2022 Annual Review

Executive Chair’s Letter

01Executive Chair’s Letter

Executive Chair’s Letter

Ana Botín

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Chief Executive Officer’s Letter

02Chief Executive Officer’s Letter

Chief Executive Officer’s Letter

José Antonio Álvarez

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Santander in 2022

03Santander in 2022

Santander in 2022

Santander Today

2022 Results

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Santander tomorrow

04Santander tomorrow

Santander tomorrow

Strategy and targets

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DataHub

05DataHub

DataHub

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Macroeconomic environment

At the beginning of last year, several macroeconomic indicators provided warning signs of a complex year ahead, mainly due to rising global inflation. Although it initially seemed that markets would adjust relatively quickly, the war in Ukraine triggered an additional supply shock. This resulted in a widespread acceleration in inflation and increased the risk of second-round effects driving up prices further.

Central banks reacted by implementing restrictive monetary policies, leading to several rate hikes throughout the year. Rates were increased more decisively in Latin American countries, and over time were followed by increases in the United States and then in Europe.

The main challenge for central banks around the world is to ensure that the rise in interest rates keeps inflation under control without adversely affecting growth.

The more restrictive monetary policies were not aligned with fiscal policies, which meant there was a risk that they would take longer to have the desired effect. They could also increase uncertainty in the capital and debt markets, raising risk premiums, public sector financing costs and leading to the need for more drastic fiscal adjustments in the medium term.

The change of approach has, so far, not resulted in expectations that GDP performance in most countries will experience a major downturn, nor significant job losses. In addition, I remain confident that technological advances should generate new investment opportunities to meet society's different needs more efficiently, boost productivity and facilitate the recovery of real disposable income.

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2022 strategy execution and
achievement of objectives

In 2022, we continued to execute our sustained growth strategy, which is focused on creating value for our shareholders.

As a result, we generated attributable profit of € 9,605 million, the highest in the Group's history, and increased earnings per share by 23%.

We did so by meeting the main financial objectives announced at the beginning of 2022: growing revenue by mid-single digits in constant euros, keeping the cost of risk below 1%, generating an RoTE of 13% and maintaining our fully-loaded CET1 ratio above 12%. Despite an improvement, the only objective we did not fully achieve was the efficiency ratio, year-end at 45.8% vs. guidance of close to 45%, affected by high inflation.

The advantages of our business model and the management of the priorities set out in last year's letter, which I detail below, boosted our results:

We are heavily investing to accelerate transformation and improve customer experience. We are simplifying our product range, reducing and automating internal processes, and increasing the functionalities available on our digital channels. As a result, we attracted 7 million customers worldwide, most of them are digital customers. Digital interaction with customers continued to increase, and today some 80% of transactions are carried out through digital channels.

Income statement

(YoY changes)

Our larger customer base boosted activity levels and volumes, both in loans and deposits, across all regions and business segments. In wholesale banking, lending continued to grow at double-digit rates, and there were good results in individuals, driven by mortgage volumes, which were up 6% in constant euros, notably in Europe. We increased deposits by 9%, reflecting greater transactionality and customer loyalty.

Importantly, we translated this increased activity into revenue. Net interest income rose strongly, supported by higher volumes and a balance sheet that was well-positioned to benefit from rising interest rates.

Net fee income exceeded €11.7 billion for the year, above the average of our European peers, benefiting from our strong local presence in the markets we serve, supported by our global businesses and platforms.

Total revenue exceeded €52 billion, up 12% (6% higher in constant euros), achieving our 2022 target.

We have a very stable deposit base supported by a high percentage of retail deposits, and a conservative liquidity strategy which allows us to serve our customers in adverse environments while maintaining liquidity ratios well above regulatory requirements. As a result, we are accelerating the TLTRO repayments and have repaid €61 billion to date, mainly in Banco Santander, S.A. which has repaid €56 billion and we maintained our liquidity coverage ratio (LCR) among the best in the market.

