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Santander Bank Annual Report 2011 Letter from Chief Executive Officer, Alfredo Sáenz
Letter from the Chief Executive Officer Alfredo Sáenz Results and the Santander share Grupo Santander generated an attributable profit, excluding extraordinaries, of EUR 7,021 million, 14.2% less than in 2010. Including provisions and capital gains, profit was 34.6% lower at EUR 5,351 million. Earnings per share were EUR 0.60, 36.1% less than in 2010. Both our net profit as well as our share price, which dropped 26% in 2011, are at cyclically low levels as they were affected by the worsening of the international environment due to the euro zone’s sovereign debt crisis. I would like to point out, nevertheless, the good performance of operating profit, which amounted to EUR 24,373 million: net interest income was up 5.5%; net fee income rose 7.6% and net operating income (before provisions) was 2.2% higher. Very few international banks have been able to generate growth in revenue and in net operating income. This reflects the good commercial performance of our businesses, and underlines our strong potential to generate future results. I would like to transmit a clear message: the results we presented in 2011 do not represent our Group’s potential pace of profit generation. Over the next two or three years we will recover levels of profitability and growth that reflect the potential of our businesses. A vital first step in this process is to absorb, in 2011 and 2012, the regulatory and economic cycle impact. Once this has been done we can return to the profit levels the Group was used to before the crisis. Alfredo Sáenz Balance sheet soundness Banco Santander has given priority to balance sheet strengthening over short-term results. In 2011, we put the“Banco Santander has given emphasis on three corporate initiatives that enabled us to priority to balance sheet bolster the balance sheet: strengthening over short-term 1. Capital. We achieved the core capital ratio requirement of the European Banking Authority six months ahead of the deadline. results, placing emphasis on 1. The core capital ratio, with Basel II criteria, increased from capital, liquidity and provisions for 8.8% in 2010 to 10.0%. real estate assets in Spain“ 2. Liquidity. During the last three years, we have carried out a significant strengthening of our liquidity position. Leveraging in Spain and Portugal and the improvement in the savings rate enabled us to gradually reduce the gap between loans and deposits, additional liquidity that will finance debt maturities in the coming years. 8 INFORME ANUAL 2011
3. Provisions for real estate assets in Spain. We increased 6. Lastly, we have a high level of profit generation before coverage of repossessed properties to 50% and in 2012 provisions. This gives us the capacity to absorb provisions we will complete the provisions required by Royal Decree-law when the economic cycle is weak and to generate profits and 2/2012. capital when the cycle improves.We made a significant effort to complete the three measures in Results and management priorities by unitsthe shortest time possible,while most of our competitors are still During 2011, many of our units had to absorb negative impacts:trying to absorb all these cyclical and regulatory effects. a cyclically high level of provisions, in the case of Spain; regulatory effects, as in the UK; and, in other cases, a higherIt is very important for the financial sector to complete this cost of wholesale liquidity and a worse than expected economicprocess of balance sheet strengthening. For this to happen, performance.moreover, two external conditions are vital: However, we are actively managing these effects and are very• First, financial stability: governments, regulators and central aware that, in the coming years, an excellent execution will be banks have to ensure a macroeconomic environment of even more vital. financial stability so that banks can capture liquidity normally and in reasonable conditions. Banco Santander has the necessary drivers, both in mature and• Second, regulatory clarity: banks have to have a clear idea of emerging markets, to return to its normal profit levels. the capital and liquidity ratios required; how they are A. Mature markets calculated; what types of balance sheet are sustainable and The challenges facing banking units in mature markets are well other types of costs to be assumed. Only in this way can they known: low demand for loans; economies under pressure; low make medium- and long-term business plans and adequate interest rate environments and higher cost of liquidity. financing of the economy can be assured. At the moment many of the regulatory changes are clearly pro-cyclical and We believe, however, that the dominant banks in these markets have a negative effect on economic growth. have a great opportunity to create value in the medium term:Only when these two conditions are met will the