Banco Santander (SAN) stock surged Tuesday as investors bet on the prospect of accelerated shareholder returns after a report that confirmed the bank's capital strength.

The speculation was prompted by the conclusion of the European Central Banks recent review of capital buffers and targets across the sector, which was broadly positive for the Spanish lender and revealed in a release published by Santander Tuesday.

Santander stock rose by as much 2.6% in Madrid to change hands at €4.30 each, trimming the year-to-date loss to 6.5%. Spain's biggest lender, however, has missed out on the Trump reflation trade that has lifted many of the largest European banks since the November 8 election, falling 6.9% compared to a 3.5% gain for the Stoxx 600 Banks Index

The ECB told Santander that it must maintain a consolidated common-equity-tier-1 ratio (CET1) of 7.75% during year ahead, much less than the 12.4% ratio reported at the end of the third quarter, which now leaves the bank with excess capital to deploy. On an individual basis, the ECB has instructed Santander to maintain a CET1 ratio of 7.25%, markedly below the 14.31% individual CET1 for the bank.

"The strength of the Group business model and its geographical diversification ... provide us with ample support to continue implementing our strategy going forward," CEO Jose Antonio Alvarez said in the statement.

The out performance has not been without merit. The bank beat expectations for third quarter earnings and reported an 8% increase in adjusted earnings for the first nine months of the year. The increased headroom in its capital buffer could ostensibly support increased payouts.

Executive Chairman Ana Botín told reporters in March that she hoped to boost the bank's full-year dividend 5% to €0.21 per share in cash and "script" payouts.

But, at the heart of the lender's current drive is the Holy Grail of all strategic goals for modern day banking institutions; an 11% return on tangible equity. Management have pledged to deliver it by 2018 and analysts think that the pledge is credible.

"We are confident about [Santander's] earnings progression" over the next two years "with our estimates sitting moderately above management's targets," said UBS's Ignacio Cerezo in a client note earlier this month.

Solid earnings growth and rising returns for stockholders make for a bright spot in an otherwise bleak landscape of large-cap European banking at present.

Santander draws nearly 10% of revenues from Mexico, according to Factset estimates, and some 50% of net profits from Latin America in general. This leaves it exposed to any downturn among Latin American economies.

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