Banco Santander, S.A. Q4 FY2021 Earnings Call

Good morning, everybody, and welcome to Banco Santander's Conference Call to discuss our Financial Results for the Year 2021. Just as a reminder, both the results report and the presentation, we'll be following today, are available to you on our website. I'm joined here today by our executive Chairman, Mrs. Ana Botín; and our CEO, Mr. José Antonio Álvarez. Our CEO will provide an overall view of the performance of the group, regions, and some of the main countries, as well as the business divisions throughout the year. Our chairman will provide key highlights of the year as well as the strategic priorities and key targets going forward for both 2022 and the mid-term. Following their presentations, we will open the floor for any questions you may have in the Q&A session. With this, I will hand over to Ms. Botin. Ana, the floor is yours.

Thank you very much, Begonia, and good morning to everybody. It's great to be with you all and thank you for joining us. So as Begonia said, and as an introduction to our 2021 results, I would like to provide you with some context of what we have achieved since 2015. Our resilient business model has allowed us to grow, to increase our balance sheet strength, our profitability, and deliver attractive shareholder returns. Again, key elements continue to be our scale, our diversification and our customer focus. All of which remain a source of strength of more predictable and earnings results through the cycle. In fact, if you look back 20, 25 years, our earnings per share represents the lowest volatility versus our peers and growing our results. And this is again a key attractiveness of our business model. So, we have laid these foundations to deliver great value, to service a growing customer base, which is up 30 million customers since 2015, increasing profits, improving profitability. Our RoTE is up close to 170 basis points since 2015, and of course, strengthening our capital base in a very significant way as well as delivering sustainable returns to our shareholders. Just a couple of numbers on this. We have remunerated shareholders with €19 billion since 2015, and our tangible NAV has grown by €12 billion since then. So, I'm very pleased to report that a strong 2021 takes us very close to meeting our 2019 Investor Day targets in spite of the pandemic, actually in some cases we're ahead, and we will continue to focus on growth, profitability, strength, including shareholder remuneration. We are guiding for 2022 a mid-single-digit revenue growth, cost income close to 45%, and return on tangible equity above 13%. And we are aiming to keep our CET1 fully loaded at around 12%. We're also aiming to keep the 40% payout in 2022, of which, as we already said, will be 50% share buybacks and the other 50% in cash. I also want to say that longer term, we aspire to increase our total shareholder remuneration beyond the 40% to around 50%, again, through share buybacks and growing our cash dividend whilst maintaining a CET1 of 12%. This would be, of course, subject to future corporate and regulatory decisions and approvals. So, if we go to the next slide, you've seen a very strong 2021 results. Our net profit is actually up 25% from 2019 underlying in a similar percentage, reflect, as I said, the strength and resilience of our business model. We onboarded 5 million new customers. We are growing revenues by 7% to over €46 billion. We again increased efficiency and reduced the cost of credit, that's down to just 77 basis points, and generating a return to shareholders as measured by tangible NAV per share and cash dividend per share of 11%. Importantly, 2021 was a pivotal year for us in terms of capital. We are at the high end of the range, delivering a 12% CET1 fully loaded. And going forward, as I already said, we expect to keep it at these levels of 12%. So, you can see our P&L here. We have been able to recover, actually more than recover our pre-pandemic levels of customer activity. In terms of the underlying profit before tax, again, it's a record high of €15.3 billion, actually, on the quarter, it's the highest underlying in 12 years, and this is up 21%. Our underlying profit of €8.7 billion, that's up 80% versus last year, 23% compared to 2019. And again, this reflects optimal cost of risk, but also very strong execution of what I have said many times is a structural change in our business model. Very importantly, as you can see, revenues are growing more than cost, with a positive operating leverage. Very strong capital generation in the year and – up to CET1 of 12%, even though we had significant regulatory headwinds this year.

