Santander pledges profitability growth after earnings beat

Banco Santander SA pledged to increase profitability and shareholder payouts as rising interest rates in key markets from the Americas to Europe set to boost income from lending at the Spanish retail banking behemoth.

The bank also signaled it’s done strengthening capital buffers after rebounding from steep losses two years ago at the onset of the pandemic. In the long run, Santander said it aims to boost shareholder payouts beyond the current 40% of underlying profit.

“Shareholder distributions are an important focus for Santander,” Chairman Ana Botin said in a statement Wednesday, after reporting net income in the fourth quarter that beat analysts’ estimates.

The results cap a year of recovery for Spain’s biggest lender, which booked massive charges when the pandemic first hit. While the retail-focused bank hasn’t benefited as much as some rivals from the trading and dealmaking rally, it stands to gain as economies worldwide return to growth and interest rates rise in markets from the U.S. to the U.K.

Shares of Santander swung between gains and losses, falling 0.8% at 9:04 a.m. in Madrid after gaining as much earlier. They have risen 31% over the past year, trailing the 51% increase in an index of European lenders. 

Key figures and targets

Fourth-quarter net income EU2.28b; analysts’ estimate EU2.2b

Net interest income EU8.72b; estimate EU8.5b

Divisional quarterly earnings:

U.S. 4q underlying profit jumped to EU538m from EU260m a year earlier

U.K. profit climbed to EU425m from EU171m

Spain profit rose to EU227m from EU20m

Brazil profit slipped to EU563m from EU568m

Medium-term group targets: ~15% RoTE, ~40% efficiency ratio

Santander said it would focus on maintaining a key measure of financial strength -- the so-called CET1 ratio -- at around 12%. The lender for years had been operating with a lower capital level, arguing that as a retail business, it’s not exposed to the same risks as the large investment banks. 

“This was a good set of numbers,” said Daragh Quinn, an analyst at KBW. “I think the debate about them being undercapitalized has moved on a bit.”

With the bank effectively setting a limit on how much it will keep building up capital buffers, it said it aspires to raise shareholder remuneration in the longer term, with around half through share buybacks and a growing cash dividend. 

The lender, in a presentation, also set new medium-term targets for profitability and cost efficiency, aiming for an underlying return on tangible equity of 15% and a cost to income ratio of about 40%. Those metrics last year stood at 12.7% and 46.2%, respectively.

Fourth-quarter earnings got a boost from a 750 million-euro write-back of provisions put aside in 2020 to cover pandemic losses.