By Jesús Aguado
MADRID (Reuters) -Spain’s Santander said it plans to return half its profits to shareholders as it announced ambitious profitability targets for the next three years, betting on customer growth and higher interest rates in Europe to boost revenue.
Santander has relied in the past on Latin America to cope with tough conditions for lenders in Europe since the financial crisis but banks across Europe are beginning to benefit from higher borrowing costs despite economic uncertainty.
“We do have tailwinds for the first time in eight years, we are running a business in Europe where we are not charging deposits and (not) giving loans close to zero,” Santander Chairperson Ana Botin told investors at the bank’s 2023-2025 strategy update in London.
Its shares rose almost 5% by 1250 GMT on news of the planned payouts and after the bank also said it aimed to achieve a return on tangible equity (ROTE) of 15-17% between 2023 and 2025, compared with 13.4% in 2022.
“While the payout target increased to 50% (from current 40%), in line with consensus but below our expectations, we flag the bank’s significantly higher revenue growth ambitions and profitability targets which could offer absolute shareholder distribution amounts well above expectations,” Credit Suisse analysts said in a note.
The remuneration would be in the form of cash payouts and share buybacks.
Chief Financial Officer Jose Garcia Cantera also said he expects a compound annual growth of 6% to 7% in the group’s net interest income between the end of 2022 and 2025.
The euro zone’s second-biggest lender in terms of market value expects to raise its global customer base by 40 million to around 200 million, helping it to grow revenue by around 7-8% per year on average in constant euros in the period, helped by collaboration among global businesses and its network.
Santander’s European region is targeting a 15% ROTE in 2025 compared with 9.28% by the end of 2022, the biggest increase in percentage points among the bank’s three core regions.
This would bring Europe, the lender’s main contributor to the group’s profits, in line with the ROTE target seen for North America.
“Spain is where we see the most opportunities to improve profitability and efficiency,” Santander CEO Hector Grisi said, adding the bank was also redefining its branch model and targeting active customers growth of around 10% in the period.
In the United States, its second-biggest market, it said it is focused on more profitable segments, such as its consumer unit, after recently exiting mortgage activities.
South America, which accounts for 31% of the bank’s profits, targets a ROTE of 19%, still the highest among Santander’s markets, from 18.77%, with the cost of risk to rise to around 320 and 340 basis points from 332 bps.
Santander expects its cost of risk, which measures the cost of managing potential losses for the bank, to hover around 100 and 110 basis points in 2025 from an expected 120 bps this year.
The lender said it also aimed to maintain its core tier-1 fully loaded capital ratio, the strictest measure of solvency, above 12% throughout the three years.
($1 = 0.9448 euros)
(Reporting by Jesús Aguado; additional reporting by Emma Pinedo; editing by Inti Landauro and Emelia Sithole-Matarise)