Thank you, Ana. And good morning to everyone. As Ana has already commented, we recorded a pretty strong set of results in 2021 with an underlying profit of €8.7 billion, 78% higher year-on-year in constant euros, driven by a very positive performance across the board, notably in the U.S., UK, Brazil and the CIB and Wealth Management businesses. Our net operating income pre-provision profit was around €25 billion with an increase of 9% year-on-year, which I think is remarkable. This was driven by a 7% revenue growth. Net interest income grew 7% on the back of higher volumes, lower cost of funds, better credit spreads in Latin America and starting some positive impact from recent interest rate hikes in some Latin American countries and Poland. Net fee income rose 8% year-on-year. Double-digit growth in corporates, wholesale banking, and Wealth Management & Insurance due to greater commercial and financial activity. Costs increased half of the pace of the revenue, which has driven significant efficiency improvements. The significant fall in loan loss provision across the group accelerated in Q4 driven by the improvement in the macroeconomic outlook and the very positive performance of our main portfolios. If we look at one step down in the P&L and we analyze the quarterly trends in core lines, we saw improving trends across the board and the P&L lines through the year, Q4 was the profit driver of 2021 of €2.3 billion after a good performance, particularly on the provisioning side. But also, some of the releases were offset for the contribution to the positive guarantee from bank levy, the charge for the Swiss francs in Poland. So, net-net, the quarter is fairly comparable with the previous ones. In more detail, sustained customer revenue growth, plus 4% NII and 3% net fee income quarter-on-quarter driven by greater volumes, initial impact for interest rate hikes, as I mentioned before, and growth in higher value-added products and services. Q-on-Q increase in cost is almost fully explained by restructuring. So, this does not represent a running rate for the coming year. In addition, a lower loan loss provision in Q4 favored the aforementioned provision release. I will run through the costs and provisions in more details in the following slides. On the cost side, we have seen significant inflationary pressure around the world. Group costs rose 4% in constant euros but were 2% lower in real terms, absorbing higher IT expenses, digital developments, increased activity, and labor agreements that particularly affected in the second part of the year. Our efficiency ratio improved to circa 46%. This was basically driven by Europe, minus five full percentage points, which recorded the highest efficiency gains. I should stress that the cost in Spain went down 7%; in Portugal, 5%; and UK also decreased. This is more to come in 2022. And our running rate will decrease in line with our targets for the region. We continue to make a structural change to our operating model to drive new improvements in productivity, which should enable us to maintain cost growth below inflation and further improve our efficiency rate. So, on the credit quality, the balance sheet remains, I would say, robust. NPL ratio at 3.16%, below 2020 and 2019. Provision is down 37% in constant euros partly due to the releasing provisions in Q4. We also reduced significantly cost of credit, which was mentioned already by Ana, to 77 basis points below 2020 and 2019 levels and exceeds our initial 2021 target. In 2022, we expect to maintain the cost of credit below our ratio through the cycle. Spain will be key as we expect cost of credit to reduce to approximately 50 basis points, offsetting some normalization in the U.S. and UK. Finally, on capital, in 2021, we reached a fully loaded core equity Tier 1 of 12.12%, thanks to the strong operating results we deliver quarter-over-quarter. In Q4, we generated 42 basis points organically, a combination of net profit, net of dividends and also the efficient risk-weighted asset management that the risk-weighted assets were flat in the quarter. Negative impacts in the quarter of two basis points due to small regulatory impacts, we already spoke about this in the previous quarter, nine basis points due to market movements affecting some ALCO portfolios, and five basis points from the minority interest in Mexico, including acquisition of SCUSA that was approved the same week, executed in the same week – of eight basis points, we closed at 31 of January 2022. And the announced acquisition of the broker-dealer Amherst Pierpont, that affects eight basis points, this still subject to completion, which will have an impact of 16 basis points on our pro forma CET1 ratio will stand at 11.96%. We were able to combine this performance with an increase in tangible net asset value per share. Looking at the regions, starting with Europe, we are accelerating our business transformation. It's where we are pushing harder in changing our operating model. Profits doubled in the region, reaching €3 billion with higher profitability due to volume growth, particularly mortgage in line with economic recovery. 24% net operating income supported by wider jobs in most countries. Revenue was up 11%, particularly customer revenue, while costs were flat ongoing due to the ongoing efficiency gains. 32% reduction in loan-loss provision and our cost of credit improved to 140 basis points. In the following slides, for the sake of clarity, includes the return on tangible equities adjusted to the 12% return core equity Tier 1 in all the units due to the fact that in order to have a like-for-like comparison between the units and given the fact that they have very different capital ratios, we are making this adjustment.

