvement. The substantial reduction to costs in Europe would more than offset the increase expected in LatAm, which would come in below inflation.
- C/I: With the forecast improvement in revenues and falling costs, efficiency’21 would be better than the 47% seen in 2020. This would compare to the consensus estimate of 46% (in line BS(e)).
- CoR’21: The figure would be below that seen in 2020 (128bps; 120bps BS(e)) with better performance in all the geographical areas (except in Mexico, due to less Government support for the crisis).
- The Operating Net Profit’21 of €>6 Bn was reiterated (€ 5.66 Bn consensus and € 5.44 Bn BS(e)), which would mean RoTE of 9-10% this year (8% BS(e)) and would allow the medium-term target to be reached (13-15%).
- Capital and Dividend: The company is comfortable with the CET1 range of 11-12% for its diversified profile, and the bank is focused on generating RoTE, and therefore capital (some 40bps annually). The company recalled that the pending regulatory adjustments’21 would be below 40bps seen in 2020. Thus, in line with this message and that conveyed at its Investor’s Day, according to our calculations, around -20bps would be pending. The CET1 level in 2020 came in at 12.34% Fully Phase In and at 11.89% in FL terms and at around 11.6%-11.7% in proforma of the pending regulatory adjustments. Starting in the 1Q’21, the company will continue the dividend accrual with its pay-out range of 40%-50% (in line with BS(e)) given its intention of resuming the full payment in cash in 2021. As for B-IV adjustments, the group recalled that the indications given in mid 2020 of -100bps were purely indicative, excluding any alleviating factors through Management Actions (i.e. securitizations), where we must add that the model adjustment carried out will also contribute to lowering the impact, and in any event, a phase in will be conducted. With this in mind, our CET1 reference will stand at 12.1% in FL terms in 2021.
 Haircut. The company is not concerned, as it considers that it will not be generic for all the industries as it would represent an unfair treatment for those companies that did not request ICO loans. In the case of SAN, the ICO loans totalled € 30.8 Bn (15% of the total Spanish portfolio) with collateral of around 75%-76%. The allowances should rather come from a direct aid programme, as in the German case. In any event, as a result of the quality of its portfolio, along with the provisions set aside, it is not a concern.
 Art. 48 BRRD 2. The bank does not consider depreciations and its exposure is low. In this regard, we recall that if a legacy Tier 1 instrument fails to meet the CRR requirements (some factors such as dividend pushers/stoppers, CMS), after 2021 grandfathering it will be regarded as T2 (SAN has outlined that there are not indications hinting at the interruption of the payment of coupons). In the event of a resolution, and without Art. 48(7) of the BRRD2, the legacy T1 instrument would be pari passu with other AT1 instruments, although after its consideration as T2 after 2021, all AT1 instruments should be pari passu with T2, giving rise to a conflict with the CRR (Art. 52 (1), and not meeting the subordination criterion (AT1 instruments should be subordinated to T2 in the event of insolvency). In short, AT1 instruments might run the risk of being “infected” and not apply for regulatory capital. For this reason, the art. 48 could alleviate this infection risk, which could allow issuers to keep some inexpensive legacies for a longer period of time (such as CMS or DISCOS). For the time being, 4 countries have transposed the BRRD2 to their domestic regulations and some of them have included this Art. 48 retroactively (Denmark, Ireland and Germany) and France for the new bonds issued as of December’20. Holland completed the consultation period on the 22nd of January and the country does not know the position to be adopted by the regulator, which should announce its decision over the coming months, as well as Spain.
 GetNet. The listing of Brazil’s payment system arm to be conducted shortly will not have any implications for the group. GenNet currently depends on Santander Brazil by 90% although after the listing it will directly depend on Santander through PagoNext (10% held by the market). The spin-off means around BRL 2.5 Bn (i.e. 2%-3% of SAN Brazil’s equity). The group had a market share of 15% in 2020. The development in other countries is taking place (although they would not be part of the listing). As a reference, Cielo, its closest peer, is trading at 1x P/BV.

MARKET IMPACT
The messages show confidence in the execution of RoTE generation with potential for improvement in our estimates (around +10%) and those of the consensus and with the resulting impact on target prices that would be closer to € 3.70/sh.