Banco Santander, S.A. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• H1 Results: Q2 profit was €3.2 billion, 20% above Q2 '23; H1 profit €6.1 billion, a record high. Efficiency ratio improved to 41.6%, best in 15 years; ROTE rose to 15.9%. TNAV plus dividend per share increased 12%.
• Transformations: Accelerating H1 transformation to be simpler, automated, and integrated. Efficiency ratio improved 261 basis points, return on tangible equity up 137 basis points. Global platforms like Gravity operational in multiple regions, processing 20% more transactions year-on-year.
• Regional Performances: Retail in Mexico saw 90,000 digital account openings via new digital processes. Consumer deposits up 14% supported by digital solutions. CIB strong in U.S. fees, with revenue growth driven by U.S. flows. Wealth management continued strong growth, and payments platform PagoNxt saw over $1 billion in transactions in H1.

Segment Performance

• Retail: Profit grew 35% year-on-year, ROTE increased to 18.1% with revenue up double digits, NII and fees performing well, cost down 4% in real terms, cost of risk stable. Revenue in Europe and South America grew, with 90,000 digital account openings in Mexico last month.
• Consumer: Deposits up 14% year-on-year supported by digital solutions, net operating income grew double digits, profit up 4% in H1, fee growth from insurance. Launched new digital onboarding for auto players and installment loans with Apple in Germany.
• CIB: Revenue grew 6%, strong in the U.S. with fees growing double digits, building a world-class business, leveraging expertise in the U.S., with revenue up 6% in Q2.
• Wealth Management and Insurance: Attributable profit grew double digits, fees from all three businesses grew double digits, efficiency improved 230 basis points, ROTE over 80%. Collaboration fees increased 12% year-on-year.
• Payments: Profit up 30% year-on-year, PagoNxt EBITDA margin 20%, transactions through PagoNxt over $1 billion in H1 with 30% quarter-on-quarter growth. Rollout of Plard global cards platform on track, with plans to manage 15 million cards in Brazil by year-end.

Guidance

• Upgraded revenue growth target to high single digits, benefiting from better NII and fee income.
• Improved efficiency ratio target to around 42% due to accelerating transformation and operational leverage.
• Raised ROTE target to above 16% from previous 16%.
• CET1 ratio to remain above 12%, with plans to rotate 1/3 of the balance sheet annually, generating higher profitability.

Risks

• Exchange Rate Divergence: Significant divergence between official exchange rate and inflation in Argentina, leading to use of inflation-adjusted exchange rate for prudent accounting.
• Regulatory Capital: Expected 20-30 basis point regulatory headwinds in the second half of the year.
• Cyclicality: CIB business is cyclical, affecting revenue and profitability trends, with fees subject to cyclical fluctuations.

Question and Answer

• Q: On risk transfers and SRTs, A: Hector and Jose discuss risk-weighted asset disposals (€30 billion in H1), capital rotation, and regulatory capital guidance (CET1 above 12% post-Basel III).
• Q: On revenue performance in Europe and LatAm, A: Hector and Jose talk about revenue growth, NII trends, with Europe showing better-than-expected performance and LatAm expected to improve in H2.
• Q: On U.K. NII outlook, A: Hector and Jose discuss rationalized market competition, cost control initiatives, and improved NII outlook for the U.K. in H2.
• Q: On Brazil cost of risk, A: Hector and Jose explain loan mix changes, dynamic strategy, and expected normalization of cost of risk in Brazil with lower rates and improved vintages.
• Q: On U.S. tax rebates, A: Hector explains federal tax rebates from electric vehicle leases, their impact on taxes, and uncertainty around future sustainability.