Executive Summary / Key Takeaways

• Banco Santander (BCDRF) is executing a profound "ONE Transformation" strategy, leveraging global platforms and operational efficiencies to deliver consistent, record-breaking financial performance.
• The company reported a record €3.4 billion profit in Q1 2025, a 19% increase year-over-year, with a Return on Tangible Equity (RoTE) of 15.8% post-AT1, reflecting strong underlying business growth and improved efficiency.
• Technological differentiators like Gravity, Openbank, Zinia, and Plard are central to its competitive moat, driving significant cost reductions, enhanced customer experience, and accelerated customer acquisition.
• Santander is committed to substantial shareholder returns, targeting €10 billion in distributions through share buybacks for 2025-2026 earnings, alongside a disciplined capital allocation framework.
• Despite anticipated macro volatility and competitive pressures, the bank's diversified business model and strategic initiatives position it for continued profitability growth and value creation, with reiterated 2025 targets for RoTE (~16.5%) and lower costs in current euros.

A Global Banking Powerhouse in Transformation

Banco Santander, S.A., a diversified global financial services institution incorporated in 1856 and headquartered in Madrid, Spain, stands as a formidable player in the international banking landscape. The company's core business revolves around providing a comprehensive suite of financial products and services to individuals, small and medium-sized enterprises, large corporations, and public entities across Europe and the Americas. Its overarching strategy, dubbed "ONE Transformation," is a multi-year initiative designed to simplify and integrate its business model, enhance operational efficiency, and ultimately become the "number one bank for customers". This strategic pivot is deeply rooted in its history, which saw its profit triple by 2024 from the end of 2013, with RoTE rising from 11% in 2014 to 16.3% by 2024, demonstrating a consistent ability to adapt and grow.

The industry landscape is characterized by intense competition, rapid digital shifts, and evolving macroeconomic conditions. Broad industry trends, such as fluctuating interest rates, easing monetary policies in some regions, and robust labor markets, create a dynamic environment. Santander's diversified business model, combining geographical and business diversification across Retail & Commercial Banking, Digital Consumer Bank, Corporate & Investment Banking (CIB), Wealth Management & Insurance, and Payments, is a foundational strength. This diversification provides resilience and predictability in earnings, making its results "less volatile over the cycle than most of our peers".

In this competitive arena, Santander leverages its strong global brand and extensive network. While direct competitors like BBVA (BBVA) and JPMorgan Chase (JPM) may exhibit faster technological agility in certain areas, Santander's integrated service offerings and deep local presence, particularly in Latin America, provide a distinct advantage in customer loyalty and cross-selling opportunities. The company strategically positions itself by focusing on profitable organic growth and disciplined capital allocation, rather than engaging in large-scale cross-border M&A, which it views as less conducive within the current European regulatory framework.

Technological Edge: The Engine of Efficiency and Growth

Santander's "ONE Transformation" is fundamentally powered by a suite of differentiated technologies that are reshaping its operational model and competitive standing. At its core is Gravity, a proprietary cloud-based system developed in partnership with Google (GOOGL). This core system is an enabler for significant efficiency gains, having already reduced the bank's cost per transaction by 10%. Gravity is currently operational in 30% of the Group's footprint, including Spain, the U.K., Mexico, Brazil, and Chile, and is expected to reach 60% deployment by the end of 2025. Its implementation has led to a 20% year-on-year increase in transaction processing, improving digital channel performance and reducing response times.

The bank's digital banking platform, Openbank, is another critical technological differentiator. Launched successfully in the U.S. and Mexico, Openbank U.S. has already gathered €2 billion in deposits, doubling initial expectations and improving the U.S. loan-to-deposit ratio by approximately 12 percentage points. In Mexico, Openbank is gaining significant momentum, attracting more clients week-over-week compared to competitors and gathering deposits by offering slightly better rates. A multiyear partnership with Verizon (VZ) in the U.S. to offer savings accounts further underscores its strategic focus on deposit gathering to lower funding costs.

Santander's checkout lending platform, Zinia, exemplifies its innovation in consumer finance. It has secured 1.7 million new contracts and established partnerships with major players like Apple (AAPL) and Amazon (AMZN) in Germany. This platform is designed to deliver best-in-class solutions and increase cost competitive advantage across its footprint. Furthermore, Plard, the global cards platform, manages over 16 million debit cards and authorizes more than 160 million transactions per month. The Payments hub, another key technological asset, processed 800 million transactions in 2024, a five-fold increase year-on-year.

