Santander focused on Europe cost cuts, Latin American profit

By Jesús Aguado

MADRID (Reuters) - Santander (MC:SAN) assured investors on Wednesday that cost savings in mature markets in Europe and higher profitability growth in Latin America were enough to deliver on midterm financial targets while pushing its digital transformation.

Santander said it was aiming for incremental annual cost savings of 1.2 billion euros ($1.4 billion) in the medium term, of which 1 billion euros would come from Europe.

Europe's banks are focused on cost savings as they attempt to offset a squeeze on margins due to ongoing record-low interest rates in the euro zone.

Santander shares were up 2.1 percent at 116 GMT against a 1.4 percent rise on the European STOXX banking index.

As part of its focus on efficiency in Europe, it said it was expecting 250 million euros of additional cost savings in Spain from the integration of Popular to boost its underlying profitability to between 14-16 percent from around 11 percent.

When it first announced the acquisition of Popular in 2017, Santander said it was expecting cost synergies of close to 500 million euros per year from 2020.

In Britain, Santander's third biggest market, it said that as part of its strategy it would focus on cost management and continued risk discipline, without giving any specifics.

Of its main markets, Britain was the area with the lowest underlying profitability target ratio. It set out a target of between 10-12 percent from 9 percent in 2018.

Santander is expecting the British economy to grow around 1 percent over the next couple of years partially due to uncertainty over Britain's decision to leave the European Union.

"It could be better and it could be worse, but your guess is as good as mine. As to what's going to happen I'm a bit confused," Sandtander Chairman Ana Botin said when asked about the Brexit outcome. She stressed that the lender was taking a conservative approach toward lending in Britain.

Santander said around 730 million euros of the total cost savings would come from efficiency gains in IT and operations and 220 million euros from shared services across regions, including Britain.

The bank also said it was aiming to reach a cost-income ratio - a measure of efficiency - of between 42 percent and 45 percent at group level in the medium term from 47 percent.

Santander reiterated it was aiming to lift its return on tangible equity (ROTE), a measure of profitability, to 13-15 percent in the medium term from 11.7 percent in 2018.

LATIN AMERICA PROFITABILITY

In Brazil, the bank's biggest market, Santander said it was expecting low interest rates to maintain growth in its loan book and keep improving its underlying ROTE above 20 percent.

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Its business in Latin America, responsible for 43 percent of the bank's profits, was seen rising its profitability to between 20-22 percent, thanks to high and sustainable revenue growth.

Santander also repeated a mid-term core Tier 1 capital ratio target of 11-12 percent, against 11.3 percent in 2018 but below the average of more than 12.5 percent among its European peers.

Botin dismissed analysts' concerns over the bank's capital adequacy, highlighting the lender's lower risk retail and higher diversification model.

"Being prudent, having more capital, we all want that but at some point enough is enough and if they keep on building buffers and buffers, Europe will not grow, banks in Europe will have increasing problems and they will have less inclination to lend," Botin told investors in London.

With banks facing increasing competition from so-called new technology entrants, Santander also unveiled a plan to expand its digital bank, Open Bank, to 10 new international markets in order to reach two million customers.