Another of our priorities was to keep cost growth below inflation (-5% year-on-year in real terms). We achieved this across all our regions and practically all our countries. This was made possible thanks to the productivity improvements we implemented, supported by our transformation plans.

This allowed us to improve the Group's efficiency ratio by 0.4 percentage points and maintain our position among the top of our peer group.

Our revenue and cost performance led to a full year net operating income of € 28,251 million, an all-time record. This represents a 2.7% return on volume credit, almost three times the cost of risk, which is a good indicator of the sustainability of our profits.

Santander has performed well in a rising interest rate environment, thanks to our focus on risk management and the robust balance sheet structure built up in recent years, which is reflected in a highly collateralized loan portfolio, our geographic and business line diversification and a medium-low risk profile .

As a result, the NPL ratio fell to 3.08% and we maintained the cost of risk slightly below 1% (at 0.99%), achieving our target. € 1.4 billion of provisions relating to updated macroeconomic scenarios were absorbed, partly by the P&L and partly offset by the releases of covid-19-related funds.

This strong credit quality performance was positively affected by performances in Spain and Mexico, the strength of housing prices in the UK and second-hand vehicle prices.

The cost of risk rose in Brazil (4.79%), partially due to a single name in Corporate and Investment Banking (CIB) in the fourth quarter. However, we expect the cost of risk in Brazil to remain stable in 2023 as we have taken measures to strengthen the portfolio and we are growing in lower-risk sectors with higher collateral.

In the US, we started the provision normalization process. In 2022, cost of risk increased to 1.35%, following two years of very low provisions due to public incentives provided to fight the pandemic. We expect this trend in 2023, but without reaching pre-pandemic levels of cost of risk.

We maintained our fully-loaded CET1 ratio this year above 12% and we were consistent in every quarter, year-end at 12.04%.

We achieved this through excellent profit generation, efficient capital allocation and the acquisition of minority interests in highly profitable businesses with growth potential, such as Santander Consumer USA and Santander México.

These actions allowed us to organically generate 138 basis points of capital, of which 62 basis points of capital were devoted to shareholder remuneration in the form of cash dividends and share buybacks. The rest was absorbed by growth various regulatory impacts and portfolio valuations. In the year, we had a relatively better performance in solvency ratios than our peers.

Execution on our priorities helped us to increase profit by 18%, to achieve the highest attributable profit in the Group's history, € 9,605 million, and to achieve an RoTE of 13.4%.

Additionally, this performance allowed us to increase our shareholder remuneration and improve the tangible net book value per share which, together with the cash dividend paid, rose by 6% in the year.

2022 performance by region and businesses

Europe

North America

South America

Digital Consumer Bank

Global businesses and platforms

In Europe, profit grew by 38% in constant euros to € 3,810 million, mainly as a result of higher volumes and interest rates in the region, as well as improved efficiency and maintaining our targeted cost of risk.

The management actions carried out boosted commercial dynamics, especially in the individuals segment, where new mortgage business increased strongly in all countries in the region. Lending to large corporates rose € 9.5 billion. The efficiency ratio improved by almost 5 percentage points, supported by the transformation projects carried out, while the cost of risk remained flat.

Spain

In Spain, we focused on customer acquisition and loyalty through quality service. We increased Spain number of customers by more than 700 thousand, increasing every quarter, and improved their satisfaction as measured by the Net Promoter Score (NPS). There was also greater activity in wholesale banking, mortgage lending and deposit capture. The favourable net interest income dynamics in the second half of the year, together with the continued implementation of our efficiency plan, led to a 15% increase in net operating income, which, together with lower provisions, allowed us to increase profit by 149%.

United Kingdom

Business dynamics remained robust in the UK, with gross new mortgage lending of £35.5 billion. Higher volumes and margin management led to double-digit revenue growth which, together with effective cost control, generated net operating income of 22% in constant euros. However, the positive business dynamics were offset by higher provisions, following releases in 2021, and together with the settlement agreed with the Financial Conduct Authority regarding Anti-Money Laundering (AML) control deficiencies prior to 2017, resulted in profit of € 1,395 million.

