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Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: <a href="https://www.smartkarma.com/entities/banco-santander-sa" target="_blank" data-smartkarma-citation="entities:21296:1" rel="noopener">Banco Santander (SAN SM)</a> is one of the few institutions which did not engage in loan loss reserve releases this quarter. It did not even release reserves for the sake of appearance, as occurred at <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings (HSBA LN)</a>. As regards credit quality, unfortunately, there is more than meets the eye and it is not spectacular. However, we believe that this is priced into the bank’s Additional Tier 1 (AT1) notes.The big issue for Santander is Brazil. Santander is essentially a Brazilian bank, headquartered in Madrid. Brazil contributes the largest amount of pre-provision profits amongst the bank’s well diversified franchise. Notably, the bank effectively managed to achieve an overall similar revenue result in the first quarter of this year as in last year, despite Brazil’s contribution declining by 16% year-on-year. This speaks to the diversification benefits inherent in the firm’s franchise. We believe this is undervalued by the market.Santander may face continuing revenue challenges in Brazil this year if the country is unable to tame its Coronavirus outbreaks. However, this appears to already be priced into Santander’s AT1 bonds.Santander’s longest dated AT1 bond trades 30 bps higher than the spread on <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse Group's (CSGN VX)</a> similar first call note, despite being higher rated and having an effective capital buffer which is greater than 200bps higher, relative to their respective risk-weighted assets. Santander’s longest-dated AT1 note also trades almost 100bps higher than <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered's (STAN LN)</a> similar first call bond. Again, this is despite being higher rated and having a similar capital buffer. As such, we see more upside and recommend that investors overweight Santander’s AT1 notes.

Executive Summary: Banco Santander (SAN SM) is one of the few institutions which did not engage in loan loss reserve releases this quarter. It did not even release reserves for the sake of appearance, as occurred at HSBC Holdings (HSBA LN). As regards credit quality, unfortunately, there is more than meets the eye and it is not spectacular. However, we believe that this is priced into the bank’s Additional Tier 1 (AT1) notes.The big issue for Santander is Brazil. Santander is essentially a Brazilian bank, headquartered in Madrid. Brazil contributes the largest amount of pre-provision profits amongst the bank’s well diversified franchise. Notably, the bank effectively managed to achieve an overall similar revenue result in the first quarter of this year as in last year, despite Brazil’s contribution declining by 16% year-on-year. This speaks to the diversification benefits inherent in the firm’s franchise. We believe this is undervalued by the market.Santander may face continuing revenue challenges in Brazil this year if the country is unable to tame its Coronavirus outbreaks. However, this appears to already be priced into Santander’s AT1 bonds.Santander’s longest dated AT1 bond trades 30 bps higher than the spread on Credit Suisse Group's (CSGN VX) similar first call note, despite being higher rated and having an effective capital buffer which is greater than 200bps higher, relative to their respective risk-weighted assets. Santander’s longest-dated AT1 note also trades almost 100bps higher than Standard Chartered's (STAN LN) similar first call bond. Again, this is despite being higher rated and having a similar capital buffer. As such, we see more upside and recommend that investors overweight Santander’s AT1 notes.

Banco Santander Sa

Banco Santander: Undervalued AT1