Banco Santander SA's first-quarter results will be affected by weak corporate banking revenues and high inflation in Argentina, but the Spanish bank is seeing strong growth in deposits and loans, according to the CEO.
José Antonio Alvarez told Santander's shareholder meeting April 12 that the bank was continuing to feel the effects of a global economic slowdown and lower-than-expected interest rates in Europe.
Argentina, where inflation hit a 27-year high in 2018, will also have a negative impact, he said. Santander, a retail-focused bank with big operations in Latin America and the U.S., derived 1% of underlying attributable profit from Argentina in 2018.
"Quarterly profit and loss is affected by lower wholesale revenues in a difficult market environment for the sector and due to the considerable inflation adjustment in Argentina," the CEO said.
But he added that the bank's loans and deposits rose 5% year on year in the quarter and that the bank's digital customers had increased by more than 1.5 million during the three-month period.
Strong demand in Latin America had buoyed lending, and deposits had increased in virtually all of the bank's main markets, Alvarez said. The bank's nonperforming loans also declined during the quarter.
Santander will also book a first-quarter charge of €100 million related to layoffs and branch closures at its Polish and U.K. operations, he told shareholders.
The meeting came as the bank proposed to buy out the remaining 25% in its Mexican business that it did not already own. Mexico accounted for 8% of the bank's underlying attributable profit in 2018.
"Mexico is a country with huge growth potential," Executive Chairman Ana Botín told shareholders. "We think this is the right time to do this deal."
Santander will spend nearly €2.5 billion to buy the 25% shares currently quoted on the Mexican stock market and will finance the transaction by issuing new shares, she said. It is planning to issue 572 million shares, or 3.5% of its current share capital, for this purpose.
The transaction will have a positive impact on the bank's capital, she said.
Botín also told shareholders the group's first-quarter common equity Tier 1 ratio — a key measure of financial strength — would be more than 11.20% despite tighter regulation, up from 11% in the first quarter of 2018, but down from 11.3% at the end of 2018.
The Spanish bank has been singled out by some analysts for having low capital levels. Berenberg analysts estimate the lender has a €6 billion capital shortfall.
Botín also reiterated the bank's return on tangible equity target of between 13% and 15% over the medium term and a CET1 ratio of between 11% and 12%.