FIXED INCOME INVESTORS PRESENTATION

Transcription

1 Q FIXED INCOME INVESTORS PRESENTATION Here to help you prosper

2 Important information In addition to the financial information prepared under International Financial Reporting Standards ( IFRS ), this presentation includes certain alternative performance measures ( APMs ) as defined in the Guidelines on Alternative Performance Measures issued by the European Securities and Markets Authority on 5 October 2015 (ESMA/2015/1415es) as well as non-ifrs measures ( Non-IFRS Measures ). The APMs and Non-IFRS Measures are performance measures that have been calculated using the financial information from the Santander Group but that are not defined or detailed in the applicable financial information framework and therefore have neither been audited nor are capable of being completely audited. These APMs and Non-IFRS Measures are been used to allow for a better understanding of the financial performance of the Santander Group but should be considered only as additional information and in no case as a replacement of the financial information prepared under IFRS. Moreover, the way the Santander Group defines and calculates these APMs and Non-IFRS Measures may differ to the way these are calculated by other companies that use similar measures, and therefore they may not be comparable. For further details of the APMs and Non-IFRS Measures used, including its definition or a reconciliation between any applicable management indicators and the financial data presented in the consolidated financial statements prepared under IFRS, please see Q Financial Report, published as Relevant Fact on 24 April 2018, Section 26 of the Documento de Registro de Acciones for Banco Santander, S.A. ( Santander ) filed with the Spanish Securities Exchange Commission (the CNMV ) on July 4, 2017 (the Share Registration Document ) and Item 3A of the Annual Report on Form 20-F filed with the U.S. Securities and Exchange Commission of the United States of America (the SEC ) on March 31, 2018 (the Form 20-F ). These documents are available on Santander s website ( The businesses included in each of our geographic segments and the accounting principles under which their results are presented here may differ from the included businesses and local applicable accounting principles of our public subsidiaries in such geographies. Accordingly, the results of operations and trends shown for our geographic segments may differ materially from those of such subsidiaries. Santander cautions that this presentation contains statements that constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of Forwardlooking statements may be identified by words such as expect, project, anticipate, should, intend, probability, risk, VaR, RRAC, RoRWA, TNAV, target, goal, objective, estimate, future and similar expressions. These forward-looking statements are found in various places throughout this presentation and include, without limitation, statements concerning our future business development and economic performance and our shareholder remuneration policy. While these forward-looking statements represent our judgment and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to: (1) general market, macro-economic, industry, governmental and regulatory trends; (2) movements in lo cal and international securities markets, currency exchange rates and interest rates; (3) competitive pressures; (4) technological developments; and (5) changes in the financial position or credit worthiness of our customers, obligors and counterparties. Numerous factors, including those reflected in the Form 20-F under Key Information-Risk Factors - and in the Share Registration Document under Factores de Riesgo - could affect the future results of Santander and could result in other results deviating materially from those anticipated in the forward-looking statements. Other unknown or unpredictable factors could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements speak only as of the date of this presentation and are based on the knowledge, information available and views taken on such date; such knowledge, information and views may change at any time. Santander does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. 2

3 Important information The information contained in this presentation is subject to, and must be read in conjunction with, all other publicly available information, including, where relevant any fuller disclosure document published by Santander. Any person at any time acquiring securities must do so only on the basis of such person s own judgment as to the merits or the suitability of the securities for its purpose and only on such information as is contained in such public information having taken all such professional or other advice as it considers necessary or appropriate in the circumstances and not in reliance on the information contained in this presentation. No investment activity should be undertaken on the basis of the information contained in this presentation. In making this presentation available Santander gives no advice and makes no recommendation to buy, sell or otherwise deal in shares in Santander or in any other securities or investments whatsoever. Neither this presentation nor any of the information contained therein constitutes an offer to sell or the solicitation of an offer to buy any securities. No offering of securities shall be made in the United States except pursuant to registration under the U.S. Securities Act of 1933, as amended, or an exemption therefrom. Nothing contained in this presentation is intended to constitute an invitation or inducement to engage in investment activity for the purposes of the prohibition on financial promotion in the U.K. Financial Services and Markets Act Note: Statements as to historical performance or financial accretion are not intended to mean that future performance, share price or future earnings (including earnings per share) for any period will necessarily match or exceed those of any prior year. Nothing in this presentation should be construed as a profit forecast. 3

4 CONTENT 1. Markets and Macroeconomic Environment 2. Santander Business Model & Strategy 3. Capital 4. Asset Quality 5. TLAC Requirements, Liquidity and Funding 6. Concluding Remarks 7. Appendix UK loan portfolio: Mortgage and Corporate RE 8. Glossary 4

