Banco Santander, S.A. — 2019 Form 20-F
Business context and reporting period. This is the audited annual report for the fiscal year ended December 31, 2019, prepared under IFRS as issued by the IASB. It reports the full year, not a standalone fourth quarter. Santander operated across Europe, North America and South America, serving about 145 million customers. The board approved the report on February 27, 2020; the auditor’s report is dated March 6, 2020.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets | €1,522.7bn | €1,459.3bn |
| Loans and advances to customers, net | €942.2bn | €882.9bn |
| Customer deposits | €824.4bn | €780.5bn |
| Total income, reported | €49.2bn | €48.4bn |
| Net interest income | €35.3bn | €34.3bn |
| Net fee income | €11.8bn | €11.5bn |
| Operating expenses | €23.3bn | €22.8bn |
| Profit before tax, reported | €12.5bn | €14.2bn |
| Attributable profit, reported | €6.5bn | €7.8bn |
| Attributable profit, underlying | €8.3bn | €8.1bn |
| Fully loaded CET1 ratio, using IFRS 9 transitional arrangements | 11.65% | 11.30% |
| NPL ratio / coverage ratio | 3.32% / 68% | 3.73% / 67% |
Reported total income rose 1.7% (2.6% excluding foreign-exchange effects); underlying total income was €49.5bn, up 2.2% (3.2% excluding FX). The efficiency ratio was 47.0%, unchanged. Cost of credit was 1.00%, also unchanged. Group return on tangible equity was 9.31% reported and 11.79% underlying.
Cash flow and liquidity. Cash and cash equivalents decreased €12.6bn during 2019 to €101.1bn. The cash-flow statement reports €3.4bn from operating activities, €7.2bn used in investing activities and €10.1bn used in financing activities, plus €1.4bn from exchange-rate effects. These flows reflect banking balance-sheet movements and should not be read like those of a non-financial company. Liquidity indicators were reported as comfortable: LCR 147%, NSFR 112% and net loan-to-deposit ratio 114%. Medium- and long-term market debt outstanding was €180.1bn.
Material changes versus 2018
- Reported attributable profit fell 16.6%, while underlying attributable profit rose 2.3% (3.2% excluding FX). Management said the difference was principally due to €1.737bn of net management adjustments, compared with €254m in 2018.
- Key 2019 adjustments included a €1.491bn impairment of Santander UK goodwill, €864m of restructuring costs, €405m of losses related to Spanish real estate assets and stakes, and a €183m UK PPI charge. Offsets included €693m of custody-business gains, €551m from Brazilian deferred-tax-asset recoveries and €136m from the sale and revaluation of Prisma in Argentina.
- Net interest income and net fee income increased, but operating expenses rose 2.2% and loan-loss provisions increased 5%. Credit quality improved overall: the NPL ratio declined and coverage increased.
- Fully loaded CET1 increased 35 basis points to 11.65% under the stated IFRS 9 transitional arrangements. Management cited 97 basis points of gross generation, partly offset by 62 basis points of accounting and regulatory impacts, including IFRS 16 and model-related changes.
- Customer loans increased 6.7% and customer funds 5.6%. Digital customers grew 15% to 36.8m; branches declined 9.6% to 11,952.
Outlook, management commentary and risks
Management described a 2019 environment of slower global growth, persistently low European rates, political uncertainty and volatile markets. For 2020, it anticipated roughly 1% Eurozone growth, 1.7% growth in Spain and continued low-for-longer interest rates. These are forecasts, not guarantees. Priorities included defending margins, cost control, simplification, digital transformation and profitable growth. Santander said it planned to invest more than €20bn in digital transformation and technology over four years. It also indicated an intention to maintain a 40–50% underlying payout ratio over the medium term.
The board proposed total remuneration against 2019 results of €0.23 per share: €0.20 cash and €0.03 scrip, subject to shareholder approval. The stated payout was 46.3% of underlying attributable profit, assuming an 80% cash election in the scrip programme. The share closed at €3.73, down 6.1% for the year.
Important risks include economic slowdown and political uncertainty in key markets; Brexit and the end of the UK transition period; low interest rates, FX and other market risks; credit deterioration and collateral values; regulatory capital, liquidity and resolution requirements; cybersecurity, technology and third-party risks; financial-crime and conduct compliance; climate-related risks; and acquisition integration. The report also describes continuing legal and regulatory matters, including UK PPI complaints, Spanish IRPH-linked mortgages (about €4.3bn of relevant loans, with exposure unclear), Swiss-franc mortgages in Poland, and litigation and competition proceedings in several jurisdictions. The filing notes the CJEU’s IRPH decision of March 3, 2020; outcomes and any resulting liability were not clear in the filing.
Management stated that Santander’s liquidity remained above regulatory requirements and that it met its MREL requirement at December 31, 2019. However, planned 2020 funding activity was expected to be more intensive than in 2019, including repayment of central-bank funding and refinancing maturities. Separately, the report identifies the emerging coronavirus outbreak as a risk whose impact could not then be predicted.
Unusual items and assurance. PwC issued an unqualified opinion on the consolidated financial statements and concluded that internal control over financial reporting was effective in all material respects. Critical audit matters included expected credit losses, Santander UK goodwill impairment, recoverability of deferred tax assets in Spain and Brazil, and provisions for contingent liabilities. The report cautions that underlying measures are non-IFRS/APMs, unaudited or unreviewed as presented in the directors’ report, and not substitutes for IFRS measures.
Most important facts for investors to verify
- Reconcile the €6.5bn reported profit to €8.3bn underlying profit, including the assumptions and composition of the €1.737bn net adjustments and UK goodwill impairment.
- Check capital headroom using the applicable fully loaded and transitional CET1 definitions, the final regulatory requirements, and the impact of future rules and model changes.
- Review credit quality by geography and portfolio, including forbearance, cost of credit, collateral assumptions and IFRS 9 stage migration.
- Assess liquidity and refinancing using the LCR, NSFR, loan-to-deposit ratio, debt maturity profile, encumbrance and 2020 funding plans.
- Track material contingencies, especially PPI, IRPH, Polish Swiss-franc mortgages, Banco Popular-related claims and competition matters; the filing does not provide a clear aggregate potential-loss value for all such matters.
- Confirm shareholder approval and implementation of the proposed €0.13 final 2019 payment and the assumptions underlying the 46.3% payout figure.