Thank you very much, José Antonio. So, as I said, we're delivering today, and we are building the Santander of tomorrow. We believe in an era of digital revolution, and this is absolutely essential. And I have to say, first of all, I am hugely proud of our team and the progress we have made over the last few years. We have laid the foundation to deliver great value and service to our growing customer base, which, as I said, was up 30 million since 2015. We have, at the same time, increased profit. We have improved our profitability. And we have strengthened our capital base as well as delivering sustainable returns to shareholders. I am incredibly excited about what lies ahead. We are continuing our journey to become the best open financial services platform, acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities. And this is what is driving our day-to-day across regions and businesses. In our daily work, actually, we're not just, of course, meeting our legal and regulatory expectations, our aspiration is to exceed all our stakeholders and our people's expectations. This is a key driver to attract the best talent, which, as we know, is the basis of success for any company these days.

In Europe, we are working really hard to transform the business model. Return on tangible is close to 10%, as you can see in the slide. Our customer focus is also showing up in better NPS across the different countries. And again, the structural changes have led to cost efficiencies of around €200 billion, and this is an area we will continue to focus on for next year. North America, we generated a return on tangible equity of close to 25%. We are working also on a structural basis in the U.S. I'll give you more details later on. And really trying very hard to leverage the connectivity across the group, our experience in Consumer Finance in Europe and Latin America and other relationships that are global.

[Operator Instructions] Our first question is coming from [indiscernible] from DBS. You’re now live.

Yes. Hi, good morning. Thank you for taking my questions. First one would be on the asset quality guidance in Brazil, if you see any downside risk to that stable cost of risk guidance you have given considering the slow economy and the fast growth of the retail books in recent years. And the second question is around city selling retail operations in Mexico, if you can give us any color around potential interest in the asset. How would you approach the funding? I mean, the 12% CET1 target is a binding constraint, even including potential M&A in Mexico and some of the places. Thank you.

So let me take the second one. I mean, José Antonio can take the second – the first one on Brazil. So, we are very satisfied, and we have a great business in Mexico. We do not need to buy. We’re generating great profits. We believe that’s going to accelerate. We’re gaining market share. I actually commented this morning that we’ve built from scratch an auto finance business that in a couple of years is at 10% market share. So, let me be very clear, we do not need to buy to generate very attractive and profitable growth. Having said that, Mexico is one of our core markets. And so, when and – the process is expected to begin and actually it’s months away, we expect to be part of that process. I can assure you we’re generating a lot of capital. We want to generate more capital and that is one of the goals of all the management team, ensuring that we are putting business on the books that is profitable and reducing the investing in new businesses, as I said, from 30% to 20% of our total RWAs.

Yes. Sure. As you’ve seen in the results presentation that we’re going to grow in Brazil. I should say that there are two different speeds in the loan book in Brazil. One is speed from the – I’m referring to 2021, in the consumer side, where we’re growing around 20%. That particularly grew faster in the first part of the year than the second half where we tightened a bit our credit standards, and we grew less in the second part of the year. Going forward, on top of this, we were building a significant amount of provisions for the expected loss, taking into account the macro-outlook that, as you mentioned in your question, we expect GDP to grow barely in 2022, and we are adjusting to this situation. And we already feel that we provide for this scenario already. In 2022, our growth is going to be – what we are seeing right now is a relatively low demand on the corporate sector. And our growth now in the consumer side is going to be at best in line with inflation, at best. I should say, inflation is running now at 10%, expected to run at the end of the year in the 6%. Probably you should expect high single-digit, but in line with inflation or below inflation, and probably we’re going to grow less than the market. So, this makes us comfortable that taking into account our provisioning levels, our origination stand as we’re going to be able to manage the slowdown.

