1 Speech of Mr. José Antonio Álvarez, Chief Executive Officer of Banco Santander at the General Shareholders’ Meeting, March 18, 2016
Mr. President of Cantabria.
Vice-president and distinguished officials with us today Shareholders of Banco Santander, ladies and gentlemen. Good morning and thank you for attending.
I will divide my speech as follows:
First, I will speak about our commercial transformation and the positive impacts we are already seeing on the Group’s results in 2015.
I will then share with you my views on the main initiatives and results of the units, as well as the management priorities for 2016.
Lastly, I will dedicate a few minutes to the Group’s objectives. 1. Grupo Santander’s evolution in 2015
2015 was a positive year for Santander. Not only did we achieve the goals we set at the start of the year …
… but we also combined this with organisational changes and progress in the commercial transformation, all of which is needed to adapt us to a changing environment.
We are facing this environment with a business model that has demonstrated its strength in recent years and which we are adapting in order to maximise our profitability levels and continue to create value for our shareholders. This transformation is backed by two key ideas: boosting our commercial revenues and strengthening the Bank’s position in costs, risk management and capital.
1. First. Progress in our commercial transformation.
2 To this end, we have launched various value offers for individual customers, SMEs and companies in different countries.
The role played by our global corporate banking division is key here, both in the segment of large companies, where we are accompanying our customers in their international expansion, as well as cooperating with local commercial banks to develop and launch products.
We are also giving a big push to technological innovation and the multi channel approach.
The commercial banking and technology and operations divisions carry out the digital transformation on a day-to-day basis. The improvement in the quality of information and the way we manage it, is enabling us to be better informed about our customers and respond to their needs more quickly and in a more personalised way.
We are advancing in digitalisation, without losing our essence as a bank. The branches will continue to be the main channel for customers, and will be more dedicated to selling higher value-added products and offering greater advisory services. We are designing new, more modern and efficient offices. All these measures are already being reflected in an improvement in our customer satisfaction indices.
2. Second. Balanced growth of business volumes. Lending rose in nine of our 10 core countries in their corresponding currencies and all segments grew, although with different strategies. In individuals, the greater loyalty is reflected in a 6% increase. In SMEs, the objective is to gain market share; we are already doing so in several countries. In big companies, we are focusing more on growth in products that are less capital intensive and on offering high value services for customers.
Something similar is happening in funds, which increased in all countries, resulting in a rise of 14% both in demand deposits and mutual funds. All of it while we continue to optimise the cost of funds.
3. Third. Solid and sustainable results. Attributable profit was €5,966 million, 3% more than in 2014.
3 in Brazil and the operation of Banco Internacional do Funchal and on the negative charges for the amortisation of intangibles, good will and provisions. The total net charge was €600 million.
Excluding these extraordinary items, the Group’s underlying attributable profit was up 13% at €6,566 million. This growth was driven by:
Record gross income of €45,272 million, spurred by the growth quarter after quarter of commercial revenues, reflecting the greater business volumes and management of spreads.
Moreover, these revenues are of high quality, as almost all of them relate to net interest income and fee income (the Group’s traditional business).
In contrast, trading gains, more volatile, only accounted for 5% of our revenues, well below that of our competitors. This means that our revenues are more recurrent and predictable.
Costs were €23,989 million, almost flat in real terms and on a like-for-like basis.
This was due to our discipline in costs. We attained the goals of the efficiency plan one year ahead of schedule, thereby making austerity in operating costs compatible with investment in digitalisation, the multichannel strategy and regulatory requirements.
We are one of the international financial system’s most efficient banks. In order to continue being so, we announced last September that we had increased the efficiency plan by €1,000 million to €3,000 million of cost savings for 2018.
These savings will enable us to make investments in technology while continuing to achieve excellent cost-to-income ratios and maintaining the quality of service of our franchises.
Revenue growth and control of costs were accompanied by a 4% decline in loan-loss provisions to €10,108 million and the consequent improvement in the cost of credit. We expect this trend to continue in 2016.
4 Our solid risk culture is one of the keys that has enabled Grupo Santander to respond to the changes in economic cycles, the new requirements of customers and tougher competition.
To this end, the launch of the Advanced Risk Management Programme and the strengthening of the risk culture throughout the Group under a common identity (“risk pro”) will enable us to keep on advancing in prudent and sustainable risk management.
5. Fifth and lastly. We strengthened solvency and today have a good position bearing in mind our business model. The year’s results contributed significantly to the organic generation of capital and enabled us to have a fully loaded CET1 above the 10% target we set at the start of the year. Risk management and growth of capital are two of our strategic objectives, as the executive chairman has already pointed out.
