Business context and reporting period
Banco Santander, S.A. filed its annual Form 20-F for the fiscal year ended December 31, 2017. The figures below are for the full year, not standalone fourth-quarter results. The Group reports in euros under IFRS as issued by the IASB. Results include Banco Popular from its June 7, 2017 acquisition; comparisons are therefore affected by the change in consolidation scope and foreign exchange.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total income | €48.4bn | €44.2bn | +9% |
| Operating profit before tax | €12.1bn | €10.8bn | +12% |
| Consolidated profit | €8.2bn | €7.5bn | +10% |
| Profit attributable to parent | €6.6bn | €6.2bn | +7% |
| Basic EPS | €0.404 | €0.401 | +1% |
| Total assets | €1,444.3bn | €1,339.1bn | +8% |
| Net loans to customers | €848.9bn | €790.5bn | +7% |
| Customer deposits | €777.7bn | €691.1bn | +13% |
Net interest income rose 10% to €34.3bn; net fees and commissions rose 14% to €11.6bn. Administrative expenses increased 9% to €20.4bn, but management said costs were virtually unchanged excluding acquisition effects and average inflation. Net impairment of financial assets was €9.3bn, down from €9.6bn; total impairment losses, including other assets, were €10.5bn versus €9.8bn, reflecting primarily goodwill impairment.
Cash flows from operating activities were €40.2bn, investing activities were a €4.0bn outflow, and financing activities were a €4.2bn inflow; exchange-rate effects reduced cash by €5.8bn. Cash and cash equivalents increased €34.5bn to €111.0bn. These banking cash-flow figures should not be read as a conventional measure of free cash flow.
Profitability and credit indicators: ROA 0.58% (0.56% in 2016), ROE 7.14% (6.99%), and ROTE 10.41% (10.38%). The Group’s NPL ratio rose to 4.08% from 3.93%, while NPL coverage declined to 65.2% from 73.8%; the filing attributes the deterioration mainly to Banco Popular. Net charge-offs were 1.36% of gross loans, versus 1.37%.
At year-end, stockholders’ equity was €94.5bn and total capitalization was €128.3bn. Regulatory capital ratios were 12.26% CET1 phased-in and 14.99% total phased-in; fully loaded CET1 was 10.84% and total capital was 14.48%. The LCR was 133%, above the 100% requirement effective in 2018. The Group reported €217.966bn of debt securities on its balance sheet.
Material changes versus the prior period
- Banco Popular added €88.3bn of credit risk at year-end, including €9.5bn of non-performing balances. Its contribution from June 7 to year-end included €1.3bn total income, €873m operating expenses and a €37m loss attributable to the parent, including €300m of after-tax integration costs.
- The Group raised €7.07bn through a July 2017 rights issue to support the Banco Popular acquisition. Customer deposits and assets grew substantially, with the acquisition an important contributor.
- Latin America’s parent-attributable profit rose 27% to €4.3bn, while UK profit fell 11% to €1.5bn and U.S. profit fell 16% to €332m. Santander Global Corporate Banking profit declined 13% to €1.8bn.
- Goodwill impairment totaled €899m, including €799m at Santander Consumer USA and €100m in Canada. The Group also recorded €297m of after-tax gains from the sale of Allfunds Bank.
Outlook, commentary, risks and unusual items
Management forecast global growth of about 3.9% in 2018 and set priorities to improve earnings quality, gain market share, continue digital and commercial transformation while controlling costs, improve risk metrics, and manage TLAC funding and liquidity costs. The filing describes these as forward-looking expectations, not guarantees.
The Group expected IFRS 9, effective January 1, 2018, to increase expected-credit-loss provisions, reduce equity at transition and add volatility to credit losses, with a potential negative effect on CET1. For 2018, it estimated issuing approximately €12–18bn of TLAC-eligible debt at parent and relevant subsidiary levels, as well as €12–20bn of subsidiary senior debt.
Material risks include economic and political conditions in key markets; Brexit and uncertainty over the UK’s future EU relationship; Catalonia-related uncertainty; interest-rate, currency, credit, liquidity and sovereign risks; acquisition integration and possible Banco Popular litigation or unforeseen liabilities; PPI and floor-clause claims; regulatory capital, liquidity and conduct requirements; cyber and operational risks; and money-laundering and sanctions compliance. The filing also describes a Brazilian tax-auditor bribery allegation involving individuals and a Santander Brasil executive; Santander Brasil said it was cooperating and relinquished the related tax-credit benefit. The filing states the Group’s estimates and provisions may not cover ultimate losses in legal matters.
The auditors issued an unmodified opinion on the 2017 and 2016 consolidated financial statements and an unmodified opinion on internal control over financial reporting. The internal-control assessment excluded Banco Popular and its subsidiaries, as permitted for the acquisition year; Popular controls were to be assessed in 2018.
Important facts for investors to verify
- Reconcile reported growth with the Banco Popular acquisition and currency effects; review the Group’s non-GAAP, constant-currency and ex-Popular comparisons.
- Check the final purchase accounting, integration costs and synergies for Banco Popular, and the financial exposure to acquisition-related appeals, litigation and potential hidden liabilities.
- Review credit quality after acquisition: NPL balances and coverage, including Banco Popular, Spain and U.S. consumer finance; assess whether the lower Group coverage ratio is adequate.
- Confirm the IFRS 9 transition impact, phased-in and fully loaded capital headroom, and progress toward TLAC/MREL requirements and planned issuance.
- Assess the size and adequacy of PPI, floor-clause, tax and other legal provisions against the disclosed claims and uncertainty.