Defying headwinds, Santander posts record capital gains

CET1 ratio hits 11.65% at end-2019

Despite absorbing a series of regulatory charges in 2019, Spanish bank Santander ended the year with its core capital ratio at record heights.

Common Equity Tier 1 (CET1) capital as a percentage of risk-weighted assets (RWAs) stood at 11.65% at end-December, up 35 basis points on Q3 and the year-ago quarter.

CET1 capital amounted to €70.5 billion ($77.7 billion) at end-2019, up from €67 billion (+5%) the year prior. RWAs climbed to €605.2 billion (+2%) on the year. 

 

The bank said regulatory charges sapped its ratio by 62bp gross, of which penalties taken as part of the European Central Bank’s targeted review of internal models (Trim) made up 36bp and the switch to accounting standard IFRS 16 19bp. This partly offset the 97bp of gross capital generation achieved over the year – a record high.

Santander is targeting a CET1 ratio of 11–12% in 2020. As of Q4 2019, its minimum required CET1 ratio stood at 9.68%.

What is it?

The targeted review of internal models was launched by the European Central Bank in 2016 to assess whether the models used by banks to calculate their statutory capital requirements are fit for purpose and align with all applicable regulations. 

The review is being conducted in two phases. The first stage review focused on credit risk models for small and medium-sized enterprises and retail portfolios, counterparty credit risk and market risk models. 

By the end of the review, ECB supervisors will have completed around 200 on-site investigations at 65 banks.

Why it matters

Santander is one of many eurozone banks taking heat from regulators for risk model deficiencies. ECB inspectors have cracked down on unwarranted variability of credit model outputs, which in certain cases have forced banks to revise up their RWA amounts and increase capital. 

On an analyst call earlier today, executives did not say whether further Trim-related charges are ahead, but they did say positive regulatory developments, such as a revised capital treatment for intangibles, could help bolster the bank’s capital ratio in coming quarters. Ongoing strong revenue growth and freedom from additional regulatory charges should make it a breeze for Santander to hit its CET1 ratio target.

Management also said they were confident the bank could absorb incoming changes to capital rules passed by the Basel Committee, which are likely to bump up its minimum CET1 requirement.

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