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Santander optimistic on UK, Mexican units despite political challenges

Banco Santander SA is expecting its British subsidiary to grow in line with the rest of the U.K. market this year in both secured and commercial lending, as the unit will remain subject to fluctuations in Britain's economy after the country's decision to leave the European Union, according to Executive Chairman Ana Botín.

"Our bank in the U.K. will be affected as much as the U.K. economy," she told analysts after the publication of Santander's 2016 annual report on Jan. 25. "If there is less growth, obviously we won't do as well."

In September 2016, Santander revised its 2018 ROTE guidance for Santander UK Group Holdings Plc to between 8% and 10% from 12% to 14%, and the unit's 2018 cost-to-income-ratio target to between 50% and 52% from under 50%. Botín said these estimates for the bank's second-largest market would remain unchanged, adding: "We are still anticipating growth in both the secured and commercial lending market in the U.K."

Net interest income in the U.K. would likely be flat this year, but that would depend on whether there was a change in interest rates or not, she said.

The Brexit vote has prompted many banks and financial services companies to contemplate moving operations out of London as they will lose EU passporting rights, but Botín said Santander had no plans to relocate any of its U.K. staff.

Challenging environment

Botín made the comments after the bank posted an increase in fourth-quarter 2016 net profit to €1.60 billion from €25 million in 2015, the year-ago figure having been impacted by several one-off items. Fourth-quarter 2016 net interest income rose to €8.10 billion in 2016 from €7.89 billion a year earlier, while net fee income also increased, to €2.64 billion from €2.45 billion.

Full-year net profit rose 4% to €6.2 billion, boosted by higher fee income and improved credit quality. Net interest income for the full year stood at about €31 billion, down 3% as margins came under pressure from the low-interest-rate environment.

Botín said Santander expects to continue to do well in Mexico "despite a challenging environment." The Mexican peso fell sharply in the run-up to the U.S. presidential elections as Donald Trump took aim at Mexico on trade and immigration.

"There is no question that there will be an impact, and there already has been an impact on ... the peso, but the Mexican economy is actually doing quite well," Botín said.

Brazil, Santander's largest market, would be less impacted by changes in U.S. foreign and economic policy because it did less business with the country, she said.

In Spain, the bank is expecting "broadly stable" net interest income, with a slight decrease in the first quarter due to asset repricing, but Botín said she hoped to see some improvement in the second half.

Spanish credit lending will grow 1% to 2% this year as corporate and consumer lending picks up, CEO José Antonio Alvarez told the call.

The executives also said the bank was on track to meet its 2018 objective of a fully loaded common equity Tier 1 capital ratio of more than 11%. The ratio stood at 10.55% at the end of 2016, and Santander is planning to raise it by 40 basis points this year.

Santander expects its cost-to-income ratio to stand at between 45% and 47% by 2018, down from 48.1% at the end of last year. It is also planning to raise its fee income to about 10% in 2018 from 8.1% in 2016.