Q2 Review - Better NII trends support modest upgrades

Research evidence excerpt

Q2 Review - Better NII trends support modest upgrades

Barclays | Banco Santander SA

portfolio should remain broadly stable as Santander seeks to maintain interest-rate

sensitivity around €500m per 100bps. While part of the strength reflects CIB and commercial

activity, management sees no reason why the key drivers behind the strong H1 performance

should not continue into H2. More broadly, management described group trends as

running "aligned or slightly better" than Investor Day assumptions.

2. Funding: becoming an increasingly important earnings driver. Funding was another

major theme throughout the call. Management repeatedly highlighted stronger

transactional deposit growth, lower funding costs and increasing customer primacy, with

Openbank increasingly acting as a funding platform for the wider group. Mexico, Brazil and

the UK were specifically cited as markets where further optimisation opportunities remain.

We increasingly view funding optimisation as an important structural driver of earnings.

Management also sounded constructive on Mexico (where net profit beat our expectations

by c.10%), highlighting improving consumption trends and continued opportunities across

SMEs, mid-corporates, mortgages and auto lending (loans were up 8% YoY as of Q2). While

the bank appeared relatively relaxed about ongoing USMCA negotiations, we suspect trade-

related uncertainty will remain an area of investor focus and a risk to investment

expectations until there is greater clarity on the agreement.

3. Asset quality: Brazil remains the key debate, but management sounded more

confident. Brazil dominated much of the discussion. Management explicitly stated that

"the worst is over" and reiterated guidance for CoR of around 4.2% despite higher-for-longer

rates.