5 Markets and Macroeconomic Environment 01

6 Markets and Macroeconomic Environment A favourable macroeconomic and financial environment expected in 2018 Growth in developing and mature markets Better fundamentals should lead to more resilient and stable growth cycles Contained inflation Interest rate rises will be gradual (2018/2019) Lower regulatory uncertainty IMF 2018 GDP Outlook 1 World Output 3.9% Euro Area 2.4% UK 1.6% United States 2.9% Latin America 2.0% Mexico 2.3% Brazil 2.3% Santander is well-positioned for growth due to its balanced geographic diversification MATURE MARKETS Cyclical macro acceleration (53% attributable profit) DEVELOPING MARKETS Structural growth remains strong (47% attributable profit) 6 (1) World Economic Outlook, April 2018

7 Markets and Macroeconomic Environment The expansionary cycle in the Spanish economy is expected to continue, backed by employment creation, higher consumption and real estate & investment recovery Annual GDP Growth Real, % Spain Eurozone (e) 2019 (e) 2020 (e) Unemployment rate Housing prices % Price index per m 2 in real terms 110 Base 100: Q3 07 peak (e) 2019 (e) 2020 (e) Source: Santander Research Department, Bank of Spain 50 Q4'01 Q4'03 Q4'05 Q4'07 Q4'09 Q4'11 Q4'13 Q4'15 7

8 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Markets and Macroeconomic Environment Loan stabilisation in Spain is accompanied by the closing of the funding gap and improved credit quality Funding Gap Non-performing loans EUR bn, Spanish system EUR bn and %, Spanish system 2,000 1, % 1,750 1, % 12% 1, % 1, % 1, % % 2% % Total loans inc. reverse repos (LHS) Total deposits inc. repos (LHS) Non-performing loans (LHS) NPL ratio (RHS) Funding Gap (RHS) Source: Bank of Spain and Santander calculations 8

9 Santander Business Model & Strategy 02

10 Santander Business Model & Strategy Our business model has unique competitive advantages A differential business model Customers distributed across geographies Mar-18 1 Serving 139 million customers with in-market SCALE in our core markets drives profitable growth Argentina 2% USA 4% Others 1% Spain 12% Chile 3% 2 Our geographic diversification generates PREDICTABLE GROWTH in profits, resulting in lower capital needs Mexico 11% 139 Million customers SCF 14% Poland 3% Portugal 4% Brazil 28% 3 The subsidiary model, with a strong culture of INNOVATION and collaboration, drives efficiency and service excellence UK 18% 10

11 Santander Business Model & Strategy In-market scale in our core markets, with a highly diversified and collateralised loan portfolio Loan portfolio by country Breakdown of total gross loans net of reverse repos, % of operating areas Europe AR; 1% MX; 3% Other Latam; 1% CH; 5% Portugal UK SCF US; 8% UK; 28% 1 Market Share 1 : 18% Branches: 676 Poland Market Share 1,3 : 10% Branches: 565 Market Share 2 : 10% Branches: 800 Spain Market Share 1,6 : 18% Branches: 4,481 # Countries 5 : 15 Branches: 509 BR; 9% Other Eur.; 2% PL; 3% PT; 4% SCF; 11% ES; 25% Total gross loans net of reverse repos: EUR 856 bn RWAs as of Mar-18: EUR 600 bn Americas Loan portfolio by business Breakdown of total gross loans net of reverse repos USA Brazil Argentina Other individuals; 10% Market Share 1,4 : 3% Branches: 679 Mexico Market Share 1 : 13% Branches: 1,401 Market Share 1 : 9% Branches: 3,484 Market Share 1 : 10% Branches: 482 Chile Market Share 1 : 19% Branches: 429 GCB; 10% Corporates; 17% Home mortgages; 36% 90% of loan portfolio is Retail, 10% Wholesale SMEs; 11% Consumer; 16% Source: Own calculation based on public information of the market (Central banks, regulators, etc.) (1) Lending (2) UK mortgages (excluding Social Housing),Consumer credit and commercial lending (excluding Financial Institutions) (3) Including Santander Consumer Finance business (SCF) (4) In the states where the Group operates. (5) Including SCF UK (6) Including Banco Popular. Data: Mar-18 or latest available. Branches do not include Santander Consumer Finance business 11

