Banco Santander SA expects its home market of Spain to provide the biggest gains in profitability and cost savings over the next three years as it executes its newly announced strategic plan.
The Spanish banking giant, which generates most of its income outside of Europe, is planning to boost revenues in its home market by significantly increasing customer growth while cutting costs.
Operations in Spain and other European markets in which Santander operates have struggled in recent years to match the profits seen in the Americas, as record low interest rates and sluggish economic growth have impacted Spain, the U.K., Portugal and Poland.
"[Spain is] where we see the most opportunities to import profitability and efficiency," CEO Héctor Grisi said during a Feb. 28 investor day presentation.
Growth plans
Santander's plans for Spain target about 10% growth in active customers from 2022 to 2025. The bank already added 700,000 new customers in Spain in 2022, Grisi said. It aims to reduce cost per customer in Spain by about 10% between 2022 and 2025 through the simplification and automation of its business model.
The planned improvements to the Spanish business are part of a new strategy that targets a 15% to 17% return on tangible equity — a key measure of profitability — for the group by 2025. Santander had an ROTE of 13.4% in 2022.
Santander's European business delivered an ROTE of 9.3% in 2022, compared to 11.1% for North America, 18.8% for South America and 13.7% at the Digital Consumer Bank. For 2025, the bank is targeting an ROTE of 15% from its European business. The improved performance would see Europe make up 40% of the group's underlying profit in 2025, from about a third in 2022.
"Europe is the region with the highest potential," Grisi said. "There is growth in mature markets if you have the right products and the right services."
This target for Europe would bring it level with Santander's North American and Digital Consumer Bank businesses, which have also been assigned 15% ROTE targets. The target for the South American business is 19% in 2025.
"For the first time, you're going to see every single one of our businesses and regions and countries at very good returns," Chair Ana Botín said.
The new strategy aims to boost value for shareholders by delivering double-digit growth in tangible net asset value per share and dividend per share on average over the coming years. The bank plans to increase its payout of profits to shareholders to 50% in the form of cash dividends and share buybacks, up from 40% in 2022.
Santander's share price performance has lagged European peers in recent years as investors looked for more generous returns from other banks, S&P Global Market Intelligence data shows.
'Digital bank with branches'
The Madrid-based bank plans to create better value for shareholders by becoming a "digital bank with branches." The five pillars of the strategy require the bank to be customer-centric, simplify and automate its products and processes, increase the contribution of its network of global businesses, boost customer activity and optimize capital.
A key component of the strategy called "One Transformation" will see the bank "converge its consumer and commercial customers to a common operating and business model." The initiative aims to reduce time spent on operations in branches and deliver a high level of automation.
Santander forecasts that the simplification and automation of products and processes will help improve its cost-to-income ratio — a measure of efficiency — to 42% in 2025 from 45.8% in 2022.
"We do have [interest rate] tailwinds for the first time in eight years," said Botín. "But a lot of the upside we have and what's behind these numbers is much more than that. It's a change in the model that is driving revenues, it's a change in how we operate, and it's a change in the biggest opportunity we have, which is individuals."