Yes. I may just add one fact, which I think is crucial for all of you and the reason that we’re doing so well in Brazil. Of course, we have a great team, and there’s great execution. But please do not forget that for South America and Brazil is 80%, 13% of our loans and 31% of profits. And the reason for that is we have a lot of fees and a lot of diversified different income streams that are growing really well. This is crucial, aside from the actual credit management that José Antonio was explaining.

Thank you. Can we have the next question please.

Yes. Good morning. Thank you for taking my questions. And first one, I wanted to ask about your cost-to-income target for 2022. If you can please comment on what should drive the improvement in the ratio at the group level, in particular, how do you see cost inflation in emerging markets? And Brazil, in particular, if you think that cost to income could improve in these markets or not? And also in developed markets, you admitted the €1 billion cost-cutting target is challenging. You maintain a high level in technology. So, I wonder if you can give more guidance in terms of costs for the business units, UK particularly the restructuring seems a bit slow. And second question on capital, you can update on the headwinds expected for 2022 in terms of restructuring charges, given – and then also the regulatory headwind that we might expect? And also related to capital and a follow-up on the previous question if I wonder what is the minimum CET1 that you would be comfortable leveraging up if you were to embark on M&A, for example, the PagoNxt deal? I see that you are guiding for 12% both in 2022 and in the medium term, which is an increase versus the previous range. So, I wonder if this is also your new threshold in terms of capital also in the event of M&A? Thank you.

Thank you very much. So let me just give you a high-level view on capital again. So, as I said, 2021 has been a pivotal year for Santander from a capital perspective. We gave a range of 11% to 12% back in 2019. I want to stress that from a regulatory perspective, from a supervisory perspective, from an economic and prudence perspective, the 11% to 12%, i.e., the 11.5%, gives us ample buffers against some minimums. This is really important. We finished at 12.12% actually fully loaded and 12%, if we take account of the inorganic. And I really want to stress that the 12% is because we understand investors want the 12%. So, we are going to be at 12% for 2022. Throughout the year, this allows us, as I said, us to be very strong from a balance sheet perspective, it allows us to grow profitably and also to reward our shareholders, increasing as our profits increase. So again, the buffer is just to give you a number 365 of our minimums, but also because we have proved and I gave these numbers, not all banks require the same amount of capital. Business models are different. They’re more or less volatile. We have proven to be the most resilient bank in the latest EBA stress test with, I think, it’s 250, a bit more capital depletion in the adverse. That’s 485 on average for the banks. But very importantly, our geographic diversification, retail commercial business, you’ve seen that in the 2008 crisis. You’ve seen that in the global pandemia, year-after-year. This is not just the last 10 years. The last 25 years, we have the lowest EPS volatility. Another evidence, of course, is the fixed income investors, which look at our balance sheet inside and out. We have the – I think the first or second – probably the second lowest credit cost than any of our peers. So again, this is crucial. Having said that, as I said, we are going to be at 12%, and 12% is our target for 2022.

And very importantly, and you’ve seen that year-after-year, we’re generating more and more capital organically, increasing our profitability, and that’s still the intention, I just said for the medium term and we’ll give you detail, how we get there. We’ll be at 15% or actually maybe even above that. So, this is really, really important. José Antonio, I think I answered that at least on the higher level, which I think is something, which we care about. Again, we’re listening to you. We’re listening to investors. And it’s been a pivotal here. And our aim is that this is not the issue that we need to discuss. We want to focus more on growth and opportunities ahead.

[Operator Instructions] Our next question is coming from Britta Schmidt from Autonomous Research. You’re now live.

Yes. Good morning. I’ve got three questions, please. Just to confirm on the CET1 ratio. If we included a buyback element for Q4 and the pending deals, would it be right to say it will be at 11.8%? And can you just confirm that the regulatory headwinds are still expected at around 30 basis points? The second question is on Spain. Despite a decrease in the customer spread, NII was up. Can you give a bit more color on that? And maybe also on the reduction in insurance fees. And the third one is on the U.S. operating model, you commented on some regulatory approvals. Could you tell us a bit more about that? Please. Thanks.