12 Santander Business Model & Strategy High and recurring pre-provision profit leads to resilient growth through the economic cycle Resilient profit generation throughout the cycle PPP/Loans well above most European peers 1 2 Group attributable profit, EUR bn %, Q1 18, Santander calculations European peers include: Barclays, BBVA, BNP, Deutsche, HSBC, ING, Intesa Sanpaolo, Lloyds, RBS, Société Générale, Standard Chartered, UBS and Unicredit 12

13 Santander Business Model & Strategy and to stable and predictable growth 2 Predictable results with the lowest volatility among peers coupled with growth in earnings Quarterly reported EPS volatility 1 717% 335% 128% 112% 91% 79% 51% 45% 44% 33% 9% -2x 3x -1x -1x 6x 3x 4x 3x 1x 10x 4x Net income increase Source: Bloomberg, with GAAP Criteria. Note: Standard deviation of the quarterly EPS starting from the first available data since Jan

14 Santander Business Model & Strategy Operational excellence: allowing us to improve both customer satisfaction and efficiency 3 Improving customer satisfaction with better cost-to-income than peers 1 # of countries in Top 3 for customer satisfaction, Dec >75% of PBT among Top 3 in customer satisfaction Cost-to-income, Mar-18 EU EU UK EU US US US EU UK UK US UK EU EU EU EU 47% 48% 49% 53% 54% 58% 58% 60% 60% 61% 64% 65% 68% 74% 75% 76% 18pp better than peer avg. UK Source: Company data and Bloomberg (1) Note: Peers included are Bank of America, Barclays, BBVA, BNP Paribas, Citibank, Deutsche, HSBC, ING, Intesa Sanpaolo, JP Morgan, Lloyds, RBS, Société Générale, Standard Chartered, UBS, Unicredit and Wells Fargo 93% 99% 14

15 Santander Business Model & Strategy The 2018 strategy is based around several different pillars Strengthen franchises Continue commercial and digital transformation Improve key metrics 2018 Meet Group objectives Grow sustainably Improve quality of results 15

16 Santander Business Model & Strategy Our commercial and digital transformation is supported by new business models, products and branches Commercial and digital transformation Supertankers Our Supertankers are being transformed into digital banks FX transfers using Blockchain Launch of Digital On-boarding and new Workcafés Profitable growth Independent Global Platforms. Led by independent CEOs but sponsored by Country Heads Start-up model + Group support First fully digital bank Superdigital Banking without a bank Leader in mobile payments Speedboats 16 Image Credit: Cymon Taylor / RM Sotheby s

17 Santander Business Model & Strategy resulting in more loyal and digital customers, due to enhanced customer experience, growth in fee income and increased cost savings Commercial and digital transformation 1 Billion Total Population 139 mn Total Customers 18.8 mn 27.3 mn Loyal Customers Digital Customers +22% +24% Fee Income Cost Savings 17

18 Santander Business Model & Strategy We are on track to meet our 2018 targets 2017 Q Targets Meet Group objectives Loyal customers (mn) Digital customers (mn) Fee income ~10% 1 13% 14% Cost of credit risk 1.07% CAGR % average Cost-to-income 47.4% 47.4% 45-47% EPS (EUR) % (Q1 18) Double digit growth DPS (EUR) Yearly increase FL CET % 11.00% >11% RoTE 10.4% % >11.5% Positive trends makes us confident to deliver solid results in 2018 (1) % change in constant euros (2) Total dividends charged to 2018 earnings are subject to the Board and AGM approval (3) Underlying RoTE: 11.8% 18

19 Santander Business Model & Strategy Excellent quality and strong top-line growth Improve quality of results EUR mn Q1 18 % vs. Q1 17 Euros Constant euros Net interest income 8, Net fees 2, Customer revenues 11, ROF and other Gross income 12, Operating expenses -5, Net operating income 6, Net loan-loss provisions -2, Other provisions PBT 3, Attributable Profit 2, Quarterly gross income performance (constant EUR mn) +11% 8,454 +4% 7,615 7, % +12% 2,955 2,582 2,324 +5% +5% Q1'16 Q2 Q3 Q4 Q1'17 Q2 Q3 Q4 Q1'18 Attributable profit Constant EUR mn Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 1,680 1,598 1,392 1,497 2,054 NII Fees Other Note 1: Data according to Q1 18 results presentation and report Note 2: Contribution to the SRF (net of tax) recorded Q2. Contribution to the DGF (net of tax) in Q4 19

