Managing a bank in a dual World: a contrarian view

Transcription

1 Managing a bank in a dual World: a contrarian view September 2012 José Antonio Álvarez CFO Santander Group

2 2 1 Outlook for the banking industry: A DUAL WORLD 2 Santander: We can create value both in emerging and in mature markets 3 Final remarks

3 The global economy is a tale of two kinds of markets with very different trends Real credit growth (YoY change) EMERGING ECONOMIES: Releveraging / increasing consumption MATURE ECONOMIES: Deleveraging / increasing savings

4 but we should avoid simplistic views we should not just take a macro view 4 and not everything in EMERGING MARKETS is good news not everything in MATURE MARKETS is bad news Now, more than ever, FRANCHISE QUALITY and EXECUTION are key we are seeing a degree of CONVERGENCE

5 1 MATURE MARKETS (I): IMPORTANCE OF MANAGEMENT: the sector is taking measures to mitigate the headwinds 5 Mature markets subject to soft adjustment (e.g., US, UK) Headwinds: Stagnant volumes Impact of regulation Low rates (pressure on deposit margins) Mature markets subject to hard adjustment (e.g., Eurozone periphery) Headwinds: Volume contraction High level of provisions Liquidity tensions Low rates Key measures: Cost structures under review Pricing is under review Capital allocation is under review Provisions are down Key measures: Significant provisioning effort Consolidation / branch closures / cost reductions Deleveraging reduces funding needs Radical changes in pricing

6 1 MATURE MARKETS (II): BINARY OUTCOME: clear winners and losers 6 The adjustment is not evenly distributed: WEAK banks will continue to struggle and they will become smaller Questioned business models based on financial risk / carry trade Need to deleverage balance sheet Lack of economies of scale No access to markets WHILE STRONG BANKS WILL BECOME STRONGER Large banks with dominating market positions and a customer driven business model and a strong balance sheet with funding capacity will increase market shares with economies of scale

7 STRONG BANKS IN MATURE MARKETS are on their way to becoming large free capital generators 7 Boom-years fast asset growth Crisis: credit losses Regulation: capital buildup NORMALISED WORD: High capitalgeneration Nomalised ROE, stable RWA There is CLEAR MEDIUM TERM BULL CASE IN MATURE MARKETS, currently being overlooked by the market well managed banks in mature markets have the potential to become attractive CASH COWS

8 Case study 1: The profitability of UK banks is coming back 8 The ROE pressure from: Regulation (capital; liquidity; bank levy ) Low rates Weak economy (= asset quality) is starting to be mitigated by: Cost cuts Pricing adjustments (e.g., clear improvement in lending spreads over the past 12 months) Spreads: UPLs The UK retail and commercial banking ROE cycle Pre-crisis 2012 Next 2-3 yrs

9 2 EMERGING MARKETS: the potential is there 9 Potential growth / development of middle classes everybody agrees but not all banks will be able to capture this potential

10 A Banker s Guide to Investing in Emerging Markets Balance emerging and mature markets- Emerging markets are not risk-free Focus on high quality, stable emerging markets- Not all emerging markets are the same Market size matters- Importance of large internal markets Business quality matters like everywhere else- The importance of a strong local market position Management matters- It is not just about being there Entry price matters- Financial discipline cannot be lost

11 Summary: key trends in the financial sector 11 MATURE MARKETS: Deleveraging Significant headwinds (weak macro, low rates, regulation) but the system is starting to adjust Do not underestimate the reversion to the mean potential of the ROE of strong banks in mature markets EMERGING MARKETS: Leveraging up Significant growth potential but these markets are still subject to cycles Importance of an across the cycle approach (controlled risk appetite) Importance of strong franchises, with a customer-focused strategy with a certain degree of convergence between both types of markets recently It is a mistake to look at banks as pure macro calls Expect a significant DIVERGENCE in results between banks (both in mature and emerging markets) FRANCHISE QUALITY and EXECUTION are key

12 12 1 Outlook for the banking industry: A DUAL WORLD 2 Santander: We can create value both in emerging and in mature markets 3 Final remarks

