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Santander confident of meeting 2020 capital target despite regulatory headwinds

Banco Santander SA could achieve its capital target for 2020 even if it were to face regulatory headwinds related to so-called Basel IV, among other things, during the year, Executive Chairman Ana Botín told analysts at the presentation of the company's fourth-quarter and full-year 2019 results.

The Spanish banking group aims to bring its common equity Tier 1 ratio — a key measure of financial strength — to roughly 12% by the end of 2020, after seeing an average increase in the ratio of 40 basis points annually over the last five years. The bank's fully loaded CET1 ratio was 11.65% at the end of 2019, compared to 11.30% three months earlier.

The gross capital generation for 2019 was 97 basis points but the lender had to absorb 60 basis points in regulatory headwinds.

Santander's capital levels, low relative to peers, have been under scrutiny by analysts.

"[W]e are very confident we can absorb Basel IV," Botín said. "[W]e do expect other positive regulatory issues — could be the capital treatment of intangibles, for example — that would help us." She added that Basel IV's impact on Santander would be less than that on its peers.

She noted that the capital level at the group's U.K. business is now going to be at 14%.

"So there have been, in some places, increases, and we've been able to absorb that," she said. "And I think what gives us high confidence is that when we need to absorb 60 basis points, we can do that organically."

Santander's recent M&A activities, including its acquisition of a 60% stake in Allianz Popular SL from Allianz Group and a 50.1% stake in U.K.-based payments processor Ebury Partners UK Ltd., would also not prevent the group from achieving its capital target, according to Botín.

The bank's board declared a second dividend of 13 cents per share for 2019, comprising 10 cents in cash dividend and 3 cents in scrip dividend, or share issue, which Botín said could be repurchased in the future.

High hopes for South America

Santander expects its businesses in South America to continue to grow in 2020, with Botín telling analysts that profitability in Brazil and Mexico are expected to be at the same level as in 2019 while noting that there is still room to boost the group's lending activities in the region.

"I always say this, that we make a lot of our profits in South and Latin America, but we lend very little money," Botín said. "There's a lot of profitable growth ahead. So especially in Brazil, margins will obviously be much lower with interest rates at 4, 4.5, but volumes and very good quality growth is ahead."

Among Santander's businesses, Brazil saw the highest year-over-year increase in underlying attributable profit in 2019 to €2.94 billion, an increase of 16% from a year ago. Mexico, meanwhile, posted underlying net profit of €950 million, up 19% year over year.

Brazil and Mexico saw net interest income of €10.07 billion and €3.16 billion, respectively, in 2019, both up from €9.76 billion and €2.76 billion a year ago, while net fee income rose year over year to €3.80 billion from €3.50 billion for Brazil and to €829 million from €756 million for Mexico.

Gloomy outlook for Europe

Underlying attributable profit in the European business declined 3.4% on an annual basis to €4.88 billion, and Santander executives expect the region to remain challenging in 2020.

"If we can succeed in Europe, we'll be much more successful eventually in the rest of the world because it is the hardest environment by far," Botín said, adding that the group aims to further reduce costs in the region.

Operating expenses in Europe were down 1.3% to €11.04 billion in 2019 from a year ago.