20 Santander Business Model & Strategy Attributable profit growth is driven by most of our markets Grow sustainably Attributable profit 1 Attributable profit by geography Q1 18 Americas Europe EUR mn and % change vs Q1 17 in constant euros 49% 51% % % Other Latam; 1% Argentina; 3% Chile; 6% UK; 13% % -21% % Brazil; 27% Spain; 18% % +1% Mexico; 7% USA; 5% Poland; 2% SCF; 13% Portugal; 5% % -11% +3% (1) Excluding Corporate Centre and Real Estate Activity Spain 20

21 Santander Business Model & Strategy Better than peer results across key metrics accompanied by improved asset quality Improve key metrics RoTE Santander Mar-18, Peers Dec-17 Efficiency Ratio Mar-18 % Group s Asset Quality Coverage ratio Cost of Credit 12.4% 9% 47.4% 66% 75 NPL ratio % 1.04% Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Q1'17 Q1'18 Global Peers Global Peers (1) Banco Popular integration (2) IFRS 9 application 21

22 Santander Business Model & Strategy Main opportunities to strengthen growth in our franchises Strengthen franchises SCF Popular acquisition: positive delivery on a transformational deal SCF: Consolidate our leadership while increasing penetration in personal loans via digital transformation UK: Well positioned as the only full-service scale challenger despite uncertain economic environment USA: Efficiently relaunching our commercial banking while improving the risk-return-profile of SCUSA Poland: Most profitable bank among peers. Reinforce presence with Deutsche Bank acquisition Brazil: We have built a great and improving bank with sustainable profit and solid organic growth Argentina: Potential to grow & consolidate market leadership Mexico: High potential growth in a stable and largely untapped market Chile: Leaders in a stable growth and profitable market GCB WM GCB: Expanding international / trade business & collaboration revenues Wealth Management: Strengthen our Asset Management & Private Banking Unit Diversification between developed and emerging markets provides stability as well as growth opportunities 22

23 Capital 03

24 Capital Consistent progress on reaching our target of FL CET1 >11% in 2018 Fully loaded CET1 1 % +16 bps 10.55% 10.84% +9 bps +8 bps -1 bp 11.00% +5 bps +9 bps -18 bps -5 bps 10.91% 10.05% Pro forma ratios with estimated impacts 2 3 Q Q FL Total capital ratio: 14.10% 14.66% FL Leverage ratio: 5.0% 5.1% RoRWA : 1.48% 1.59% Diff. FL CET1 ratio: 10.66% 11.00% 0.34% 0.56% 0.1% 0.11% RoTE : 12.1% 12.4% 0.3% Santander has a high RoTE with strong capital quality: The least capital destruction 4 among European peers (-199 bps vs -345 bps) Higher density (42% vs 33% in Mar-18) Better leverage (5.1 vs 5.0 fully loaded in Mar-18) (1) 2018 data calculated using IFRS 9 transitory arrangements. Fully loaded IFRS 9 impact would be -23 bps (2) Blackstone (+10 bps); Metrovacesa (-2 bps) (3) AFS and regulatory impacts (4) Capital destroyed in adverse scenario in bps, EBA stress test

25 Capital Group regulatory capital and current distance to MDA Current distance to MDA 14.66% Targeted distance to MDA 1 January >14.5% T2 AT1 CET1 1.79% 1.68% 11.19% 2.504% % 2 required % Total capital 2.00% 1.50% 0.75% 1.875% 1.50% T2 AT1 CCyB (0.031%) G-SIB buffer CCoB Pilar II requirement T2 AT1 CET1 2.00% 1.50% >11.00% ~130bps % 0.20% 1.00% 2.50% 1.50% CCyB G-SIB buffer CCoB Pilar II requirement 4.50% Minimum Pilar I 4.50% Minimum Pilar I Group Phased-in ratios Mar-18 Regulatory requirement for 2018 Comfortable management buffer to MDA of >100 bps in regulatory transitional total capital and CET1 ratios, in line with Santander s business model and predictable results As of Mar-18, the distance to the MDA for 2018 amounts is 2.504% Regulatory ratios Dec-18 Target Significant payment capacity from distributable items: As of Mar-18, ADIs at Santander S.A. EUR 57.2 bn, ~100x times 2018 full AT1 cost Assumed regulatory requirement 1 Jan 19 CET1 (1) MDA trigger= Group CET1 (11.19%) + AT1 (1.68%) + T2 (1.79%) vs. Regulatory Total Capital (12.166%) = 2.504%. 3.28% 1 year ago. (2) 8.656% is the MDA threshold which reflects the minimum CET1 to be maintained by the Santander Group as communicated by the ECB on its decision regarding prudential minimum capital requirements for 2018 following the results of the Supervisory Review and Evaluation Process (SREP) (3) Assuming stability in the minimum requirements. (4) Assuming the fulfillment of AT1 and T2 during

