Banco Santander experienced a huge drop-off in profits in the first quarter and put aside an additional €1.6bn to deal with an expected jump in loan losses as the eurozone’s largest retail bank prepares for a “strong global recession” caused by coronavirus.
Santander said on Tuesday that net profits dropped 82 per cent year-on-year during the first quarter, thanks to an 80 per cent increase in loan loss provisions.
Although the Spanish lender felt only a “relatively limited impact” from the pandemic in the first three months of the year, its lending business has been transformed since the end of the reporting period.
In the UK and Spain, for example, new consumer loan applications were 70 per cent lower in April compared with February, whereas lending to businesses doubled as the bank joined government rescue schemes in several markets.
José Antonio Alvarez, Santander chief executive, said he was optimistic that the global economy would rebound relatively quickly, but cautioned that the impact on the bank could be more severe if the economic recovery was slower than expected.
“We remain relatively confident if the scenarios we have [play out] — but it’s a big if at this stage . . . what matters is not how deep house prices fall but how long it takes to recover prices afterwards.”
Santander’s shares climbed more than 4 per cent in morning trading after Mr Alvarez reassured analysts about the strength of its balance sheet. He said: “It takes time for us to build up capital, but it is also extremely resilient when withstanding the shocks of a crisis.”
He said he expected the bank’s common equity tier one ratio — a key measure of its financial strength — to be in the “upper half” of its target range of 11 to 12 per cent by the end of the year.
The CET1 ratio was 11.58 per cent at the end of March, down from 11.65 per cent at the end of 2019.
Benjie Creelan-Sandford, analyst at Jefferies, said that “some comfort may be taken from management’s indication that provisions should peak below previous crisis levels” but cautioned that the bank was “vulnerable to a drop-off in new lending activity”.
Santander stuck to its aim of cutting €1bn in costs in its European businesses this year, but said it would reassess all its targets “once we have a more complete understanding of the full impact of the crisis”.
The bank declined to provide details on how its €1.6bn loan loss “overlay” was broken down across the different countries it operated in but said it expected to see more strain in small business lending and unsecured consumer credit, compared with its mortgage and car financing businesses.
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