Santander Strategy Update: Resilience Priced In At Current levels

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UBS | Santander updated the main targets of its 15-18E business plan. The new 11% Group ROTE18E figure (previous 13%) is largely aligned with our existing forecasts, to which we make modest changes. We still see Santander as a reasonably safe option within the sector, due to its geographical diversification and management’s emphasis on a shareholder friendly message where focus remains on sustained EPS/TBVS/DPS growth and no appetite for large acquisitions, especially outside the bank’s current footprint. We see the merits of that approach, but UK/US headwinds imply earnings momentum is now structurally slower and prospective returns are largely embedded in the stock’s current multiples. Also, we still see solvency on the mend, but leaving little space to absorb potentially negative regulatory effects, not adding appeal to the stock.

UK/US main laggards, Brazil key swing factor

The main areas behind lower management targets are unsurprisingly UK (8-10% ROTE18E, old 12-14%) and US (4% vs. 11%). In line with our post referendum report, UK now incorporates a more subdued growth/rate/FX environment, with inevitable effects on loan growth, NIM and LLPs, the latter still the biggest question mark in our view (20bps UBSe). Our 18E UK net profit target remains 35% below FY15 levels. As per US, the rebasing is even more marked, an admission of a lower for longer rate picture and a derisking of SCUSA’s credit book. More positively, we believe Brazil provides upside risk to consensus if the recent LLP stabilisation remains in place.

Capital maths still leaving little room for manoeuvre

Our view on SAN’s solvency remains unchanged. We see current ratios improving (11.2% by 18E vs. 10.4% in H116), as the bank’s c.110bps annual earnings formation can fund 40% cash payouts (45-50bps p.a.), rising AT1 coupons (5-10bps) and 3-4% RWA expansion (25bps). Albeit a positive progression, this remains tight given today’s market volatility (e.g., pension deficit, AFS) and uncertain regulatory climate (e.g., credit risk floors with c.€285bn IRB mortgage book and c.15% weight or operational risk).

Valuation: earnings visibility reflected in current multiples SAN trades on 0.9x PTBV and c.9x PE17E.

Our new €3.8/share PT (vs. old €3.7 as we assume a moderately better capital position) stands 4% below current prices.