DBRS Morningstar Confirms Issuer Ratings of Santander Totta at “A” / R-1 (low), Stable trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banco Santander Totta SA (Totta or the Bank), following the confirmation of the ratings of its parent, Banco Santander SA (Santander or the Parent). DBRS Morningstar has confirmed Totta’s Long-Term Issuer Rating at “A”, and its Short-Term Issuer Rating at R-1 (low). The trend on all of the ratings remains Stable, in line with the trend on Santander’s Issuer Ratings. Totta’s support assessment remains SA1.

KEY RATING CONSIDERATIONS

The confirmation of the ratings follow DBRS Morningstar’s confirmation of Santander’s A (high) / R-1 (middle) Issuer Ratings, with a Stable trend. DBRS Morningstar maintains its SA1 support assessment for Totta, which implies strong and predictable support from the Parent. As a result, Totta’s ratings will generally move in tandem with Santander’s ratings. The SA1 designation considers Totta’s important role as a core component of Santander’s international franchise and DBRS Morningstar’s expectation that Santander has the willingness and ability to support Totta, if required.

RATING DRIVERS

An upgrade would be linked to an upgrade of Santander’s Issuer Ratings.

A downgrade of Santander’s ratings would have a negative impact on Totta’s ratings. Any indication of a reduction of support from the Parent could impact DBRS Morningstar’s support assessment, and potentially also have a negative impact on Totta’s ratings.

For more information on the rating drivers of Santander, see the separate press release https://www.dbrsmorningstar.com/research/421185.

CREDIT RATING RATIONALE

Santander Totta SA is a commercial bank in Portugal owned by Santander that provides universal banking services to individuals, small and medium-sized enterprises and large corporations. Totta is a medium sized bank with EUR 57.6 billion in total assets as of Q2 2023. The Bank conducts the majority of its operations in Portugal. It is the third largest banking group in Portugal with a mortgage market share of 23% as of end-2022.

In DBRS Morningstar’s view, the Bank has a sound earnings capacity with an improving trend in recent years amid post-COVID recovery, higher interest rates and recent cost optimisation. Net attributable income increased significantly in 2022 to EUR 607 million from EUR 299 million in 2021. Results in 2021 were affected by an extraordinary restructuring plan that impacted its financial performance. The sound performance continued in H1 2023, as the Bank reported a net profit of EUR 333 million, up 38% YOY benefitting from the high interest rate environment. This translated into a Return on Equity (RoE) of 17.6% as of H1 2023 which is higher than its domestic and European peers.

While high inflation, subdued economic growth and rising interest rates are expected to lead to a deterioration in the Bank’s asset quality, the impact on Totta’s balance sheet has been relatively marginal to date. Totta’s asset quality metrics remain among the strongest in the Portuguese banking sector, with a 2.6% Stage 3 loan ratio, and Stage 3 coverage levels of 87% at end-2022.

Totta’s funding profile is underpinned by its customer deposit base in Portugal. As of end-June 2023, the Bank was mainly funded by customer deposits (76%) with deposits from Central Bank and financial institutions accounting for 13% and debt securities representing around 11% of total funding. Totta’s deposit base was pressured in H1 2023, declining 8.8% YOY, as funds shifted from retail deposits to higher yielding products such as Government’s Saving Certificates and investment funds as well as due to the early amortization of credit by customers. Nevertheless, deposit outflows seem to have stabilised in the last quarter and the Bank’s liquidity profile remains solid, with low liquidity needs given the subdued lending environment. The Liquidity Coverage Ratio (LCR) is 129% at end-June 2023, comfortably meeting regulatory requirements.

In DBRS Morningstar’s view, Totta has an adequate capital position which provides a significant cushion. As of June 2023, Santander Totta reported a fully-loaded common equity tier 1 (CET1) ratio of 17.6% down from 21.4% in Q2 2022, as the Bank resumed dividend distributions in 2022 following a pause after the European Central Bank’s recommendation (ECB/2020/19) in March 2020.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Credit rating actions on Banco Santander SA are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of Banco Santander SA are discussed separately at https://www.dbrsmorningstar.com/research/421185.

There were no Environmental or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (4 July 2023).

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations (22 June 2023). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The following methodologies have also been applied
• DBRS Morningstar Criteria: Guarantees and Other Forms of Support (28 March 2023) https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this credit rating include Morningstar Inc. and Company Documents, Santander and Santander Totta 2022 & H1 2023 Presentations, Santander and Santander Totta 2022 & H1 2023 Press Releases, Santander and Santander Totta 4Q 2022 & 2Q 2023 Report, and Santander and Santander Totta 2022 Annual Accounts. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and credit ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/421328.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pablo Manzano, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director - Global FIG
Initial Rating Date: July 18, 2012
Last Rating Date: October 4, 2022

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