These technological advancements are not merely incremental improvements; they represent a structural shift that enhances Santander's competitive moat. They directly contribute to financial performance by driving efficiency improvements, with 253 basis points of efficiencies achieved since the transformation began. Digital sales are up 23% year-on-year, and the cost to serve has dropped by 5%. This technological roadmap, while in a "transition year" with full platform deployment expected over the next 18 to 24 months, is foundational to Santander's strategy of achieving higher profitability, lower cost-to-income ratios, and sustained market positioning.

Financial Performance: Delivering Record Results Amidst Strategic Shifts

Santander's financial performance in Q1 2025 underscores the effectiveness of its strategic transformation. The bank reported a record profit of €3.4 billion, marking a 19% increase compared to Q1 2024, with all its global businesses contributing to this growth. This robust performance translated into a Return on Tangible Equity (RoTE) of 15.8% post-AT1, an almost 2-point improvement year-over-year. Revenue in Q1 2025 was up 5% in constant euros, driven by a 4% increase in Net Interest Income (NII), excluding Argentina, and record fee income, which grew by almost double digits. Earnings per share rose to above €0.21, supported by strong profit generation and a reduced share count due to ongoing buyback programs.
Looking back at the full year 2024, Santander achieved its third consecutive year of record results, with profit reaching €12.6 billion and RoTE increasing to 16.3%. Revenue for 2024 was up 10% in constant euros, with fee income growing 11% in constant euros, significantly bolstered by the addition of 8 million new customers and network benefits representing approximately €20 billion of revenue.

Operational leverage is a hallmark of Santander's current performance. In Q1 2025, expenses grew below revenue and inflation, showcasing the positive effects of its transformation initiatives. The efficiency ratio closed at 14.8% in Q1 2025, ranking "amongst the best in the sector". For the full year 2024, the cost-to-income ratio improved to 41.8%, the "best we have ever reported in 15 years".

Asset quality remains robust, reflecting prudent risk management and favorable market conditions. The cost of risk consistently improved quarter after quarter, dropping to 1.14% in Q1 2025 and ending 2024 at 1.15%, better than initial guidance. The NPL ratio improved year-on-year to below 14% in Q1 2025, with the NPL portfolio largely collateralized.

In terms of liquidity and capital, Santander maintains a solid balance sheet. The CET1 ratio reached 12.9% in Q1 2025, positioning it at the top end of its 12% to 13% operating range. The bank generated 10 basis points of capital in Q1 2025, including 33 basis points of net organic capital after absorbing 24 basis points of profitable risk-weighted asset (RWA) growth. The ALCO portfolio expanded to €152 billion, an increase of €7.5 billion quarter-on-quarter. Asset mobilization efforts are significant, with approximately €2.8 billion mobilized in Q1 2025 and €60 billion in FY 2024, demonstrating a strategic approach to optimizing capital deployment.

Segmental Dynamics: Diversified Engines of Profitability

Santander's diversified business segments are each contributing to its overall profitability and strategic objectives.

Retail & Commercial Banking, the "heart of our banking business", is central to the "ONE Transformation." In Q1 2025, Retail profit grew strongly, with revenue up 8% to a new quarterly record, driven by solid NII and fees across most countries, particularly in the U.S.. The segment's efficiency is improving, with costs flat, reflecting structural gains from transformation efforts. Retail's cost of risk improved year-on-year across major countries and was stable in the quarter. The bank has added 3.5 million active customers, reduced product offerings by 40%, and seen digital sales increase by 23%, while the cost to serve dropped by 5%.

The Digital Consumer Bank (DCB) is focused on expanding leadership and improving cost competitiveness. Q1 2025 saw NII growth, primarily in the U.S., and a 12% year-on-year increase in deposits. Openbank's launch in Mexico and a multiyear partnership with Verizon in the U.S. for savings accounts are key initiatives for deposit gathering. While DCB Europe's fees were impacted by a new insurance regulation in Germany, this is considered a one-off rebasing event, and its return on tangible equity remained in double digits.

Corporate & Investment Banking (CIB) is building a "world-class business" by deepening client relationships and leveraging expertise. Q1 2025 was another record quarter for CIB, with revenue up 8%. CIB revenue in the U.S. rose 23% year-on-year, and global markets revenue increased by 23%, driven by investments and cross-selling opportunities. The segment achieved a RoTE of approximately 22%, reflecting its focus on profitability and capital discipline.