financial sector recover attractive profitability; gain market share and becomereturn to its role of financing the economy normally. large generators of capital.Strengths as a Group Spain and PortugalWe must concentrate all our efforts on taking advantage of our In 2011, I told you that we were seeing a turning point in thesebusiness opportunities and ensuring we return to a level of units. However, during 2011 the sovereign debt crisis triggeredprofitability and growth that befits our business mix and the a downturn in the Spanish and Portuguese economies, andquality of the organization. further falls in interest rates, which delayed the process of returning to the average profitability of our businesses in theseIn order to achieve this normalization of profits, we are starting countries.from a privileged position. We have strengths as a Group that setus apart from our international competitors: Both the results of the Santander Branch Network and Banesto in Spain as well as those of Portugal, suffered a sharp1. The diversification of our business portfolio is clearly better setback. The aggregate profit of the three units dropped from than the rest of international banks. EUR 1,722 million in 2010 to EUR 964 million in 2011.2. We have a major presence in growth markets. We generate However, our medium-term view has not changed: the crisis is more than 50% of our profits in high growth emerging offering the most solid banks opportunities to gain market share markets. and improve their competitive position. We have a unique situation to gain en edge in the Spanish and Portuguese markets,3. We have very strong local positions, with market shares of and we are going to exploit it. more than 10%. Many of our competitors have banks without scale in many markets, and this prevents them The management priorities for the next two years remain as attaining an acceptable level of profitability. follows: adapt prices to the new environment; maintain firm4. Our business model is sustainable in the new regulatory control on costs and gain profitable market share from and liquidity environment. Other banks are having to step up competitors immersed in processes of integration and the pace of reducing the size of their wholesale balance sheet. restructuring. Our objective in Spain and Portugal is to recover in the medium-term the level of profits we had in 2008.5. Our solvency and credit quality are clearly better than those of our local competitors. INFORME ANUAL 2011 9
Rest of Continental Europe/Santander Consumer b. Emerging marketsSantander Consumer posted an attributable profit of EUR 1,228 The growth opportunities in emerging markets are well known.million, 51.5% more than in 2010, largely due to an improved However, not all banks that operate in these markets will becost of the provisions made in the main markets where it able to create value in the medium- and long-term: it isoperates. This result includes the contribution of Santander necessary to have a good local critical mass; a strong cultureConsumer USA which, as of 2012, leaves the perimeter of and commercial model and an adequate risk appetite, with aSantander Consumer and will be included in the US. good view of the credit. Santander meets all these requirements.Santander Consumer can continue over the coming years totake advantage of its position of strength in its markets, Brazil’s attributable profit declined 7.2% to EUR 2,610 million.maintaining good management of prices and risk. Despite the good growth in net operating income (+10.6%), profits were under pressure from higher provisions andMoreover, we have a good opportunity to develop retail writedowns.banking in Germany, on the basis of the business acquired fromSEB. As you know, we have been betting on growth in Germany Once the integration of Santander and Banco Real is concluded,for many years and today we generate close to EUR 500 million the challenge is to narrow the profitability gap with our localof profits there. Our consumer business operations in the rest of competitors. This should give us a sustained 15% growthContinental Europe are also delivering very good profitability. potential in profits in the coming years.United Kingdom In México, attributable profit was 40.9% higher at EUR 936The profit from our business in the UK was 41.7% lower at EUR million. The management priority for the next few years is to1,145 million. It was hit by the provision for payment protection consolidate the business improvement achieved in 2011 andinsurance remediation (PPI) and by regulatory impacts on the continue to participate in the market’s growth opportunities.cost of liquidity which exerted pressure on Santander UK’s In my view, our potential in Mexico is very high and we expectresults. profit growth of more than 15% a year.The objective in the UK is to take the necessary measures to In Chile, attributable profit fell 9.0% to EUR 611 million due toabsorb the regulatory impact. This includes