Santander eyes further boost to lending income as 'worst is over' in Brazil

Banco Santander SA is forecasting further growth in lending income following a record second quarter for profits as margins look set to improve in Brazil, its most profitable market.

Growth in net interest income (NII) has stalled in Brazil in recent quarters, just as it has soared in most of Santander's other major markets in Europe and North America. NII is the difference between interest revenues and interest expenses.

Net interest margins in Brazil have shrunk for Santander in recent quarters, as deposit costs have caught up with rising interest rates and a shift to a lower-risk loan mix has reduced income. Brazil raised interest rates to quell inflation earlier and more aggressively than many major economies, hiking from 2% in February 2021 to 13.75% in August 2022, where they have remained.

"The worst is over in Brazil," CEO Héctor Grisi said during a second-quarter earnings call.

"We see upside potential for further net interest income growth in the coming quarters as tailwinds in Europe and Mexico are expected to remain, and inflation and interest rates in our largest Latin American countries seem to have peaked or nearly peaked, resulting in a positive outlook for margins in the next six to nine months," Grisi added.

Santander's group NII grew by 17% year-over-year to €10.77 billion in constant euros in the second quarter, company filings data shows. NII in Brazil fell by 1.4% year-over-year to €2.14 billion in constant euros during the period, the data shows.

Brazil was Santander's largest market in 2022, generating €12.91 billion in revenue and €2.54 billion in profit in constant euros, company filings data shows. Spain was its second-largest source of revenues, while the US was its second-largest source of profits.

Improving outlook

Santander saw the average cost of deposits in Brazil begin to fall and customer spreads — the difference between the average rate a bank charges borrowers versus the average rate it pays depositors — improve in the second quarter, said Grisi.

"We expect NII [in Brazil] in the second half of 2023 to be higher than the first half of the year, leading to a flat NII in the year with a substantial improvement in 2024," said Grisi.

The prospect of an improving outlook in Brazil for Santander comes as the bank enjoyed a record second quarter for profits in the three months to the end of June. Santander's profits grew by more than 17% to €2.68 billion in constant euros in the quarter off the back of an almost 15% year-over-year increase in revenues to €14.31 billion, mainly driven by NII growth.

Profitability

Santander expects profitability to improve in the second half of 2023, driven by NII growth, CFO Jose Garcia-Cantera said. The bank recorded a return on tangible equity of 14.5% in the first half, short of its 15% target for the full year.

The bank will resist passing higher interest rates on to depositors where possible, Garcia-Cantera added. Spain's banking system has among the lowest deposit betas — the portion of interest rate rises that is passed on to depositors — of all major European countries, according to data from the European Central Bank.

In May the euro area deposit beta was 13%, compared to 5% in Spain, an analysis of ECB data by investment bank Jefferies shows.

"In Europe, we are strictly managing deposit costs, especially in Spain and Portugal, where there is excess liquidity in the system and much lower credit demand," said Garcia-Cantera.