Portugal

In Portugal, we continued to increase our market share in mortgages and insurance, we improved efficiency through the restructuring plans implemented in recent years, and balance sheet management has enabled us to reduce the level of provisions. As a result, we enhanced our return on invested capital and increased our profit by 16%.

Poland

In Poland, we carried out our business in an uncertain geopolitical and regulatory environment, which required us to record various charges and provisions. Despite this, our excellent commercial and operational structure led to strong growth in commercial revenue and effective cost control in the context of high inflation, which enabled us to strongly increase profit and achieve a 12% RoTE.

North America

In North America, the Group's priorities were accelerating profitable growth, enhancing our competitive capabilities in our target businesses, and developing initiatives to improve connectivity. As a result, we once again generated a high profit, close to € 2.9 billion.

United States

In United States, we are in the middle of a franchise transformation. This simplification of both structure and processes, together with the strength of our balance sheet, allowed us to perform in line with our financial objectives in a difficult market for some of our businesses, such as leasing. The strong performance of CIB and Private Banking, combined with the high valuation of second-hand vehicles, enabled us to contain the increase in provisions to below initial forecasts.

During the year we made progress in terms of efficiency, disposed of less profitable portfolios, and continued to develop our consumer finance proposition. Consequently, results and profitability remained high, reaching € 1,784 million.

Mexico

In Mexico, we continued to focus on business growth. We captured more than half million customers, significantly improved customer satisfaction and gained market share in retail lending due to our strategy in mortgages, credit cards and auto finance. As a result, we are now in the top 3 in the auto finance market having very quickly strengthened our position. In addition, we successfully launched our payment solutions platform, Getnet, which enabled us to achieve a market share, based on number of transactions, of close to 20%.

This greater activity together with interest rate management allowed us to grow revenue at double-digits and improve efficiency which, together with the solid credit quality performance, resulted in profit of € 1,213 million in euros, up 49% compared to 2021 (31% in constant euros) and improved profitability (17% RoTE).

South America

In South America, our customer base increased above 6 million in the year and we are in the top 3 in terms of NPS in the main countries. We are the largest bank in the region, predominantly in wholesale banking and auto financing where we are market leaders in Brazil, Chile, Argentina, Colombia and Peru. We also generated widespread growth in lending, with good dynamics in individuals. We achieved an attributable profit of € 3,658 million, driven by commercial revenue growth supported by greater transactionality, higher gains on financial transactions, and good cost management in a high inflation environment.

Brazil

At the start of the year, the Brazilian economy was among the most affected by inflation, which led its central bank to increase interest rates earlier than in other countries. This resulted in an appreciation of the Real against other currencies. There is some degree of deterioration in credit quality across the country in 2022. To combat this, we focused on repositioning the portfolio toward lower risk and higher collateral segments, and slowed new consumer credit lending, where we are the market leader with a 23% share.

Results were affected by the negative balance sheet sensitivity to rising interest rates which impacted revenue, cost pressure in a high-inflation environment and an increase in provisions as a result of the reduction in mass market disposable incomes and the impact of a single name in CIB in the fourth quarter. Profit, however, remained high, at € 2,544 million and RoTE was approximately 20%.

Chile

In Chile, we progressed further in our main business objectives and remained leaders in credit quality in the country. Profit increased thanks to the double-digit growth in fees and gains on financial transactions, good cost management and credit quality performance, which more than offset the net interest income decline due to negative sensitivity to interest rate increases.

Argentina

In Argentina, we continued building our open financial services platform, strengthening the value offering of Getnet, Santander Consumer and Superdigital. Profit increased sharply reflecting revenue growth above costs and inflation, with efficiency and profitability improvements. Also, loan-loss provisions normalized from low levels in 2021, although the cost of risk remained robust.

