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Santander Outperforms European Peers Globally
Across Europe, banks are facing high competition, market uncertainty and low interest rates. Thus, European banks engage in more cost-cutting programmes. Even so, most banks saw less-than optimal results at the close of 2018. But one bank clearly outperformed its peers: Santander.
In this context of pressure and cost-cutting, what was Santander’s strategy to obtain strong profitability and growth in 2018?
This is what the Sia Partners’ Banking Observatory seeks to analyse. In the following data visualisation, we compare three performance indicators across eight large European banks (Barclays, BNP Paribas, Crédit Agricole, Deutsche Bank, BPCE Group, HSBC, Santander and Société Générale), globally and across all their banking activities, over 2017 and 2018.
Santander delivered strong growth and profitability in 2018 relative to its peers. We find that this is principally due to its strategy based on digital transformation and its presence in Latin America, with a low-cost centralised structure in Spain and Portugal as near shore centres.
This is evidenced by looking at three key performance indicators:
Total income
Santander has the highest total income due to the success of their digital transformation and its presence in Latin America.
In terms of income, Santander’s total income was £43bn in 2018, which was composed of 71% net interest – this is the highest amongst its peers. Santander achieved this through increasing its retail and commercial customer base (individuals, SMEs and corporates) and hence their loan book.
This in turn was driven by their digital and commercial transformation: they now have 32 million digital only customers, up from less than 17 million in 2015. In fact, Santander has improved its digital global platforms along creating two new where customers can access every product and service. In addition, Santander are creating new ventures such as OpenBank based in Spain that can compete in, and disrupt, markets in order to serve customers as well as OnePay FX which is using blockchain technology to operate at scale anywhere in the world.
Another key driver is Santander’s presence in Latin America in comparison to its peers. They generated £21bn in income in Latin America in 2018 which is 44% of their total income.
Cost-to-income ratio
Santander globally has a high net profit with particular pockets of profitability to be found in Spain, Portugal and the Americas.
Santander obtained high revenues and low costs in 2018. As a result, Santander achieved a high net profit of £6.9bn in 2018 – the second highest amongst its peers. HSBC reported a higher net profit in 2018 than Santander, primarily due to lower credit impairment charges and credit risk provisions. However, Santander achieved a higher return on assets of 0.53%, while HSBC was on 0.51%, showing a better utilisation of its smaller balance sheet.
Focussing on Santander’s net profit figures further, despite obtaining a decrease in the UK (£1.2bn, -8%) in 2018 compared to 2017, we note the strong increases in Spain (£1.6bn, +21%), Portugal (£429m, +10%), Latin America (£3.8bn, -2% in € but +16% excluding exchange rate) and the United States (£492m, +42%) in 2018 compared to 2017. This is due to higher volumes of loans and more and more processes in those locations being handled in Spain and Portugal’ near-shores centres, ensuring marginal costs are as low as possible. Santander’s good results could have been even better without the depreciation of the Brazilian real and the Argentine peso.
Many of Santander’s peers suffered losses in Investment Banking /Capital Market activities in the year of 2018. This has attributed to Santander’s group performance as its business structure is less exposed to these activities. However, Santander would still have the best results without considering Corporate and Investment Banking business division in our study.
Santander has the lowest cost-to-income ratio due to low operating expenses achieved through its centralised structure in Spain and Portugal.
Santander had the lowest cost-to-income ratio compared to its peers in 2018 (by quite a margin at 47%), with that of Santander Corporate and Investment Banking’s cost-to-income ratio close to 40%, bringing the average down. This is primarily a result of Santander having an extremely centralised structure in Spain and Portugal, which are low cost near shore centres, significantly bringing down costs compared to its peers.
Net Profit
Santander globally has a high net profit with particular pockets of profitability to be found in Spain, Portugal and the Americas.
Santander obtained high revenues and low costs in 2018. As a result, Santander achieved a high net profit of £6.9bn in 2018 – the second highest amongst its peers. HSBC reported a higher net profit in 2018 than Santander, primarily due to lower credit impairment charges and credit risk provisions. However, Santander achieved a higher return on assets of 0.53%, while HSBC was on 0.51%, showing a better utilisation of its smaller balance sheet.
Focussing on Santander’s net profit figures further, despite obtaining a decrease in the UK (£1.2bn, -8%) in 2018 compared to 2017, we note the strong increases in Spain (£1.6bn, +21%), Portugal (£429m, +10%), Latin America (£3.8bn, -2% in € but +16% excluding exchange rate) and the United States (£492m, +42%) in 2018 compared to 2017. This is due to higher volumes of loans and more and more processes in those locations being handled in Spain and Portugal’ near-shores centres, ensuring marginal costs are as low as possible. Santander’s good results could have been even better without the depreciation of the Brazilian real and the Argentine peso.
Many of Santander’s peers suffered losses in Investment Banking /Capital Market activities in the year of 2018. This has attributed to Santander’s group performance as its business structure is less exposed to these activities. However, Santander would still have the best results without considering Corporate and Investment Banking business division in our study.
What did we find out?
Our analysis shows Santander to be a strong competitor, demonstrating the highest operational efficiency of the eight European banks in our study: Santander has the highest total income due to the success of their recent digital transformation, Santander has the lowest cost-to-income ratio mainly due to low operating expenses achieved through its near-shores centres in Spain and Portugal and Santander has the highest return on assets, showing a high net profit and a good utilisation of their assets, especially driven by their business in Spain, Portugal and the Americas.
We will seek to update our analysis once full year 2019 results are published to see how this picture has evolved further especially given the ongoing Brexit uncertainties.
*Note: In order to achieve consistency across our sample, all currencies have been converted into GBP (as HSBC report in USD whilst Deutsche Bank, Santander, Credit Agricole, Société Générale and BNP Paribas report in EUR) using an average yearly exchange rate for all performance indicators, such as total income and net profit.