Santander’s ratings are driven by the bank’s strong, seasoned business model in retail and commercial banking, which produces a reliable and well-diversified earnings stream and generates capital at group level. Scope believes this business model has proven its resilience to shocks, having withstood the global financial crisis, the Spanish real estate market collapse, the euro area sovereign crisis and a recent recession in its key market of Brazil without any damage to capital. Going forward, Santander faces additional challenges in the UK as a result of Brexit-related macro uncertainty while the outlook for Spain and Brazil is more positive.

Moreover, good credit demand in emerging markets is compensating for a muted growth outlook in Europe. This has led the group to profitably re-deploy capital from cash-generating European operations to fast-growing emerging-market subsidiaries.

Due to the group’s presence in several developed and emerging markets, Scope believes the key ongoing challenges for Santander will be the different regulatory requirements and priorities among the various authorities and ensuring that prudential and supervisory requirements are met at both group and local level.

In its recent investor day in April, Santander presented details of its strategy for the digitalisation of its subsidiaries. Scope views Santander’s efforts in digital innovation as positive because it protects the bank’s successful business model from technological disruption. According to Scope, Santander’s credit profile may benefit if these efforts led to further consolidation of the group’s competitive position in its different markets.

Notwithstanding the above, the report flags that Santander will likely face a tougher operating environment in case of a hard Brexit, which could impact its asset quality and performance in the country.

Scope also notes the risk of further M&A, as Santander has historically been an active player. So far, most acquisitions and mergers have been effectively and successfully integrated, but the risk remains that a large unexpected transaction could have negative consequences on the group’s fundamentals, including prudential metrics.

Lastly, tensions on Spanish sovereign and bank debt could negatively affect Santander’s ratings, though Spain’s economic and fiscal performance remain reassuring for the time being.

Download the issuer rating report here.