26 Capital Santander is committed to fulfil the AT1&T2 buckets through the transitional period Group FL Total Capital ratio Mar-18 1 Group FL Total Capital ratio 2018E 14.43% 1.94% 1.49% TIER2 TIER1 T2 issuances to target ~6bps AT1 issuances to target ~1 bp >14.5% 2.0% 1.5% TIER2 TIER1 AT1 issuance to target 1.5% of RWAs is close to zero assuming constant RWAs % CET1 Generation 2 ~10-20 bps >11% T2 issuance to target 2% of RWAs ~EUR 0.4 bn Note: Assuming constant RWAs (1) Total capital ratio fully-loaded IFRS 9 phased-in (2) Net of pro forma estimated impact + organic generation. All amounts except Mar-18 are targets 26

27 Capital FX hedging policy on capital ratio and P&L Stable capital ratio hedge Our P&L Policy Hedged Exposure Group FL CET % Dynamic P&L hedging policy Mitigate impact of FX volatility Corporate Centre assumes all hedging costs Manages FX volatility in our FL CET1 ratio Based on Group regulatory capital and RWAs 27

28 Capital and interest rate risk hedging Mostly positive interest rate sensitivity Net interest income sensitivity to a +100 bps parallel shift EUR mn; Mar-18 ALCO portfolios reflect our geographic diversification Distribution of ALCO portfolios by country Mar-18 c Chile; 4% Mexico; 6% +101 US; 12% Spain; 35% +112 EUR 97 bn +110 Brazil; 16% Poland; 6% Portugal; 4% UK; 16% Note: Last available data (1) In the case of Santander Brazil, there is a negative sensitivity which means that for a -100bps parallel shift we would have a positive impact of around EUR 20 mn 28

29 Asset Quality 04

30 Asset Quality All asset quality ratios improved with cost of credit achieving the Investor Day goals Credit quality ratios NPL ratios by country % % Q Q Spain SCF Poland NPL ratio Portugal United Kingdom Brazil Mexico Chile Q Argentina USA Cost of credit ratios by country % Q Q Cost of credit Spain SCF Poland Portugal United Kingdom Q Brazil Mexico Chile Argentina USA

31 Asset Quality Coverage ratio well situated among European peers with higher collateralisation Coverage ratio % Coverage vs European Peers %, Santander Mar-18, Peers 1 latest available data EU 78 EU San EU UK UK EU EU Q EU 57 UK 50 UK UK EU European peers include: Barclays, BBVA, BNP, Deutsche, HSBC, ING, Intesa Sanpaolo, Lloyds, RBS, Société Générale, Standard Chartered and Unicredit. Note: Data taken from banks published accounts and definitions may not be homogeneous 31

32 Asset Quality Continuing the reduction of real estate exposure Real estate exposure 1 EUR bn Following the acquisition of Banco Popular, we announced our intention to reduce Grupo Santander s NPE Agreement with Blackstone was completed in March 2018 according to plan: No material impact on results Positive impact of 10 bps on the CET1 capital ratio As a result of this operation the Spain Real Estate unit has an exposure of EUR 5.2 billion We will continue reducing this exposure in the coming quarters Gross value Jun-17 Net value EUR bn Blackstone transaction and other Provisions Net value Mar-18 Mar-18 Real estate assets 4.0 Foreclosed assets 2.8 (1) Spain Real Estate activity Rental assets 1.2 RE non-performing loans (NPLs) 1.2 RE assets + RE non-performing loans

33 TLAC Requirements, Liquidity and Funding 05

34 TLAC Requirements, Liquidity and Funding TLAC requirements are manageable and an optimisation exercise for Santander The TLAC requirements regulation is a work in progress. On 23 November 2016, the European Commission published the proposals to amend the CRD IV and CRR On the same date, the European Commission also published a proposal for the amendment of the BRRD regarding the ranking of unsecured debt instruments in the creditor insolvency hierarchy (the Senior Ranking Harmonisation Directive ) 1 TLAC phase-in requirements Using the Group requirements as a proxy for the aggregate TLAC requirement G-SIB 2 CCoB % 1.0% 2.5% 2018 Total Capital Target Eligible Senior 2.5% > 2.5% The amendments include measures that will implement the TLAC requirement into EU and national law Implementation of the TLAC requirement is expected to phase-in from 1 January 2019: 16% from 1 January 2019 (18% from 2022) plus applicable capital buffers TLAC T2 AT1 8.0% 2.0% 1.5% 14.5% Indicative amount of Senior Non- Preferred subject to significant issues still under discussion Santander has a resolution strategy approach of multiple point of entry (MPE). The TLAC requirement is expected to be requested at each resolution entity CET1 4.5% Jan 2019 TLAC phased-in requirements CRD IV: Capital requirement directive. CRR: capital requirement regulation. BRRD: Bank recovery and resolution directive. (1) According to proposal of Senior Ranking Harmonisation Directive, Royal Decree-law 11/2017 of 23 June on urgent actions on financial matters was approved by the Spanish Government, creating the new category of senior non-preferred debt under Spanish Law (2) G-SIB buffer. (3) Capital Conservation Buffer 34

