According to Scope, the presented strategy is unlikely to materially change the risk profile of the Santander group, despite the capital reallocation towards emerging markets from developed economies, resulting from faster credit and RWA growth in emerging markets. Scope views positively Santander’s well executed business model in Latin America, a key driver for Santander’s rating. While emerging markets’ profits can be volatile, they have proved crucial in setting Santander apart from domestically-oriented Spanish and other European banks in the past decade.

At the investor day, Santander also highlighted how focused the group is on digital innovation. The bank budgets EUR 5bn per year in IT spending for the next 4 years, 40% of which on innovation. We regard such managerial focus as positive: while Santander’s business model has weathered the past crisis well, Scope thinks that one main challenges for European banks going forward will be to protect their competitive advantage against rapidly shifting customer behaviour, amidst heightened competition from banks and new competitors such as fin-techs and big-tech companies.

With a CET1 target range of 11-12% on a fully loaded basis, Santander will likely continue to operate at the lower bound of its European peer group. Given the group’s strong track record of organic capital generation, low earnings volatility, predominance of retail, and relatively high asset-risk intensity, we regard Santander’s capitalization as adequate.

The return on tangible equity target range of 13-15% is relatively wide, allowing for different scenarios on interest rates. Santander expects to be able to raise profitability in Europe largely by lowering costs while growing in the US and Latin America where interest rates are higher. Scope views an increasing share in these markets as positive.

Alongside the issuer rating at AA-, the following ratings were affirmed, all with Stable Outlook

• Senior unsecured debt (preferred, non MREL-eligible) AA-
• Senior unsecured debt (non preferred, MREL-eligible) A+
• Tier 2 debt A-
• AT1 debt BBB-/Stable
• Short-term debt S-1+

Among the key rating drivers Scope highlighted: (i) a business model that has withstood crisis challenges: cost-efficient provision of retail and commercial banking services (high pre-provision income buffer to absorb credit charges) and resilient group profitability; (ii) globally diversified revenue and earnings streams with strong market positions in several key markets including Spain, Portugal, Argentina, Brazil, UK, Mexico, Chile, and Poland; (iii) ongoing improvement of capital, liquidity and funding positions in recent years and (iv) European banking union likely to provide a stronger regulatory and supervisory framework.

According to Scope, Santander’s rating could be downgraded as a consequence of a less favourable operating environment in the UK following Brexit, renewed tension on Spanish bank and Sovereign debt or bank specific event risk, including M&A risk. Conversely, evidence that Santander’s digital investments can drive material business and revenue growth and market share gains would be positive for the rating.

Scope also assigned a BBB- debt rating to Santander’s USD1.2bn 7.5% AT1 notes issued in February 2019 (XS1951093894), in line with previously rated AT1 bonds by Santander. The bond’s principal loss absorption mechanism is equity conversion with a trigger of 5.125%, applicable both at consolidated and parent company level. 

Stress testing & cash flow analysis
No stress testing was performed. No cash flow analysis was performed.

Methodology
The methodologies used for this rating(s) and/or rating outlook(s), Bank Rating Methodology and Capital Securities Methodology, are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rating was not requested by the rated entity or its agents. The rated entity and/or its agents participated in the rating process. Scope had access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Marco Troiano, Executive Director
Person responsible for approval of the rating: Dierk Brandenburg, Managing Director
The issuer rating was first released by Scope on 02.04.2014. The rating/Outlook was last updated on 08.06.2017.
The short-term rating/Outlook was first released by Scope on 22.05.2014. The rating/Outlook was last updated on 26.10.2017.
The senior unsecured debt rating/Outlook was first released by Scope on 02.04.2014. The rating/Outlook was last updated on 25.07.2017.
The non-preferred senior unsecured debt rating/Outlook was first released by Scope on 25.07.2017.
The ratings/Outlooks for the Tier 2 securities were first released by Scope on 19.12.2016. The ratings/Outlooks were last updated on 08.06.2017.
The AT1 ratings/Outlooks were first released by Scope on 09.10.2014. The ratings/Outlooks were last updated on 08.06.2017.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

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