actively managing the increase in provisions. We have a privileged position in thisprices, the structure of the balance sheet and the cost base. market: in market share, customer base and quality ofMoreover, we continue to develop our business with companies, management. We have to be able to adapt our price and costsa segment where we still have a presence below that of our structure in order to absorb the new regulatory framework.natural share. In Argentina, attributable profit declined 2.7% to EUR 287For this, we have the business acquired from Royal Bank of million, but in local currency terms it was 8.0% higher.Scotland. We expect the big investment effort in installed capacity (34 new branches in 2011) to enable us to boost the profitUnited States contribution of this unit in the coming years.Sovereign’s attributable profit increased 24.0% to EUR 526million, largely due to the sharp fall in provisions. In Poland, the attributable profit from nine months consolidation with the Group was EUR 232 million, and for the whole yearAfter dedicating three years to strengthening the balance sheet EUR 288 million.and managing costs, our main challenge in the US for the nextfew years is to boost revenue generation and establish the Bank Zachodni WBK, our commercial bank in Poland, hastechnology and operational foundations needed to grow in the a long way to go and is already well positioned to capturecountry. The generation of fee income is clearly below that of growth opportunities. Furthermore, we can add value in theour regional competitors and we will have to work to gradually cooperation between this local unit in Poland and the Group’snarrow this divide. Our technology systems enable us to global units.increase the offer of transactional products and improve cross- The good results in 2011 enable us to reaffirm the goal of aselling to customers. profit contribution to the Group of more than EUR 450 million in 2013.10 ANNUAL REPORT 2011
“Our business units must pay particular attention to successfully carrying out the measures put into effect to improve their profitability”The combination of cyclical normalisation and the measures Conclusionstaken by our units will enable us to return to normal profits I want to leave you with four clear messages:in the coming years. 1. The first is that we have been able to generate excellentIn September, we held our Investor Day in London at which we operating results, and this is a good reflection of ourpresented our strategy to analysts and investors. The message of business. However, we are very aware that the net profit inthese sessions was clear, and I want to reiterate it in this letter: 2011 does not reflect at all the potential profitability of ouras a Group, our normalised profitability is clearly higher than the businesses in the medium term.current levels. 2. The second is that we are taking the necessary steps toOur goals are: normalise our profitability. We do not base our future by • A return on equity of between 12% and 14% within three trusting the economic recovery will make our profits grow. years. On the contrary, we are very conscious that it is up to us to define and execute the strategies enabling us to attain our• A return on tangible equity (excluding goodwill) of between goals. 16% and 18%. 3. The third message is that, in order to carry out this profitWe believe that these objectives represent our normalised normalisation, we have the best professionals inprofitability, i.e. a return in accordance with the potential of our international commercial banking. We have a high qualitybusinesses, and which is not dragged down by the current team which is very motivated and has shown in the past itscyclical moment. In order to attain these levels, we need three capacity to assume ambitious goals and meet or even surpassconditions: them.First, it is vital to complete the threefold strengthening of 4. Fourth, the Santander share is currently at a level that doesthe balance sheet: capital, liquidity and provisions for real not reflect the structural profitability or our medium-termestate assets. We will finish this process during 2012. growth potential. As our capacity to normalise our profits becomes clear, this will be reflected in the share price.Second, we see some cyclical recovery, mainly in Europe,which we expect to begin in 2013 and consolidate in 2014 and I am very optimistic about the prospects for your investment2015. This means lower needs for specific provisions, reduced in the coming years.liquidity tensions and a rise in interest rates.Lastly, our business units must pay particular attention tosuccessfully carrying out the measures put into effect toimprove their profitability, adapt to the environment and takeadvantage of the opportunities that arise. We believe this willbe the case as we are very aware that, in a complicatedenvironment, execution is the key and we are not going to fail. Alfredo Sáenz CHIEF EXECUTIVE OFFICER ANNUAL REPORT 2011 11