35 TLAC Requirements, Liquidity and Funding The Group s business model combines local knowledge with global best practices through legally, financially and operationally autonomous subsidiaries Legal autonomy structure Dec-17 Banco Santander Totta. 99% 70% 100 % Bank Zachodni WBK Santander UK Group Holdings Banco Santander S.A. 100 % Santander Consumer Finance Banco Popular 100 % 100 % Santander Holdings USA Banco Santander Brasil 89% 75% 67% 99% Grupo Financiero Mexico Banco Santander Chile Banco Santander Río Legal autonomy: There are no legal commitments that imply financial support. Financial autonomy: Financial interconnections are limited and at market prices. Operational autonomy: Shared services are limited and carried out through autonomous factories. Access to FMIs through other Group entities is very limited. 35

36 TLAC Requirements, Liquidity and Funding divided into different resolution groups that can be resolved separately though multiple entry points MPE resolution strategy Dec-17, EUR bn Banking Union European Union 3 rd Countries Resolution Group PE Spain PE Poland PE Brazil PE Mexico PE Point of Entry PE Portugal PE UK PE Chile PE Argentina PE USA Size of Resolution Groups (Total assets by geography) Brazil USA 13 Spain (Parent) Portugal United Kingdom Poland Mexico Chile Argentina We have defined the Resolution Groups (RGs) mirroring the model of autonomous financial groups so that all entities have been assigned to one RG Each RG comprises the entity identified as the entry point in resolution and the entities that belong to it 36

37 TLAC Requirements, Liquidity and Funding Santander s MPE approach follows its autonomous capital and liquidity model, though there are still issues under discussion with regards to TLAC application Significant issues still under discussion USA Mexico Chile Portugal Brazil Argentina UK Santander S.A Poland Total T1 CET1 Final TLAC transposition to EU and relevant jurisdictions TLAC level and perimeter of resolution groups Eligible Senior debt final treatment Internal TLAC requirement Deductions and mitigants final treatment Local figures as of Mar-18 in percent (phased-in) 37

38 TLAC Requirements, Liquidity and Funding Santander s liquidity management is based on the following principles: Decentralised liquidity model Needs derived from medium- and long-term activity must be financed by medium- and long-term instruments High contribution from customer deposits, due to the retail nature of the balance sheet Diversification of wholesale funding sources by instruments/investors, markets/currencies and maturities Limited recourse to wholesale short-term funding Availability of sufficient liquidity reserves, including the discount window / standing facility in central banks to be used in adverse situations Compliance with regulatory liquidity requirements both at Group and subsidiary level, as a new conditioning management factor 38

39 TLAC Requirements, Liquidity and Funding Conservative and decentralised liquidity and funding model EUR 12 bn 1 issued during Q EUR bn Very manageable maturity profile EUR bn, Mar Poland 0 Santander S.A UK 4.6 US Santander S.A. SCF Mexico 0 Chile 0.5 Brazil 1.3 Portugal 0 SCF 0.7 UK Argentina 0.3 Brazil (1) Data include issuances from all units and the following product types covered bonds, senior, senior non-preferred ( Senior TLAC ), preferred stock, subordinated, with period-average exchange rates

40 TLAC Requirements, Liquidity and Funding Santander S.A. s Funding Plan is focused on TLAC-eligible instruments, following our decentralised liquidity and funding model Santander S.A. Funding Plan 2018 EUR bn, Apr-18 Santander S.A. issuances YTD EUR mn AT1 T2 SNP Funding Plan Issued YTD PUBLIC Product Nom. EUR Maturity Coupon Spread 6M January SNP 1, % MS+60bps February Sub 1, % MS+110bps March AT1 1,500 Perp 4.75% MS+409bps April SNP US3M+1.12% MS+66bps SNP 1, % MS+66bps SNP 1, % MS+99bps Total YTD 6,433 PRIVATE Currency Nominal Maturity Reoffer Q EUR MS+54bps (1) Data include issuances from all units and the following product types covered bonds, senior, senior non-preferred ( Senior TLAC ), preferred stock, subordinated, with period-average exchange rates (2) Excluding securitisations 40

