Spain's Santander (MC:SAN) released €750 million ($846 million) in provisions related to the pandemic in the fourth quarter, betting on an economic recovery in its key markets, resulting in an eightfold increase in net income compared to the previous year.
The coronavirus crisis has forced banks in Europe to create costly provisions to protect their books from potential consequences. However, banks, particularly in the United States and the United Kingdom, are beginning to reduce these provisions as the economy improves.
The release of provisions at Santander was at the lower end of the previously forecast provision of 700 million to 1 billion euros for the last quarter of 2021.
Net income for the October-December period was €2.28 billion, up 4.6% from the third quarter. For the full year 2021, the bank reported a profit of €8.12 billion after posting a record loss of €8.77 billion in 2020.
Quarterly and full-year earnings were in line with analysts' forecasts. Given the improving economic outlook, Santander forecasts a return on equity (ROTE), which measures profitability, of over 13% in 2022, up from 12.73% at the end of 2021.
Santander's Tier 1 capital ratio, the most stringent measure of solvency, rose to 12.12% from 11.85% in September. Taking into account the corporate transactions already announced, the ratio would be 11.96%. The target of 12% was retained. Stocks, which are up 7% this year, fell 0.8% on Wednesday, while the European banking index rose 0.4%.
FOCUS ON EMERGING COUNTRIES "The lack of any visible capital generation remains the main drag on the stock," UBS said, while Deutsche Bank (DE:DBKGn) called the results resilient, with "positive developments in Spain, Brazil and the US being relatively solid."
Santander has expanded into emerging markets in search of faster growth than its core markets in Europe, where it's cutting costs to cope with ultra-low interest rates.
The bank said it is targeting a cost-to-income ratio, a measure of efficiency, from the current 46.2% at group level to around 45% by 2022. In the UK, which accounted for nearly a fifth of the quarter's earnings, adjusted net income more than doubled year-on-year, partly due to 245 million euros of provision releases.
In the United States, which also accounted for more than a fifth of revenue, adjusted earnings doubled from the same quarter in 2020 thanks to a strong US economic recovery.
Net interest income, a measure of income from loans less deposit costs, rose 8.7% to 8.72 billion euros in the fourth quarter, beating forecasts of 8.51 billion euros.
In Brazil, which accounts for nearly a quarter of underlying earnings, net interest income rose 17.2% year over year in the fourth quarter. In Mexico, loan revenues increased 4.1%, while in Spain they fell 7.7% compared to the year-ago quarter.
