Banco Santander, S.A. Q4 FY2024 earnings call

Key Managerial Messages and Operational Highlights

• 2024 Performance: 2024 was a record year with strong revenue growth (top-line up 10% in constant euros) and 8 million new customers across global businesses. The ONE Transformation improved efficiency by over 2 percentage points and boosted RoTE to 16.3%. The balance sheet was solid with a CET1 ratio at an all-time high of 12.8%.
• Retail Consumer: Benefited from scale and the ONE Transformation. Digital onboarding improved, and product reduction in the front book will drive future benefits. The global platform rollout in regions like the UK enhanced customer experience and reduced costs.
• Global Platforms: Rollout in the UK and other regions improved customer experience and reduced costs. Consumer business had operational leverage with 6% revenue growth and 1% cost decrease, with initiatives like Zinia and Openbank in the US.
• Wealth, CIB, and Payments: CIB fees grew 21% in the US, Wealth fees were up double-digits, and Payments volume increased 11% with EBITDA margin near 30% target. CIB, Wealth, and Payments drove fee growth, leveraging network strengths.

Santander's 2024 performance was strong. Top-line revenue grew 10% in constant euros. Fee income rose 11% in constant euros. Expenses grew much slower than revenue, leading to a record net operating income of €36 billion. Return on Tangible Equity (RoTE) was 16.3%. The balance sheet was solid with a Common Equity Tier 1 (CET1) ratio ending at an all-time high of 12.8%. Different segments performed well: Retail consumer benefited from scale and the ONE Transformation, with 8 million new customers added. Wealth, CIB, and PagoNxt all saw revenue growth. Payments volume increased 11% in 2024, and its EBITDA margin was near a 30% target for 2025. In absolute terms, profit reached a record €12.6 billion, and TNAV and dividend per share grew by 14%.

Guidance

• NII Outlook: Excluding Argentina, NII is expected to be slightly up in constant euros and slightly down in current euros based on forward rates.
• Fee Income: Fee income to continue growing via network effects. Retail driven by commercial dynamics and product deployment, Consumer fees slightly down due to regulation, CIB strong with US as top fee contributor, and Wealth with double-digit fee growth.
• Cost-to-Income Ratio: Retail and consumer will lead structural efficiency gains. Retail and Consumer cost-to-income below 42% and flat ex-Argentina, Consumer below 40%, CIB below 45%.
• RoTE and Share Buybacks: Target RoTE post AT1 around 16.5%. Target to distribute €10 billion in share buybacks for 2025 and 2026 from earnings, with 50% of profit split between cash dividends and buybacks.

Risks

• Macro Volatility: Volatile macro environment with potential challenges in different regions, e.g., Brazil's retail business sensitive to rate changes but diversified by other global businesses.
• Regulatory Uncertainties: Potential impacts of Basel IV and DTA treatment in Brazil could affect capital and profitability.
• Competition: Competition from stronger deposit franchises and new entrants in markets like the UK may impact retail bank performance.

Q: After the announcement on extraordinary distributions, what's the trade-off between organic and inorganic growth, and where does excess capital rank in management priorities for 2025-2026, especially with European banking M&A?

A: Ana Botín stated capital allocation prioritizes profitable organic growth and investments first, then ordinary dividends and buybacks. Inorganic must be complementary to strategy and generate attractive returns. Hector Grisi added ONE Transformation is ongoing, with cost evolution in 2024 showing real cost growth of 1% due to retail operating leverage and consumer cost containment.

Q: Regarding the UK being a core market, does it apply to the ring-fenced retail bank, and where are sustainable returns in a competitive environment?

A: Ana Botín said the UK is a core market with the ring-fenced retail bank. UK retail has resilient revenue, with NII bottoming out in H2 2024 and expected to be slightly up. Leveraging global platforms and ONE Transformation will improve customer experience and reduce costs for more upside.

Q: About the 13% CET1 target for 2025, does it include special buybacks beyond ordinary, and what's the organic CET1 generation outlook?

A: Ana Botín said capital hierarchy prioritizes organic growth, then distributions. José García Cantera added risk-weighted asset growth is expected to be ~1-2% net, with regulatory charges similar to 2024.

Q: How does a more accommodating US regulatory backdrop impact the US business and create opportunities?

A: Ana Botín said a better US regulatory backdrop would drive better returns. The US business is a natural hedge, with refocused strategy on pillars like consumer bank and Openbank launch optimizing funding. Hector Grisi added US revenue expected high-single-digit with adjusted RoTE ~14%.

Q: On capital deregulation and global platforms, how will it affect Santander, and where are next geographies for ONE Transformation?

A: Ana Botín said regulators' actions are uncertain, but Santander's model provides a buffer. ONE Transformation is about changing bank operations globally, with retail and consumer leading efficiency gains. Hector Grisi added Retail and Consumer cost-to-income to be flat/down in 2025 with specific targets for each business.