41 TLAC Requirements, Liquidity and Funding Well-funded, prudent and highly liquid balance sheet with high contribution from customer deposits and diversified wholesale instruments Liquidity Balance Sheet EUR bn, Mar-18 1,124 1,124 Liquidity Coverage Ratio (LCR) Mar-18 Net Stable Funding Ratio (NSFR) Dec-17 Net loans to customers Deposits Group 146% 1 111% 1 132% 121% Fixed assets & other Securitisations M/LT Funding 119% 109% Financial assets 179 Assets Liabilities Equity and other ST Funding 145% 2 105% 2 Note: Liquidity balance sheet for management purposes (net of trading derivatives and interbank balances) (1) Provisional data, includes Banco Popular (2) Parent bank 41

42 TLAC Requirements, Liquidity and Funding The main metrics show the strength and stability the Group s liquidity position Evolution of key liquidity metrics 1 LTD and MLT funding metrics by geography Mar Q1'18 Net loans / net assets 74% 74% 75% 75% 75% 76% Net loan-to-deposit ratio (LTD) 112% 113% 116% 114% 109% 112% Customer deposits and mediumand long-term funding / net loans Short-term wholesale funding / net liabilities Structural liquidity surplus / net liabilities 118% 116% 114% 114% 115% 113% 2% 2% 2% 3% 2% 2% 16% 15% 14% 14% 15% 14% Encumbrance 26% 26% 25% 28% - (Deposits + M/LT LTD Ratio funding) / Net lending Spain 88% 142% Portugal 102% 111% SCF 243% 66% Poland 89% 114% UK 114% 110% Brazil 101% 122% Mexico 88% 122% Chile 143% 95% Argentina 78% 134% USA 136% 112% Group total 112% 113% (1).- Balance sheet for liquidity management purposes. Note: in 2013 customer deposits include retail commercial paper in Spain (excluding short-term wholesale funding). The 2013 ratios include SC USA by global integration. Note: all figures as of 2017 include Popular 42

43 TLAC Requirements, Liquidity and Funding backed by a strong liquidity buffer in every subsidiary Liquidity buffer by subsidiary Dec-17, EUR bn Total Buffer: EUR bn Note: all figures as of 2017 include Popular 43

44 TLAC Requirements, Liquidity and Funding Banco Santander S.A. ratings Long Term Ratings Moody s Standard and Poor s Fitch A2 LT senior unsecured debt A Stand-Alone Credit Profile, Issuer Credit Profile LT senior unsecured debt A- Viability Rating, Issuer Default Rating LT senior unsecured debt Senior non-preferred Baa1 Adjusted Baseline Credit Assessment Senior non-preferred A- Senior non-preferred BBB+ Dated T2 Baa2 Dated T2 BBB+ Dated T2 BBB Ba1 Additional T1 BB+ BB+ Short Term Ratings Moody s Standard and Poor s Fitch P-1 A-1 F2 44

45 Concluding Remarks 06

46 Concluding Remarks Concluding Remarks The Group s stable capital generation is supported by strong pre-provision profits providing Santander with a high capacity to absorb provisions and underpins the Group's capacity to generate future earnings Strong capital levels in line with Santander s business model based on geographic diversification, solid market positions in areas where it operates and independent subsidiary model in terms of capital and liquidity The Group is well above the regulatory capital requirement with significant payment capacity from distributable items, while maintaining comfortable margins to conversion and MDA triggers The Group continues with its objective to organically generate 40bps of fully loaded CET1 per year, maintaining business growth and dividend payment TLAC/MREL requirements are manageable and remain a key focus in 2018 and represent an optimisation exercise for Santander Comfortable liquidity position: Compliance with regulatory liquidity requirements established at Group and subsidiary levels ahead of schedule, with high availability of liquidity reserves 46

47 Appendix: UK loan portfolio: Mortgage and Corporate Real Estate 07

48 Appendix: UK loan portfolio: Mortgage and Corporate RE Robust retail banking credit performance Retail Banking NPLs Retail Banking loss allowances and write-offs GBP mn 2, % 2,340 2,105 2,129 GBP mn Loan loss allowance % 1.25% 1.25% Dec-15 Dec-16 Dec-17 Mar-18 Write-offs during the period Dec-15 Dec-16 Dec-17 Mar-18 NPL ratio Balance of Retail Banking loans (GBP bn) FY 15 FY 16 FY 17 3M 18 48

