Banco Santander announces SGD 6NC5 senior non-preferred bonds at an IPG of 3.800%

Banco Santander, S.A. (Banco Santander), or Santander Group is a Spanish financial institution with operations globally, most notably in Europe and Latin America. The issuer plans to issue new SGD 6NC5 senior no-preferred bonds at an initial price guidance (IPG) of 3.800%. The bond comes with a one-time call option on 23 October 2029 (Year 5). The issuer is rated A+ (Stable) by S&P, A2 (Positive) by Moody’s, and A- (Stable) by Fitch. The bond is expected to be rated A-, Baa1, and A- by the three rating agencies respectively. Net proceeds will be used for the general funding purposes of the Group.

Financial highlights

(Note: Growth rates are YoY and results are as of 1H24 [30 June 2024] unless otherwise stated. Banco Santander reports both statutory (IFRS) and underlying (non-IFRS) figures – we use statutory figures unless otherwise stated.)

Banco Santander’s profitability broadly remained decent in 1H24.

Net interest income (NII) saw a solid +12.1% growth from €20,920m in 1H23 to €23,457m in 1H24. Net interest margins (NIM) remained robust at 2.93% in 1H24, up from 2.68% one year ago in 1H23. Net fee income also grew by +6.1% to €6,477m, with management reporting a ‘solid performance’ across most of its businesses. Taking these together, operating income (reported as ‘total income’) climbed +9.7% to €30,715m in 1H24.

In terms of business segments, the ‘Retail & Commercial Banking’ segment is typically one of the core revenue and profit drivers for the company, and this continued to be the case in 1H24 (55% of attributable profit). This segment was also one of the bigger drivers of revenue and profit growth in 1H24, with a +22.9% increase in operating income and a +37.4% increase in attributable profit, helped by a solid increase in NII as described above. Meanwhile, the ‘Digital Consumer Bank’ segment also saw a double-digit growth in operating income, similarly supported by higher net interest income but with some headwinds from increased loan-loss provisions.

Operating expenses rose by +3% primarily due to inflation (especially staff costs), though this was markedly lower than the pace of revenue growth described above, which may reflect ongoing cost management measures by management. Coupled with a slightly higher tax expense (in line with higher profit before tax), this meant that Banco Santander’s net attributable income (profit after tax excluding minority interests) grew by +15.6%, from €5,241m in 1H23 to €6,059m in 1H24.

Outlook

Following the decent results in 1H24, management has opted to upgrade its FY24 revenue guidance from ‘mid-single digit growth’ to ‘high-single digit growth’ (for comparison, 1H24 revenue growth was +9%); it also upgrade its return on tangible equity target from 16% to over 16%. On the other hand, we note that they slightly reduced their efficiency ratio (operating expenses divided by total income) target from ‘under 43%’ to about 42% (1H24: 41.6%), suggesting they continue to expect cost management measures to bear fruit , albeit at a slower pace than expected.

For us, we think these 2024 targets are achievable considering the ongoing momentum from 1H24 highlighted above, especially if management continues to follow through on cost management measures.

However, it may be more difficult to sustain this pace of revenue growth given the prospect of margin pressures in Spain and the UK (given likely rate cuts in the respective markets) – while we highlighted the decent NII and NIM growth in 1H24 in the previous section, we also note that (on a quarterly basis) 2Q24 figures have come off slightly compared to 1Q24. Some other risks include broad macroeconomic risks particularly in Europe and the Americas (esp. South America). With that being said, ongoing cost management measures could help to provide some support to profits.

As a whole, we like Banco Santander’s current strong positioning in its selected markets, and think it should remain profitable barring a severe downturn.

Credit profile

Banco Santander’s asset quality remained decent in 1H24. Banco Santander’s non-performing loans (NPL) ratio remained steady at 3.02% in 1H24 (1H23: 3.07%). Cost of risk rose from 1.08% (1H23) to 1.21% (1H24), alongside an increase in credit risks amidst uncertainties over inflation and interest rates in Europe, as well as geopolitical tensions and elections in Europe and Latin America. Nonetheless, this 1.21% figure remain within the ‘circa 1.2%’ management FY24 target which they have affirmed.

Banco Santander’s CET1 ratio was reported at 12.5% (1H23: 12.2%), in line with management targets of over 12.0% (after Basel 3 implementation), and with a comfortable buffer over the ECB requirement of 9.6%. Total capital ratio came in at 16.7%, also with a healthy buffer over the regulatory requirement of 13.9%. As for liquidity, its liquidity coverage ratio also came in at 163% (+5pp from 1Q24), again well above requirements. We think Banco Santander’s capital ratios remain healthy.

Thoughts on new issue

Banco Santander is a solid issuer which is likely able to continue delivering solid profits while maintaining a robust capital position. We primarily compare this new issue with other senior bank papers in the SGD space (Table 1). The caveat is that Banco Santander’s business operations differ significantly from the other issuers below (Deutsche Bank, HSBC, Standard Chartered) both in terms of the geographies involved, and the sources of revenues – we chose these bonds as they are among the few senior SGD papers available with a few years to call or maturity.

This new issue provides an attractive yield pickup compared to similarly-rated senior SGD papers from other Financials issuers, though we note as usual that the final price guidance is likely to come in lower than the IPG of 3.80%. We think these bonds will also suit investors seeking higher credit seniority. With that being said, investors seeking higher yields can consider moving instead to Tier 2 (lower-ranking) papers of resilient issuers, as we have highlighted in the two articles below.

Related article: European Banks in 1Q24 – are they what we expected?

Related article: The 2H24 SGD Bonds Outlook

Table 1: Santander and other bonds

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.