Q3 2014 and the tempest ahead

Q3 results
All presentations: EN
Net earnings of €1.605bi
EPS €0.131
(I compute 0.134: 1.605bi for 11.988bi shares...)

Excellent quarter across all subsidiaries and lines (except Santander bank US). 
But only one step to the return of normal results: improvement to continue at a rate of around €0.01 per quarter till end of 2016. It is the 3rd consecutive +0.009 quarterly EPS increase.

Highlights:

• Efficiency plan: 2014 target (€750mi) reached in September. Upped to €1bi for 2014 and €2bi to 2016
• Net earnings at €1.605bi, up 8.5%. YTD is up 44.7% against 2013 (constant €)
• 5 net capital gains for 2014 for a total of €2bi. They do not hit the P&L but are put in the balance sheet (Q1: Altmira 385, Q1: SCUSA 730, Q2: UK pensions 220, Q4: Custody: 410, Q4: Insurance: 250)
  With Q4 estimate at €1.75bi (easy to reach, only the Brazilian repurchase will contribute €75mi in net earnings per quarter through lower minority interests), and capital gains in the P&L (will not occur) total net earnings for 2014 will be around €8.1bi! That amount is however the 2014 value creation for shareholders.
• Capital up 52bpp, 50% from Coco, 50% through scrip.
• Spain.
  Cost of new deposits at 0.55%, was 1.41% a year ago
  New NPL entries for companies w/o real estate purpose at level 141, was 179 in Q1 and Q2. Mortgages and other loans to people continuing to improve.
• UK
  Demand deposits up 54% YoY after a rise of 71% of Q3 2013 against 2012. Oustanding success of 1|2|3 accounts to lower the cost of deposits.
• US
  New SCUSA: loans +33% YoY, not yet impacting earnings as initial provisions put the NPL coverage ratio at 296% 
• Brazil
  Cost of credit at 5.1% (6.7% in Q3 2013). Continuous improvement for 2 years

Motley: "Interestingly, Santander’s biggest profit growth came in Spain"
Beginning of the year Santander gave as guidance €1.1bi 2014 net earnings in Spain alone. Real numbers will be slightly higher (50mi more) . For 2016, guidance (Spain only) is €3bi

News:

• 2014/11/03. Bloomberg consensus for Q3: €1.546bi. (€1.055bi in Q3 2013) (ES)
  That is €0.129 EPS, really doable, with Spain on focus. The article put the focus on Latam. I respect elconfidencial opinions.
• 2014/10/31: Banco Popular: +1.7% but through exceptionals as provisions at +97% (ES)
• 2014/10/30. Sabadell: YTD +42.5% (ES)
• 2014/10/29. BBVA YTD -37.3% against 2013, but w/o exceptionals +43.2% (ES)
• 2014/10/24. Q3 Bankia (ES) and Caixabank (ES) (ES) (reuters)
• 2014/10/23: Bankinter is the first Spanish bank to report Q3 (ES):
  Net earnings YTD at +31.6%, NIM: +17.9% (interests down, but costs of deposits down quicker)

Santander reports Q3 on Nov 4th

Aside from Emilio Botin's death, quarter was quite.

EPS at €0.13
Spain and UK continuing to improve at slow rate
Brazil neutral
US positive because SCUSA growth less torrid (less advance provisions) and €/$ movements

M&A activity was in the same way as previous quarters, to change in Q4:
- Selling CF insurance with €250mi capital gain (for Q4, but will be parked in a reserve balance sheet account). Selling 51% insurance in Portugal.
- JV in Brazil, $205mi investment
- Ongoing CF expansion in Canada ($201mi), one more country ready to switch to commercial bank (triggered during next financial crisis).
- Exclusive discussion with Unicredit to double the size of AM

Next quarters will not be quite: tempest weather is coming (in general not negative)
- Oct 26th: stress test results and Assets Quality Review
- Nov 4th: ECB takes supervision of 130 biggest EZ banks. When will the RWA rules be uniformized across EZ countries?
- Oct 30th: deadline for exchange offer in Brazil

There are also very active geopolitics without specific impact on Santander:
- Incredible mess in Syria, Iraq, Lybia
- Active new cold war centered in Ukraine, USD, oil, with China scoring and Iran favorably impacted
- Ebola
- Winter in Northern hemisphere coming. Together with the stunning defeat of Ukrainian central forces, this is why the situation is so quite in Ukraine (Ukraine has no global offensive capabilities left, and Russia can let winter work)

There are also several significant local events with direct potential impact on Santander
- Oct 26th: 2nd turn for Brazilian presidential elections (R$/€ exchange rate is the direct impact)
- Weak numbers from Germany (I think one of the main SAN's strategic objective is to start a commercial bank in Germany, and this is a facilitating factor)

As last remark. Weakness from SAN in Madrid came just in time to get the best ratio for the dividend scrip: Ratio is computed with the share prices average the 5 days before Oct 16th (9, 10, 13, 14 and 15 Oct)