49 Appendix: UK loan portfolio: Mortgage and Corporate RE Well diversified CRE portfolio Credit performance Sector analysis Dec-16 Dec-17 Stock %, Dec Total committed exposure 9.0bn 8.1bn Up to 70% LTV 88% 88% 70% to 100% LTV 2% > 100% LTV 1% 1% Standardised portfolio 1 7% 8% Total with collateral 98% 97% Development loans 2% 3% 100% 100% Dec-16 Dec-17 NPL ratio 2.00% 0.85% NPL coverage ratio 32% 78% Office Retail Industrial Mixed use Residential Standardised portfolio Hotels and leisure Student acc No new business written above 70% LTV (Dec-16: 0%) 91% written at or below 60% LTV (Dec-16: 95%) Weighted average LTV on exposures Dec-17: 48% (Dec-16: 50%) 2 Average loan size of 4.8 mn at Dec-17 (Dec-16: 4.8 mn) NPL ratio decreased primarily due to the sale of collateral to repay two impaired loans, as well as other redemptions and write-offs of older vintage loans Other (1) Consists of smaller value transactions, mainly commercial mortgages (2) Excludes standardised portfolio 49

50 Appendix: UK loan portfolio: Mortgage and Corporate RE Prime residential mortgage book of GBP bn Mortgage product profile Geographic distribution Stock %, Dec-17 Standard Variable Rate (SVR); 15% Stock %, Dec Variable Rate; 19% 1 Fixed rate; 66% South East London North Midlands and East Anglia South West, Wales and Other Scotland Northern Ireland Mortgage borrower profile Stock %, Dec-17 Buy to Let; 4% Mortgage lending GBP bn First time buyers; 19% Home movers; 44% (5.7) Remortgages; 33% Dec-17 New business Redemptions & repayments Internal transfer Mar-18 29% interest only mortgages (Dec-16: 31%) 2 c. 77% of maturing mortgages retained 3 (1) Variable rate includes tracker and base rate linked products (2) Full interest only loans and the element of part-and-part attribution to interest only balances, excluding BTL mortgages (3) Refer to glossary at for a full definition 50

51 Appendix: UK loan portfolio: Mortgage and Corporate RE Consistently prudent mortgage lending criteria Mortgage loan distribution Loan-to-Value (LTV) Dec-16 Dec-17 Dec-16 Dec-17 Loan size distribution (stock) Less than 0.25mn 71.6% 69.1% 0.25m - 0.5mn 21.3% 23.3% 0.5m - 1mn 6.3% 6.8% 1m - 2mn 0.7% 0.7% Over 2mn 0.1% 0.1% Average loan size distribution (new business) London and South East 264k 100% 260k 100% Simple average LTV 2 New lending 65% 62% Stock 43% 42% Indexed LTV distribution (stock) > 85% - 100% 4% 4% > 100% 1% 1% New lending % with LTV >85% 17% 19% Rest of UK 144k 146k All UK 198k 196k 24,000 first-time buyers ( 4.0bn gross lending) Loan-to-income multiple ,500 BTL mortgages (average LTV of 61%) (1) Average earnings multiple of new business at inception in the periods (2) Unweighted average loan-to-value of all accounts 51

52 Glossary 08

53 Glossary Glossary and Acronyms ADIs: Available distributable items AFS: Available for sale bn: Billion Bps: Basis points CCoB: Capital Conservation Buffer CCyB: Countercyclical buffer CET1: Common equity tier 1 DGF: Deposit Guarantee Fund DPS: Dividend per share EPS: Earning per share FL: Fully loaded G-SIBs: Global Systemically Important Banks K: thousands LTV: Loan to Value LLPs: Loan-loss provisions MDA: Maximum distributable amount M/LT: Medium / long term mn: Million NPL: Non-performing loans n.m.: Non meaningful PBT: Profit before tax P&L: Profit and loss RoRWA: Return on risk-weighted assets RWA: Risk-weighted assets RoTE: Return on tangible equity SCF: Santander Consumer Finance GCB: Global Corporate Banking SMEs: Small and Medium Enterprises SRF: Single Resolution Fund ST: Short term SVR: Standard variable rate TLAC: Total Loss-Absorbing Capacity TNAV: Tangible net asset value YoY: Year-on-Year UK: United Kingdom US: United States MXN: Mexican Pesos NII: Net interest income 53

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