After Covid dragged Banco Santander down to its first annual loss in 2020, the Spanish group bounced back to profit in 2021. Those developed markets that previously dragged the bank down are now powering its recovery.
Group chief executive José Antonio Alvarez expects this trend to continue in 2022, with profits growing faster in Europe than South America and North America, in which it includes Mexico and the US. That will lead to a return above its cost of equity in Europe, says Alvarez, as the continent helps it to a return on tangible equity target of between 13% and 15%.
Expectations of higher interest rates help. But it’s also to do with cost cuts in Spain and the UK. By the end of 2022, the bank will have reduced its cost base in Spain by more than a quarter over the last three or four years, notes Alvarez.
He adds that the level of provisioning in Spain in 2022 will probably be half that of 2021, when local peers released provisions faster.
Perhaps most notable is how much better the UK and US are doing. After years of decline, Santander’s underlying profit in the UK was five times higher than in the first nine months of 2020, at €1.1 billion. In the US, the same figure was a record €1.8 billion: four times higher than the year before, making the US its single biggest earner.
There are plenty of questions about how sustainable this is.
In the UK, higher mortgage volumes, as well as repriced deposits and SME growth, were behind a 27% rise in net interest income. In the US, much of its improvement is to do with its ownership of the country’s largest sub-prime car lender, as government stimulus has helped lower credit-loss provisions, while supply-chain bottlenecks have caused prices for used cars to rise.
Our mortgage applications in the UK continue to be at a very high level
José Antonio Alvarez
Nevertheless, these results make it easier for the bank to defend its position in the two markets after years of rumours about it looking to sell out. Staying could mark it out from BBVA, which sold its US bank to PNC in 2020, and perhaps from BNP Paribas and Banco Sabadell, which have recently been rumoured to be selling their retail banks in the US and UK, respectively.
“The UK and US are core markets for us,” Alvarez confirms.
Indeed, of the three most important acquisitions Santander did in 2021 – fixed income broker dealer Amherst Pierpont, and the minorities of Santander Consumer USA and Santander Mexico – two were in the US.
Meanwhile, in the UK, return on equity is back in double digits. Alvarez thinks it will improve further. Rising rate expectations are particularly beneficial for Spain, where most mortgages are indexed to Libor. But, compared with the eurozone, policy rates will rise faster in the UK, home to Santander’s second-biggest deposit book after Spain.
“It is very likely that both the two main drivers of our business in the UK, mortgages and deposits, will perform better in 2022 than in 2021,” Alvarez says. “With high rates, you might think that hurts demand in mortgages. But if rates increase, it’s not going to be dramatic. Our mortgage applications in the UK continue to be at a very high level.”