In underlying terms, the return on tangible equity (RoTE) was 11% and the return on risk weighted assets (RoRWA) rose to 1.30%. Both figures stand out compared to those recorded by our main competitors.
In short, we grew in business, boosted capital and at the same time increased the cash dividend per share.
2. Evolution by business areas
I will now dedicate a few minutes to looking at the evolution of the main units in 2015 and the management priorities for 2016.
Santander Spain made significant progress in its new strategy, which rests on the following pillars:
The first one is building long-term relations with customers. A new relationship concept was introduced that rewards loyalty via the 1|2|3 strategy.
The second is to be the bank of choice of companies in Spain, for which we strengthened the commercial team specialized in this segment. We also launched the 1|2|3 account for SMEs, which was contracted by more than 50,000 of them. We are increasing our market share in the segment and are leaders in wholesale and private banking.
5 improve customer satisfaction by optimizing their experience with us. In this context, we achieved a significant improvement in customer satisfaction surveys during the year.
None of this is worth anything unless it is also accompanied by advanced risk management and a sustainable level of profitability, which makes our customers and shareholders feel comfortable.
Attributable profit, against a backdrop of tough competition, was 18% higher at €977 million. Of note was the good evolution of credit quality and the cost of credit, which we expect to maintain in the future.
Looking to 2016, we will continue the strategy of forging long-term relationships in order to reach two million 1|2|3 customers. We also want to continue to improve customer satisfaction, gain market share in SMEs, reduce the cost of credit and continue to lower the volume of unproductive assets. Lastly, we will continue to advance in the digital transformation process. The United Kingdom continued the good dynamics in individual customers. We increased the number of loyal customers via the 1|2|3 strategy, as well as in companies where we continued to gain market share in a market which, as a whole, is flat.
We also focused on mobile channels and digital banking, launching various solutions, which were recognized by the market. This produced a 22% rise in the number of digital customers.
Attributable profit was £1,430 million, 14% more than in 2014, due to the good commercial dynamics, reflected in gross income, and enhanced credit quality that reduced loan-loss provisions.
The focus in 2016 will continue to be on customer satisfaction, the digitalization process, increasing the range of services and growing in SME business, again, more than the market. Lastly, and in accordance with the new local requirements, we are beginning the process of ring-fencing our retail and corporate banking, which must be completed in 2019.
In Brazil, we continued the improvement of the bank started several years ago, which is developing a more sustainable business model: more customers, more loyal ones and greater productivity and efficiency.
6 of business mix toward lower risk products. In 2015, we focused more on companies, large firms and mortgages.
I would like to highlight the good evolution of the income statement, due to: Revenue growth in every quarter.
We controlled costs, which grew well below the inflation rate.
And we reduced the cost of credit, the result of a favourable evolution of credit quality, where we performed better than our competitors. Attributable profit was 33% higher at €1,631 million at constant exchange rates.
Although it is not possible to isolate oneself completely from the country’s current recession, the improvement in the franchise over the last few years enables us to face the current environment with guarantees.
We have management tools to take advantage of high interest rates and inflation, and we will focus on selective business growth, operational efficiency and risk control. We expect to be able to improve our 2015 results this year in local currency terms.
In the United States, we are adapting our organizational structure to the regulatory requirements. We strengthened the risk management and control models in order to comply with the supervisors’ expectations.
To this end, we are in the process of creating the Intermediate Holding Company (IHC) that will integrate all the businesses in the US (Santander Bank, Banco Santander Puerto Rico, Santander Consumer USA, Banco Santander International (BSI), etc).
We are also investing in improving the banking franchise, in order to step up the relationship with our customers and increase profitability. At Santander Consumer USA we will focus on auto finance, while we discontinue the personal loan business.
All these measures are having a temporary impact on results and explain a large part of the fall in profits to $752 million. But we are convinced we are laying the foundations for a better and stronger franchise in the future.
7 in companies, and reduce costs. In Santander Consumer USA, activity will be focused, as I already mentioned, on strengthening our main auto finance businesses.
Santander Consumer Finance has a successful business model and a position of clear leadership in auto finance and durable goods in Europe.
The integration of GE Nordics at the end of 2014 and the development of the agreement with PSA Finance, which covers 11 countries and is being incorporated according to the schedules, has strengthened geographic and product diversification. By the end of 2015, the operations of Spain, Portugal, UK, France and Switzerland had been incorporated. The last two are markets where SCF is not present.