13 At Group level, the priority has been to strengthen our balance sheet 13 1 Capital 4 2 Liquidity while our recurrent profits has been well sustained 3 Real estate provisions The Group will complete its balance sheet strengthening effor in 2012 this leaves us well position to grow in 2013

14 1 Balance sheet strength: Capital 14 Provisions were absorbed while maintaining our capital strength Core capital (BIS II) above 10% 5,9% 6,3% 7,6% 8,6% 8,8% 10,0% 10,1% surpassing the minimum 9% ratio required by EBA Dec'06 Dec'07 Dec'08 Dec'09 Dec'10 Dec'11 Jun'12 Note: Dec 06 and Dec 07 according to BIS I

15 1 Balance sheet strength: Capital 15 Santander will not need capital even under severe stress-test scenarios Spain Assistance and Recapitalization Programme for the sector Core Tier 1 in Spain (Jun'12): 10.2% In a very severe external 1 stress-test, coupled with the sharp adjustment already made between Real Year-to-date Adverse scenario Santander won't need capital: In the most adverse top-down scenario, the Group will keep a ratio 9% Ratifies the IMF stress-test conclusions GDP Unemployment Housing 2 prices -2.3% -6.4% pp +2.1 pp -24.4% -25% Would be in the Memorandum of Understanding's Group 0 banks: those with no capital shortfall Land 2 prices Stock market -39.4% -43.5% -61% -54% (1) Established under an Advisory Panel participated, among others, by the ECB, IMF, European Commission and EBA (2) Change in prices in real terms

16 2 Balance sheet strength: Liquidity In a highly demanding scenario, the Group maintains a solid liquidity position due to 16 deleveraging in Spain and Portugal Loan-to-deposit ratio 1. Total Group Var. Jun'12/Dec'11 in EUR billion +7 bn. -5 bn. Gap reduction: -12 bn. 150% 135% 117% 117% 117% Loans Deposits 1 D'08 D'09 D'10 D'11 Jn'12 the Group's high issuing capacity Deposits 1 + M/L term financing / loans H1'12. EUR billion 26,0 16,0 10,0 16,6 9,4 M/L term issues Securitisations 2 104% 106% 115% 113% 115% Q1 12 Q2 12 Total 2 D'08 D'09 D'10 D'11 Jn'12 (1) Including retail commercial paper (2) Placed in the market and including structured financing

17 3 Effort in provisions: We re getting close to the end of the provisioning cycle in Spain Effort in real estate provisions in Spain, against capital gains and ordinary profit 17 EUR million Provisions in Q2'12 before tax: Against capital gains* EUR 884 mill. Against ordinary profit EUR 1,896 mill Impact on attributable profit of - EUR 1,304 mill. 619 EUR 2,780 million Provisions net of tax Capital gains net of tax (*) Not including capital gains from Insurance disposal agreement, to be recorded in Q3'12: EUR 490 mill.

18 4 Solid profit generation EUR billion Group's revenues 18 Solid pre-provision profit, growing over previous semesters 21,4 21,4 +6% 22,5 Pre-provision profit EUR billion +6% 11,8 +10% 11,3 12,5 EUR billion H1'11 H2'11 H1'12 Group's expenses +0% 9,6 10,0 10,0 H1'11 H2'11 H1'12 H1'11 H2'11 H1'12

19 We can deliver attractive returns in both emerging and mature markets: 19 1.A. Mature markets with cyclically high provisions (16%): Spain and Portugal Germany, 5% Other Europe, 2% Attributable profit by geographic segment in H1'12 (1) Spain, 14% Portugal, 2% Poland, 4% Brazil, 26% 2. EMERGING MARKETS (56%) UK, 13% 1.B.Other mature markets (28%): UK, US, Germany USA, 10% Other LatAm, Chile, 6% 6% Mexico, 12%

20 1a MATURE MARKETS WITH CYCLICALLY HIGH PROVISIONS (SPAIN / PORTUGAL): Three key ideas about banking in Spain (I) FIRST KEY IDEA: The Spanish financial system is aware of its problems and it is taking measures 20 Cleaning up balance sheets Total provisions will reach EUR 240bn (24% of PIB) Excess installed capacity The system will close down 10,000-15,000 branches over the next few years Weaker / subscale entities will be absorbed by stronger ones Endgame: a system with < 10 (strong) entities