Regulatory approvals. Yes, regulatory approvals in the U.S. We got approval for Santander Consumer buybacks, and we executed that on Monday. We have pending approval for the Amherst Pierpont, which is the other transaction. That's the only one pending. On the CET1, including everything we know until now, would be very close to 12%. I think it's 11.96%, 11.97%. So, including all the – we were at 12.12% exactly at the close of December, will be very close to 12%, 11.97%, 11.98%, something like that, it's in the 11.96%, including the pending approvals, which will happen in Q1. In terms of – so again, we said we will be at 12%. As I explained, we have a diversified, very predictable business model. We've delivered every single year. And there will be some ups and downs every quarter, but our goal is to be at the end of the year at 12% or above. And I'd say, every quarter also.

Regulatory headwinds, I think maybe José Antonio you can take that one and the Spain insurance. Regulatory headwinds, I think – have you said anything about that? Do you want to expand? Again, we're going to be at 12%. We feel very confident and they should be leveling off and, of course, a lot less than in 2021. That's for sure. On the capital, naturally, there are some potential regulatory headwinds coming basically from some colorful morals, difficult to assess at this stage. But we feel that aside from any kind of inorganic that we don't have things that we do not contemplate at this stage. We're going to be running around 12%, maybe a bit higher, a bit lower than that, including the regulatory headwinds and probably, taking into account the look for interest rates, some impacts coming from the ALCO portfolios. So, everything in good basis and our expectation of right now, so this is in CET1. Insurance, well, we have – insurance businesses is running – is going very well all across the world including Spain. Spain is growing a lot.

What we have had in Spain is some one-off coming from annuities that – well, probably it's not going to – no, for sure, it's not going to repeat it in 2022. But I will be surprised if our insurance fee, insurance generation in Spain does not grow in the region of 15% in 2022. So, I'm fairly optimistic about insurance. And I think Insurance continues to be one of our best opportunities to grow our fee income.

Thank you. Can we have the next question please?

Good morning. Thank you for the presentation and taking my questions. I have two questions. One is on ESG commitments. I mean you have given guidelines on what is the support that you are planning in terms of lending on green finance targets. I was wondering whether at what stage the bank is considering to disclose a Scope 3 emissions for the loan book, and to track a bit more on progressing towards that net zero by 2050? And the other question is a bit more linked to the previous one. At the bank level, if you could just run through a bit of what's your interest rate sensitivity on the main units of the bank? Thank you.

Thank you. So let me take both of those. I mean, the interest rate sensitivity, actually, we are positioned for higher rates. So net, it should be positive. Sometimes it takes some time to feed through, but clearly positive. On the ESG commitments, Scope 3. So, we are taking into account Scope 3, as we go through the stress test. We did some of that already last year. We're doing that this year. We're actually going to be very focused on embedding that bottom up. But obviously, to measure Scope 3, we need consistent numbers. We need our customers to give you numbers that we can rely on. And we then need to compare that with others in a way that's comparable. And all of that is going to take some time.

Thank you. Can we have the next question please?

Thank you for the presentation and taking my questions. I have two questions. One is regarding the FX denominated mortgages in Poland. How should we think about your exposure to those? We've seen other banks both actively reaching for out-of-court settlements and increasing their coverage levels amid unfavorable court decisions. Do you anticipate increasing charges related to the resolution of these mortgages? And then my second question is basically a follow-up. You had initially guided for an RoTE ranging from 13% to 15%. Now you're guiding for 13% in 2022. Is this level encompassing any downside risk from the higher-than-anticipated costs amid higher inflation like you are highlighting? Thank you.