The strategy’s success is reflected in attributable profit of €938 million, 18% more than 2014.
This year we intend to complete the agreement with Banque PSA Finance by carrying out the operations of Germany, Italy, Holland, Belgium, Austria and Poland. In addition, we will bolster consumer business via Pan-European agreements and we will step up our presence in digital channels.
In Mexico, we completed the branch expansion plan started in 2012.
This strategy increased the pace of commercial activity, with market share gains and revenue growth, mainly in net interest income. We also maintained credit quality under control, improving the cost of credit and the NPL ratio. This resulted in an 8% rise in pre-tax profit at constant exchange rates. Attributable profit was €629 million.
In 2016, we are confident we can keep on strengthening our position in key segments: SMEs, companies and mortgages. We want to become the first choice bank of our customers, reducing the churn rate and increasing loyalty via transactions over the long-term.
In Chile, we focused on growth in companies and on target segments of individual customers as well as on enhancing the quality of customer attention. We narrowed the gap with our competitors.
8 In 2016, we will focus on further improvements in customer attention and on our commercial banking transformation, which includes renewing branches. Argentina’s profit grew by more than 20% at constant exchange rates to €378 million. This positive evolution was backed by the new commercial strategy and the expansion plan, which produced strong growth in net interest income and fee income.
We will continue this year to expand the commercial network and progress in digitalization, within an environment we see as more favourable for business development.
In Poland, the strategy in 2015 was focused on growing in mortgages, SMEs, leasing and large companies. We are the leaders in profitability; moreover, we hold outstanding market positions in cards and mobile and online banking. We have an excellent franchise and good position in the country. We have outperformed our competitors in a difficult environment. We posted an attributable profit of €300 million, 15% lower than a year ago. This was due to a sharp drop in interest rates and to the extraordinary contribution to the deposit guarantee fund because of the collapse of a bank.
In 2016, we want to be the reference bank in innovation and leaders in digital channels, with a clear objective of increasing our market share in companies, and, moreover, in a more difficult environment where the sector will be affected by a new tax on assets.
In Portugal, we are returning to a more normal level of profits. They rose 63% to €300 million, and we gained market share, mainly in companies. Santander Totta was awarded last December most of the assets and liabilities of Banco Internacional do Funchal (Banif), making us the second largest private sector bank in the country, with a market share of more than 14%.
We will manage in 2016 the integration of Banif’s former customers, continue to gain market share and keep up the process of normalizing the cost of funding and loans.
9 This contributes value to the Group via well-defined functions of: control, support, improvement in the global/local relationship and transmission of best practices between units.
In an increasingly competitive world, it is crucial that the corporation provides global capacities to the subsidiaries and the know-how to beat the local competitors who do not have this support.
As in the rest of the units, we are focusing on the principles of simplification, efficiency, value added and transparency. To this end, we have improved the weight of corporate activities in the Group’s results and we expect to keep up this trend in the coming years, putting us at the best levels compared to our competitors.
3. Group objectives
Shareholders, ladies and gentlemen, I will end by summing up the Group’s global objectives and outlook.
We have clear goals for the year, as announced at our Investor Day. They are:
• Raise the number of loyal customers. • Deepen digitalisation measures.
• Increase market share in SMEs and companies. • Reduce the cost of credit.
• Maintain leadership positions in efficiency. • Strengthen organically our capital ratios.
• Boost the dividend, net book value and earnings per share.
We are living through a very volatile environment; we know we face a difficult context in the coming quarters. Yet Santander has consistently shown in the past that it has sufficient strength to overcome the challenges and we will do so again. To this end, we have an excellent starting point:
Our business model is clear and well defined. It is a proven and successful model in contrast with that of many of our main competitors, some of whom are fully immersed in redefining their models.
10 We have a high quality balance sheet.
We have high levels of solvency and liquidity for our business model. We have a large number of customers. This gives us enormous
potential and we are working to increase their loyalty.
We have robust technological capacities on which to develop our digital transformation process.
Lastly, and most importantly, we have very talented employees from many countries who are fully committed to the Bank’s development. This is vital for the improvements we are implementing. I would like to take the opportunity here to thank them for their efforts and work in a very demanding year.
In short, we are one of the world’s best and most solid banks. 2015’s good results once more underscore that our business model minimises risk and makes our results more stable.
Despite the recovery in the share price in recent weeks, still our share price does not reflect our real value and strengths. I trust that our message of sustainable growth and value creation will end up being reflected in the share price.