21 1a MATURE MARKETS WITH CYCLICALLY HIGH PROVISIONS (SPAIN / PORTUGAL): Three key ideas about banking in Spain (II) SECOND KEY IDEA: As a result of the crisis, the system has been divided into three groups 21 Banks with strong international presence (Santander, BBVA) Do not need capital Rest of financial system Intervened banks / nationalized (Bankia, Catalunya Caixa, B. Valencia, etc.) Damaged balance sheets Market access Without market access Sustainable business Strong restructuring need

22 1a MATURE MARKETS WITH CYCLICALLY HIGH PROVISIONS (SPAIN / PORTUGAL): Three key ideas about banking in Spain (III) 22 THIRD KEY IDEA: As weak banks close down branches and shrink their balance sheets (liquidity / profitability pressures + European STATE AID requirements), strong banks will be the CLEAR WINNERS STRONG BANKS (SAN, BBVA) Rest of the financial system Nationalised entities (Bankia, CX, NCG, etc.) BRANCH MARKET SHARE % >25% 48% < 45% 15% < 14% BUSINESS MARKET SHARE % > 28% 44% < 42% 17% < 14%

23 1a MATURE MARKETS WITH CYCLICALLY HIGH PROVISIONS (SPAIN / PORTUGAL): We have a great opportunity to recover lost profits, taking advantage of our position of strength Our profit is cyclically depressed Significant provisioning effort in 2011 and 2013 Significant pressure on deposit margins (low rates + liquidity tensions) Weaker competitors have only recently started to close down branches in a relevant manner We are optimistic about our outlook for the next 2 years We are close to completion provisioning levels will start to normalise in 2013 and 2014 Margins to improve over the next 2-3 years Strong market share gains (e.g., flight to quality / deposits)

24 1b MATURE MARKETS WITH A MORE BENIGN CREDIT CYCLE Net profit- UK + US + SAN Consumer (EUR m) 2,4 H ,0 1,6 H Results currently under pressure due to tougher regulation low rates, (mainly UK) 1, We can deliver profit growth through: Initiatives in segments in which we are underrepresented (e.g., SME banking in the UK) Margin management New efficiency enhancement programmes plus, over the medium term, these units will benefit from the normalisation of interest rate levels in the US or the UK 24

25 2 EMERGING MARKETS: significant long term potential ,7 4,9 Net profit Eur million In 2012, results in LatAm (mainly in Brazil) will be temporarily depressed due to higher provisions (reflecting the global slowdown) H ,6 H , in 2013, we expect our profits in the region to resume their growth path

26 We believe that, over the next three years, SAN will go through a progressive PROFIT NORMALISATION 26 Our profit is cyclically depressed We are optimistic about our outlook for the next 2 years High real-estate related provisions in Spain Pick-up in provisions in LatAm Annualised provisions in H1 2012: > EUR 15bn Group provisions will normalise over the next 2-3 years Pressure on deposit margins (Eurozone, UK, US): low rates and liquidity tensions Margins to improve over the next 2 years We can deliver profitable market share growth in Spain, Portugal, S. Consumer plus in key segments in the UK, the US and Latin America

27 27 1 Outlook for the banking industry: A DUAL WORLD 2 Santander: We can create value both in emerging and in mature markets 3 Final remarks

28 28 We are well positioned in the currrent environment Well diversified Presence in growth markets Strong local positions Sustainable business model Low risk balance sheet; better-than-average credit quality Strong pre-provision profit generation

29 In a «two speed World», we can create value in both emerging and mature markets 29 In MATURE MARKETS: Take advantage of our position of strength and unexploited segments to deliver attractive ROEs (and recover foregone profits in markets under pressure) and become free cash flow generators In EMERGING MARKETS: We have dominant presences in large and attractive markets We are focused on continuing to build strong commercial organizations able to take full advantage of the growth opportunities in these markets with a low risk profile This will translate into a more normalised ROtE: From 11% currently.to 16-18% within 4 years

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