Banco Santander, S.A. (STD)

Q1 2012 Earnings Call

April 26, 2012 4:00 AM ET


Alfredo Sáenz Abad – Second Vice Chairman and CEO

José Antonio Álvarez – CFO


Alfredo Abad

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Good morning, we’re going to begin the Results Presentation. As usual, I will be reviewing the basic parameters for the year and for the quarter so far. Then, Jose Antonio Alvarez will review the business areas and I’ll close with some conclusions.

The first thing to be said is the economic context is still very difficult and also very diverse, depending on the geographies. In Europe, at the beginning of the quarter, it seemed that there was some degree of stabilization. But now, in the latter part of the quarter, once again, we see signs of instability in the market. The U.S., on the other hand, closed 2011 with higher growth rates and remain solid at the start of the year, while Latin America still showed dynamic growth rates of around 3% or more in the main countries.

(Inaudible) the Grupo Santander has applied different strategies depending on the countries and the momentum in each economy and the priority in all of them was to strengthen our balance sheet, aided by our strong capacity to generate results. Quick overview of the quarter, three keys were, first, strong gross operating income, with over €11.35 billion, that’s 8% up on the first quarter of 2011, enabling us to post a pre-provision profit of €6.26 billion which is a new quarterly record and an attributable profit of €1.6 billion.

Second, the group’s diversification. At this time, 56% of our profit comes from emerging countries. I remind you that in line with our strategy, we have strong local franchises and we continue to improve our geographic diversification as demonstrated by the latest acquisition in Poland.

And then thirdly, we have continued to bolster our balance sheet significantly in the quarter. We have once again improved our capital ratios whilst under BIS and EBA criteria, we’ve improved our funding structure and our liquidity, improving our loan-to-deposit ratio to 115%. And in credit quality, we compare well with the industry in the main areas where we operate.

Let’s look at each of these points in more detail. We have continued to generate solid revenues in the top part of our P&L are near. And the net operating income in the quarter was at €11.35 billion and this is an important figure, because it sets a new quarterly record for the group and it does show a changed trend with respect to previous quarters, with growth over the fourth quarter backed by most units, mainly Brazil and Mexico, but also Spain, Santander Consumer Finance and the U.S.

And as we will see later, in most cases, the income was purely commercial and hence, more recurring. We also had a good quarter in trading gains. As well as this favorable trend in revenue, we see that cost remained virtually stable over the fourth quarter and this quarter. The net result of all of that is a pre-provision profit of €6.28 billion, which is also a quarterly record, which has enabled us to maintain our excellent track record in that line in our P&L of the last several years in which it has been continuously increasing.

New growth in the quarter puts us again amongst the world leading banks by profit generation, and it makes our P&L extraordinarily solid and we are extraordinarily able to absorb provisions in very demanding economic context. As a result, at a point in this cycle in which there is high need for extra provisioning, we’ve been able to maintain – sustain profits as you see on the right-hand side of the slide. So you can more easily understand the underlying elements, we have subtracted the distorting effect of generic provisions and of the special provision fund we constituted last year in the fourth quarter.

These very recurring results are due to the group’s diversification and to the right geographic mix between emerging and mature markets. As I’ve pointed out, we have a strong presence in growth markets, which generates 56% of the group’s profit. Of the rest, 31% of the profit is generated in mature markets, where provision levels are still fairly stable, and 13% of the profits comes from markets where cyclically high provisions and therefore, with profits still depressed in relation to their potential towards, which we must move in the next quarters and years.

The Group’s international expansion in the last few years has enabled us to build a business portfolio which is better than those of other savings national banks. Today, we have a stronger presence in emerging markets than our major competitors. We have very strong local brands with critical mass, whilst many of our competitors have banks without sufficient scale in many markets. And this has enabled us to have a better profit mix and a more stable and recurring profit. As a result of all of that, we are in an excellent position to normalize our profit.

And speaking about the improvement of our business portfolio, I should refer to the acquisition that we’ve made in Poland, which will merge BZ WBK with the Kredyt Bank. This is a very good transaction for the good and consistent with our strategy and the Santander business model for several reasons. First, because we increase our weight in a high-wealth core market. Second, because it enables us to become one of the top three players in the Polish financial system, far ahead of our nearest competitors.

Thirdly, it provides us with an excellent opportunity for growth and to improve our profitability with annual growth in this period of between 15% to 20%. And fourthly, it meets the Group’s financial criteria that it increases EPS and it offers an attractive return on the investment of almost 13% in the third year. And according to our forecast, fifthly, Santander will have at the end of the process a stake of between 76% and 81% of the new bank. Others shareholders will include the European Bank for Reconstruction and Development, which has recently announced its entry into the Zachodni Bank’s shareholding structure. So in summary, this is an opportunity, unique opportunity in terms of scale, positioning, profitability and growth potential in Poland.

The third point in my introductory slide was the strength of our balance sheet. Beginning with capital ratios, the quarter was a business as usual quarter. We closed it with the BIS II core capital ratio of 10.10%, was up eight basis points from the previous quarter, and that was attained by 18 basis points of organic capital generation, minus the negative impact of 10 basis points from exchange rate differences. As a result, we have stabilized our core ratio at over 10%, which we reached at the end of 2011. In EBA terms, we have gone up to 9.11%, which is well above the minimum requirement for June.

As for liquidity, the group has improved the excellent position with which it closed 2011. There were two drivers behind this. On one hand, deleveraging has continued in some markets, as mentioned, especially the Eurozone, mainly Spain, while our commercial gap shrunk by €11 billion in the quarter, which has put us within the target we announced in the last presentation, covering (audio gap) policy, supported by our wide and diversified access to wholesale markets.

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