MercoPress. South Atlantic News Agency

Spanish bank cautious about Brexit but confident of solid growth in Latin America

Though Brexit uncertainty is casting a shadow over Santander's third largest market, it expects solid growth in Latin America accounting for 43% of its profits

Spanish bank Santander is expected to take a cautious stance on its British business in a strategy update on Wednesday, seeking to reassure investors after its aborted recruitment of former UBS banker Andrea Orcel as CEO.

Though Brexit uncertainty is casting a shadow over the bank’s third-biggest market, the euro zone’s largest lender by market value is benefiting from its global diversification and expects solid growth in Latin America, which accounts for 43% of its earnings.

The bank is expected to further protect its balance sheet in Britain, where higher costs have dented profitability, by setting stricter conditions for lending.

Globally, Santander is likely to reinforce efficiency measures as part of its digital transformation to persuade investors that its latest profitability and capital targets can be maintained, analysts said.

In January Santander said it was aiming to lift its return on tangible equity (ROTE) — a measure of profitability — to 13-15% in the medium term from 11.7% in 2018.

It also set a mid-term core Tier 1 capital ratio target of 11-12%, against 11.3% in 2018 but below the average of more than 12.5% among its European peers.

Continuing robust growth in lending volumes in Brazil, its biggest market, is expected to offset some pressure on pricing and financial margins, though other challenges remain.

In the United States it is working to lift low profitability ratios of around 4% while savings from the integration of Banco Popular remain a focus in Spain, its second-biggest market.

Investment firm Alantra expects Santander to deliver 600 million Euros in cost cuts from the integration, compared with a target of 500 million Euros as part of its attempt to improve its 10.8% underlying ROTE in Spain.

The aborted hiring of Orcel is not on Wednesday’s agenda, but investors are likely to question the management over Santander’s decision in January to withdraw its job offer. 

“Orcel was seen as a potential dealmaker. Now that he is not on board, the bank wants to be seen as a robust retail bank with Latin America as its core growth story,” said Enrique Quemada, chief executive of investment bank ONEtoONE.

Santander has said it is sticking with Jose Antonio Alvarez as CEO, but investors say a replacement in the medium term is not to be ruled out.