Uruguay, Peru and Colombia

In Uruguay, Peru and Colombia, business performance was driven by strong volume growth, especially in credit, which was reflected in revenue performance and, consequently, net operating income. In Peru and Colombia, we launched new businesses that will allow us to continue growing strongly and maintain the high profitability shown to date, with double-digit RoTE in both countries.

Digital Consumer Bank

As for Digital Consumer Bank, the European auto market continued to contract, so we focused our efforts on defending our leading position in the sector. We developed various strategic alliances, such as the new agreement signed with Stellantis and the leasing and subscription businesses launched this year. As a result, we increased new business lending in a shrinking market, strengthening our leadership position while maintaining very high profitability.

Dynamics at Openbank were good, with strong balance sheet growth following the continued increase in deposits.

DCB's profit reached € 1,308 million, 12% higher than the previous year in constant euros, mainly supported by net fee income, leasing and good cost of risk performance, which more than absorbed the pressure from higher interest rates.

Global businesses

Finally, turning to our global businesses.

Following its excellent results in 2020 and 2021, Santander Corporate & Investment Banking (SCIB) profit in 2022 was € 2,805 million, a new record, growing above 30% year-on-year and generating a return on equity of 22%.

This profit, which is better than the rest of the market, is the result of the global network created for SCIB's customers, which generates revenue from collaboration across markets and segments that local banks cannot achieve alone. We continue to position ourselves as the strategic advisor to our clients. In Europe, we consolidated our regional platform, increased our market share and are closing the gap we had with our main competitors. In South America, we strengthened our leadership, and, in the US, we integrated Amherst Pierpont Securities, our broker-dealer, as we focus on growing our business. In addition, we are leaders in sustainability in Latin America and Europe and globally in the renewable energy sector in Structured Finance.

In Wealth Management & Insurance, our goal is to be the best Wealth and Protection Manager in Europe and Latin America. WM&I is currently one of the Group's growth drivers. In a difficult year, where the market registered volume decreases, we produced remarkable results.

In Private Banking, we continued to expand our range of high-value products, both in alternative financial products and investment funds or specific real estate investment services. This allowed us to attract €11.7 billion in the year and increase profit by 40% in constant euros.

In Asset Management, financial market volatility impacted portfolio valuations and, consequently, negatively affected the assets under management. However, we worked to strengthen our alternative product offering based on our ESG objectives. As a result, we generated a profit of € 580 million.

Finally, in Insurance, we grew strongly, with total premiums increasing 24% mainly due to protection insurance in Europe and non-credit insurance in the Americas. The Auto business maintained high growth rates and digital sales accounted for 20% of the total sales volume.

As a result, WM&I generated 31% of the Group's total fees and the profit, considering net fees ceded to the branch network, was €2,728 million, 10% higher year-on-year in constant euros.

In payments, PagoNxt generated revenue of € 953 million, a 72% increase in constant euros, well ahead of its 50% growth target.

In the year, we launched the new Cards & Digital Solutions division, to further improve service quality in a high growth business. At year-end, the area managed 97 million cards across the Group, generated around €4 billion in revenue, and achieved 57% profit growth and profitability around 30%.

Priorities for 2023

In 2023, we expect an environment of some uncertainty, additional interest rate hikes in some countries, slower global growth and inflation easing but remaining high.

As a result, at our Investor Day on February 28, we include a series of medium-term commitments, which are our management priorities.

To make progress in their achievement, in 2023 we will focus on:

This allows us to use the Group's unique features to support our local markets, while our global businesses generate increased volumes through our strong presence at the local level. We intend to further increase the connectivity between our global and local businesses.

As a result, we expect to increase the profitability of all our businesses and reinforce our aspiration to be the most profitable bank in each country in which we operate.

And we will achieve this while continuing to generate more capital and increasing our shareholder remuneration.

Closing

01. Executive Chair’s Letter

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