20-F: Banco Santander Files 20-F, Reports Record Profit and Achieves 2023 Targets

Banco Santander reported record profit for FY2023, achieving all financial targets and highlighting growth across its global businesses.

Summary

• Banco Santander, S.A. filed its 20-F for the fiscal year ending December 31, 2023.
• The bank reported record attributable profit of EUR 11.1 billion, a 15% increase compared to FY2022 (18% in constant euros).
• Total income reached EUR 58 billion, up 11% year-on-year (13% in constant euros).
• The bank achieved all its 2023 financial targets, including double-digit revenue growth, a 44.1% efficiency ratio, a cost of risk (CoR) of 1.18%, a fully-loaded CET1 ratio of 12.3%, and a return on tangible equity (RoTE) of 15.1%.
• Santander added 5 million new customers in 2023, reaching a total of 165 million customers.
• The bank highlighted the success of its ONE Transformation program, which drove profitable growth and structural efficiency improvements.
• Santander emphasized its commitment to responsible banking, with EUR 20.2 billion in green finance raised and facilitated, EUR 67.7 billion in socially responsible investment assets under management, and 1.8 million new people financially included.
• The bank outlined its 2024 financial targets, including mid-single-digit revenue growth, an efficiency ratio below 43%, a CoR of approximately 1.2%, a fully-loaded CET1 ratio above 12%, and a RoTE of 16%.
• Santander aims to deliver double-digit growth in tangible net asset value (TNAV) per share plus dividend per share through the cycle.

Sentiment

Score: 7

Explanation: Overall positive sentiment due to record profit and achievement of targets, but with some caution due to macroeconomic headwinds and potential risks.

Positives

• Record attributable profit and achievement of all 2023 financial targets.
• Strong customer growth and double-digit revenue growth.
• Successful implementation of the ONE Transformation program, leading to improved efficiency.
• Solid capital position and credit quality metrics.
• Significant progress in responsible banking initiatives, including green finance, socially responsible investment, and financial inclusion.
• Positive outlook for 2024 with ambitious financial targets.

Negatives

• Attributable profit in North America and South America declined year-on-year.
• Net fee income in Europe and Digital Consumer Bank decreased.
• Operating expenses increased due to inflation and investments.
• Net loan-loss provisions increased in most segments.
• Negative impact from temporary levy on revenue in Spain.

Risks

• Potential adverse impact from global economic slowdown, volatile macroeconomic conditions, and persistent inflation.
• Escalation of war in Ukraine and conflict in the Middle East could further disrupt financial markets and supply chains.
• Potential resurgence of COVID-19 or other public health emergencies could negatively impact business activity.
• Uncertainty regarding the impact of Brexit on UK operations and the broader financial sector.
• Increasing regulatory scrutiny and potential changes in regulations could increase compliance costs and restrict activities.
• Deterioration in credit quality of loan portfolio and insufficient loan loss reserves could lead to significant losses.
• Failure to improve or upgrade information technology infrastructure and manage cybersecurity risks could disrupt operations and lead to data breaches.
• Over-reliance on third-party vendors and affiliates for critical services could expose the bank to operational and regulatory risks.
• Risks associated with the use of artificial intelligence, including flawed algorithms, bias, and regulatory uncertainty.
• Potential disintermediation risk from the introduction of central bank digital currencies (CBDCs).
• Increased competition from traditional and non-traditional financial service providers could pressure margins and market share.
• Difficulties in managing growth, integrating acquisitions, and executing strategic actions could negatively impact profitability.
• Inaccurate or misused risk management models could lead to unanticipated losses.
• Climate change-related transition and physical risks could adversely affect the bank and its customers.
• Reputational damage from various sources, including employee misconduct, litigation, and cybersecurity incidents, could harm business prospects.

Future Outlook

Banco Santander expects continued profitable growth in 2024, targeting mid-single digit revenue growth, an efficiency ratio below 43%, a CoR of approximately 1.2%, a fully-loaded CET1 ratio above 12%, and a RoTE of 16%. The bank aims for double-digit growth of TNAV per share plus dividend per share through-the-cycle.

Management Comments

• We changed the layout of our consolidated directors report in 2018 to include the contents previously provided in these documents, which we no longer prepare separately: Annual report, Consolidated directors report, Annual corporate governance report (CNMV format document), Board committee reports, Sustainability report, Annual report on our directors remuneration (CNMV format document).
• The consolidated directors report also includes all information required by Spanish Act 11/2018 on non-financial information and diversity.
• It can be found in the 'Responsible banking' chapter, which constitutes the consolidated non-financial information statement (NFI).
• Our sustainability strategy supports our purpose to help people and businesses prosper.

Industry Context

The banking sector faced a challenging year in 2023 with high inflation, rising interest rates, geopolitical tensions, and banking sector volatility. Despite these challenges, Santander demonstrated resilience due to its diversified business model and geographic footprint. The industry is expected to face continued headwinds in 2024, including a lower contribution from interest rates to net interest income, potential deterioration of credit portfolios, and gradual withdrawal of excess liquidity. Digital transformation and climate transition remain key challenges and opportunities for the banking sector.

Comparison to Industry Standards

• Santander's fully-loaded CET1 ratio of 12.3% is above the regulatory requirement of 8% and compares favorably to the average of its European peers.
• In the 2023 EBA stress test, Santander outperformed its peers by destroying only 170 bps of fully-loaded CET1 capital under the adverse scenario, compared to the peer average of 418 bps and the European banking system average of 459 bps.
• Santander's cost of risk of 1.18% is below the target of <1.2% and compares favorably to the industry average.
• The bank's efficiency ratio of 44.1% is an improvement compared to the previous year and is among the best in the industry.

Management Changes

Legal Proceedings

• Several legal cases are ongoing, including disputes related to Payment Protection Insurance (PPI) mis-selling in the UK, CHF mortgage loans in Poland, and a testamentary trust in Mexico.
• The bank is also involved in legal proceedings related to the acquisition of Banco Popular.

Related Party Transactions

• The audit committee confirmed that all related-party transactions in 2023 were conducted at market conditions and were not material to Santander or the related party.

Stakeholder Impact

• Santander aims to create value for all stakeholders, including shareholders, employees, customers, and communities.
• The bank's responsible banking initiatives aim to have a positive social and environmental impact, including supporting the transition to a low-carbon economy, promoting financial inclusion, and investing in communities.
• The bank is committed to providing a positive customer experience and addressing the needs of vulnerable customers.
• Santander prioritizes employee well-being, diversity, equity, and inclusion.

Next Steps

• Consolidate activities under five global businesses: Retail & Commercial Banking, Digital Consumer Bank, Corporate & Investment Banking, Wealth Management & Insurance, and Payments.
• Extend One Transformation efforts to all countries.
• Focus on customer experience, operational leverage, and global technology platform.
• Continue progressing towards net-zero emissions by 2050.
• Financially include 5 million more people between 2023 and 2025.
• Invest EUR 400 million between 2023-2026 to foster education, employability, and entrepreneurship.

Key Dates

Keywords

Banco Santander, 20-F Filing, Financial Results, Annual Report, Profit, Revenue, Banking, Financial Services, Risk Management, Responsible Banking, ESG, Sustainability, Climate Change, Financial Inclusion, Digital Transformation