First one, and then José Antonio, on the Swiss francs. So, I believe it's remarkable what the team has achieved. We are achieving close to 13% in 2021 after COVID. So, in 2019, we guided medium term, that's three to four years. So that's 2022, 2023 to 13% to 15%. We're going to – we're close to 13% now. We are saying above 13% next year. Second very important point, again, that shows we not just delivered but over delivered, when we gave the guidance, we said 11% to 12% CET1.

Well, it's very long. We have an exposure between the consumer bank and the bank of €2 billion round €2 billion FX Swiss franc mortgages. Our provisioning levels now are 22%, 23%. Well, we are doing some settlements with the customers, as everybody is doing the same. The final cost of this largely depends on some rulings for the courts and the success of the settlements we are doing. But – well, this is largely behind us on the back of much better outlook for the Polish business on the back of higher interest rates.

Thank you. We are running out of time, but I have two questions left. I will ask you to be very brief. So, can we have the next question, please?

Yes. Hi guys. Good morning. I have just a couple of quick ones. On NII at the group level, what's your assumption for the – in the guidance that you're giving us for 2022 mid-single-digit revenues, what's your assumption for the ALCO portfolio? You've decreased the allocation to Spain quite significantly while keeping the overall ALCO portfolio level pretty constant versus 2020. What should we – how should we think about it going forward? How about tiering, for example, what's your assumption baked into the guidance as well as rate rises in Europe and across your geographical footprint? So that's on NII and if I may, a super quick one. On the DGF and ERF charges from 2024 onwards or even maybe 2023. Are you expecting a significant reduction there?

Okay. José Antonio, could you just – if you could be brief? We have one more question, and we have...

Yes, NII growth, you're referring specifically to the ALCO portfolio, yes? So, in the second half of the year, we already had in 2021, I mean, less revenues coming from the ALCO portfolio in the back. The ALCO portfolios are basically in Brazil, Chile, Mexico, somehow in Poland and somehow in U.S.; not in Europe, where the portfolios are small on the system and UK is not a system. So higher rates naturally means lower revenues from this, but this is included in our NII guidance and in our guidance for 2022, with the expectations we have for rates, yes? So that is to go up in Mexico, Brazil, U.S., UK not in Europe, but Europe does matter in this regard. That's it. The second question was? Yes. Well, in 2023, if I'm not wrong, we cover the back – the low side of the range established by Bank of Spain.

Thank you. Can we have the last question, please?

Our last question is coming from Carlos Cobo Catena from Societe Generale. You are in live.

Hi, thank you for the presentation. I'll try to be quick. One is on organic capital formation. You've guided to – sorry, you explained the 42 basis points formation this quarter. But if I deduct the cash payout in dividends and 81, I may get to something more around 20 basis points. So, I was wondering what is the difference? And whether that delta is record going forward or not, if that includes any sort of securitizations in the group? And the second question is about Stellantis in Europe, you reinitiated the agreement. And I was wondering if you could give us a little bit more color on what are the expected changes in the business plan going forward, different business lines? Or how that new agreement would affect the business performance? Thank you.

So let me just take the second one. On Stellantis, again, we have a very strong relationship in Europe. We've already agreed a very, I think, interesting agreement for both sides, which would allow us to grow our business together over the next few years, really, that's baked into the numbers that you have. Again, we are making a strong digital transformation as we deliver every year, and we are committed to continue to do that. And again, Stellantis is a very strong partner of us here and in the U.S. In terms of the – just as a general point, I'd say that we are generating more and more capital organically. In 2021, you've had headwinds, not just on regulation, but also on markets, especially exchange rates and interest rates to some degree.

Securitization naturally is a tool to match capital. The guide there is fairly simple. As long as we can release capital, doing securitization with an implicit cost of equity below the cost of equity, we're going to do that. How much is going to be this? This 2021 was fairly positive because in granular portfolios like the consumer finance ones, we were able to release capital at the levels at 4%, 5%, 6% that are very attractive, and we continue to check the securitization market. If we offer opportunities, we're going to take it. If they don't offer an opportunity, we will keep more loans in our balance sheet. It's fairly simple, our approach. But naturally, this is a source of flexibility given the very nature of our portfolio, particularly the consumer finance ones.