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Santander slumps to €11bn loss after writedowns

Banco Santander SA

Santander slumps to €11bn loss after writedowns

Spanish lender takes €6bn cut to value of UK arm amid deteriorating economic outlook

Santander stressed the strength of its underlying business by reporting stronger than expected capital levels and committing to resuming dividend payments © EPA

Santander slumped to an €11.1bn loss in the second quarter after the coronavirus pandemic forced the eurozone’s largest retail bank to take large writedowns on the value of several of its businesses, led by its UK arm.

This marked the first loss in the Spanish lender’s 163-year history and came after it wrote off €6.1bn of goodwill left over from the purchases that created Santander UK in the 2000s.

Together with a €1.5bn writedown in September last year, the value of the UK business on Santander’s balance sheet has fallen almost 90 per cent over the past year. However, the bank insisted the impairments “do not change the strategic importance of any of the group’s markets or businesses”.

José García Cantera, Santander chief financial officer, said: “We remain quite confident about the UK, it’s a very important business for us . . . the underlying attractiveness of UK banking remains intact.”

Santander’s acquisitive former chairman Emilio Botín spent more than £11bn forming Santander UK through the purchase of a string of former building societies, Abbey National, Alliance & Leicester and Bradford & Bingley. It grew rapidly under the leadership of Mr Botín’s daughter Ana, who went on to become group executive chairman in 2014. 

To investors, capital base matters, and that went up more than expected

Davide Serra, founder of asset manager Algebris

However, the division’s profits had already begun to tumble before the coronavirus crisis because it was particularly exposed to a price war in the mortgage market. On Wednesday Santander UK reported a 74 per cent year-on-year decline in pre-tax profits for the first half of the year.

In total, the group wrote off more than €10bn in goodwill across its historic acquisitions, plus €2bn in deferred tax assets that it no longer expects to recover.

Santander stressed that the non-cash adjustments did not affect its capital levels or the stability of its underlying business. However, the changes do reflect what it described as a “deterioration in the economic outlook” despite government efforts to minimise the impact of the pandemic.

Rising unemployment rates and business insolvencies are expected to lead to an increase in customer defaults later this year and into 2021, while lower interest rates will put further pressure on bank profitability.

Pablo Manzano, an analyst at DBRS Morningstar, said: “This is another piece of data that tells us the pandemic is not just going to have an impact for one or two quarters on banks’ financials, but for years. It’s important for Santander, but also for the banking sector as a whole.”

Despite the non-cash hits, which it blamed on “the deterioration in the economic outlook”, Santander stressed the strength of its underlying business by reporting stronger than expected capital levels and committing to resuming dividend payments as soon as regulators allow.

Mr Cantera said the bank “entered this crisis in a much stronger position than we’ve ever been, and we feel very comfortable about continuing to support the economy . . . we are showing our model still works.”

Santander reported revenue of €10.7bn for the quarter, down 13 per cent from a year ago, primarily due to the impact of foreign exchange movements. Excluding currency fluctuations, revenue dropped 3 per cent. The company also made solid progress in cost-cutting plans, with operating expenses down 4 per cent after excluding currency movements.

As a result, the bank’s preferred underlying profit measure, which excludes the goodwill and DTA impairments, fell a more modest 15 per cent, to €1.5bn. It put aside an additional €3.1bn to deal with loan losses, compared with €3.9bn in the first quarter.

Santander’s common equity tier one ratio, a key measure of balance sheet strength, ended the period at 11.84 per cent, at the upper end of its full-year target range of 11 per cent to 12 per cent.

Shares in the Spanish lender have long been weighed down by concerns about relatively low capital levels, but the company has insisted its diversified business means it is more resistant to economic shocks than rivals.

The lender also said it had put aside capital in the quarter to contribute to a potential future cash dividend. In the meantime, it committed to pay a share-based dividend, equivalent to 10 cents per share for 2019.

Davide Serra, the founder of asset manager Algebris, which invests in Santander, said the bank “cannot completely insulate themselves” from the effects of Covid-19 and Brexit in the UK, but he remained optimistic about the lender’s underlying strength. “To investors, capital base matters, and that went up more than expected.”

Also on Wednesday, UK lender Barclays added a further £1.6bn to its reserves for bad loans in the second quarter, and credit impairment charges more than tripled from £408m in the same period last year.

A day earlier, the European Central Bank ordered banks in the eurozone to continue to freeze cash dividend payments until at least January next year.

Mr Cantera said Santander would have preferred the central bank take a “more personalised approach” to deciding which banks could pay dividends.

 “A general rule is a bad idea in the sense that it increases uncertainty about the sector, increases the cost of equity of the sector, and affects valuations.”

Additional reporting by Stephen Morris in London

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