Wealth Management & Insurance aims to be the "best wealth and insurance manager in Europe and the Americas". Profit in Q1 2025 rose double digits, backed by strong activity and double-digit fee growth across all three businesses (Private Banking, Asset Management, Insurance). The efficiency ratio improved by nearly 1.5 points year-on-year, and RoTE stood at close to 70%. Collaboration fees, a key driver of growth, increased by 10% year-on-year.

The Payments segment, encompassing PagoNxt, Cards, and Merchant Acquiring, holds a "unique position on both sides of the value chain". It delivered a strong Q1 2025, with double-digit revenue growth and a 30% increase in profit. PagoNxt's EBITDA margin improved to approximately 29%, ranking "one of the best ratios among our competitors". The segment manages over 16 million debit cards through Plard, processing more than 160 million transactions per month.

Outlook and Shareholder Value: A Clear Path Forward

Santander's management expresses strong confidence in achieving its 2025 targets, reiterating its commitment to a RoTE of approximately 16.5% post-AT1. The outlook for 2025 anticipates resilient revenue, around €62 billion, similar to 2024 levels, with growth in constant currency supported by mid-to-high single-digit fee growth. A key objective for 2025 is to reduce costs in absolute euro terms year-on-year, driving positive operating leverage despite lower interest rates, primarily in Europe. The cost of risk is expected to remain stable at the Group level, with improvements in some markets offsetting others.

Specific guidance for 2025 includes NII, excluding Argentina, being slightly up in constant euros and slightly down in current euros, based on an assumption of European end rates around 1.5% by year-end 2025. Retail's cost-to-income ratio is targeted below 42% (around 39.7% excluding Argentina), Consumer's is expected to be down to less than 40%, and CIB's below 45%.

Shareholder remuneration remains a core focus. Santander targets distributing up to €10 billion to shareholders through share buybacks for 2025 and 2026 earnings, subject to regulatory approvals. This will comprise approximately 50% of reported profit (split evenly between cash dividends and buybacks) plus any incremental excess capital. The decision to no longer set a maximum price for buybacks reflects management's confidence in the group's future profitability and value creation. Since 2021, including the current buyback program, the bank will have repurchased approximately 14.5% of its outstanding shares, delivering an approximate 20% return on investment to shareholders.

Capital generation is expected to remain strong, with ordinary business-driven RWA growth of 4% to 5% largely offset by asset mobilization initiatives, resulting in net RWA growth of only 1% to 2%. Regulatory charges are anticipated to be similar to 2024 levels. The fully loaded Basel III impact is estimated at 25 to 30 basis points, phased in at around 5 basis points per year over the next five years, with day-one impact close to zero.

Risks and Challenges: Vigilance in a Volatile World

Despite a strong outlook, Santander operates in an environment with inherent risks and challenges. Geopolitical events and volatile forward rate curves across jurisdictions pose ongoing uncertainties. While the bank proactively manages its interest rate sensitivity, these external factors can impact NII performance. The new insurance regulation in Germany has already affected Consumer fees, though this is considered a one-off rebasing event. Potential macro model adjustments, particularly in Germany, could also influence credit impairment trends.

Inflation headwinds and FX pressure remain persistent concerns, although Santander reiterates its ability to deliver lower costs in current euros for 2025 despite these pressures. Hyperinflation in Argentina necessitates a prudent, inflation-adjusted exchange rate, which can cause distortions in reported figures. The U.K. motor finance case, while complex and subject to ongoing regulatory review, is not expected to materially impact the group's financial position or 2024 targets.

Santander's strategy to mitigate these risks includes a continuous shift towards lower-risk portfolios and tightened underwriting criteria in markets like Brazil. Its diversified earnings and geographical footprint act as a stabilizer during periods of instability, a key competitive advantage.

Conclusion

Banco Santander is demonstrating a compelling investment thesis, driven by its "ONE Transformation" strategy and a deeply diversified business model. The company's relentless focus on operational efficiency, underpinned by significant investments in global technology platforms like Gravity, Openbank, Zinia, and Plard, is translating into tangible benefits: record profitability, improved efficiency ratios, and robust customer growth. This technological leadership, coupled with disciplined capital allocation and a commitment to substantial shareholder distributions, positions Santander for sustainable value creation. While macroeconomic volatility and competitive dynamics present ongoing challenges, the bank's proven ability to deliver on its targets, its strong asset quality, and its strategic adaptability reinforce its trajectory towards increased profitability and consistent shareholder returns in the coming years.