Santander Bank: Balance Sheets and Income Statements Analysis

Introduction

The global financial crisis has led to the collapse of major banks, others merged with each other’s while others become completely bankrupt; currently, there are so many banks in the market and all are competing for customers, investors, and cash. The intense competition has made banks think of new ways of doing business to avoid losing their market share and businesses. Analysis of the financial industry helps an investor to understand how the financial institution is performing; a good analysis takes into consideration the fundamentals such as the industry the business is operating in, the economic factors that impact the business operations, and the company internal information (Meir). Company information can be found on its website or in print media. The analysis can then be used to make a comparison with other firms within the industry.

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Origin

This is report is part of the fulfillment of Fin 415: Management of Financial Institutions requirements. The report’s aim is to boost the diagnostic skills of the scholars through making a PowerPoint Presentation to Board of Directors (BOD) on the Santander bank information available on the internet.

Scope

The report’s goal is to use the information available on the internet to analyze Santander Bank which is based in Spain.

Methodology

Trend analysis was used to analyze the Santander Bank financial statements for three financial years (2010, 2009, and 2008). The financial statements information was interpreted through the use of financial ratio analysis (Meir).

Santander Bank Brief History

Queen Isabel II authorized amalgamation of Santander in 15th May in the year 1857; due to heavy trade during that period, Santander began its businesses as an outside bank that facilitated businesses between Latin America and North of Spain (Santander.com). The bank has various subsidiaries in various parts of the world for example Santander UK, Chile, Brazil, Portugal, Spain, Argentina, Sovereign, and Mexico (Santander.com). The bank offers various services to its market such as Current Account and Savings Account, Credit cards, Insurance, loans, Savings and Investment, Mortgages as well as Online Banking Services (Santander.com). In the global market the bank proffers Commercial Banking, Global Private Banking, Global Retail Banking and Insurance and Asset Management; besides it operations the bank also maintains Equity and Financial management division (Santander.com).

The bank vision (Towards a Global Bank) and its corporate values have enabled it to be the world’s fourth biggest bank in terms of earnings and eighth by market capitalization (Santander.com). In 2010, its earnings attributable to the owners were above EUR 8.2 billion, 7.9% less than in 2009 (Santander.com).

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Finding and Analysis

This part analysis the bank annual reports for three financial years that is 2010, 2009 and 2008, in order to understand the profitability and stability of the bank.

Balance Sheets and Income Statements analysis

The Santander bank Balance Sheet and Income Statements are briefly discussed in this part.

Balance Sheet

In the financial year 2009 total assets increased by 5.8% from EUR 1,049,632 million in 2008 to EUR 1,110, 529 million in 2009, this figure further increased in 2010 by 9.6% to EUR 1,217,501 million. While the total liabilities increased by 4.8% from EUR 989,630 million in 2008 to EUR 1,036,650 million in 2009 (Santander.com). In 2010 liabilities were EUR 1,136,586 million which is an increase of 9.6% (Santander.com) this means that the bank is exposing itself to risk as it adds more liabilities.

The bank total equity has increased by 23% from EUR 60,001million in 2008 to EUR 73,871million in 2009, while in 2010 total equity increased by 9.5% EUR 80,914 million. The increase in assets lead to total liabilities increase in the financial year 2009 and 2010 (Santander.com), consequently, total equity in both year increased this indicates that the bank was exposing itself to short term and long term risk.

Income statement

In the financial report year 2008 profit for the year were EUR 9,030 million and EUR 9,427 million in 2009; denoting an increase of 4.4%. While in the year 2010 the profit decreased by 3.2% to EUR 9,129 million, this shows that in the year 2010 the bank performed poorly compared to the year 2009. The decrease in 2010 profit was as a result of increase in the cost of doing business; the global financial crisis may have played part in the increase of operational and financial cost of the bank (Santander.com). In order to be in business the bank seeks more of debt financing in order to go on with operations.

Ratio Analysis

This section presents financial ratios of Santander Bank for the three financial years that is 2008, 2009 and 2010; refer to appendix 1 for the ratio calculations.

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Profitability ratios

Profitability ratio measures the management effectiveness as shown by the turnover generated on sales and investment (GoldmanSachs.com). This means that if a firm can be able to make a profit it will be able to meet its short term obligations and also pay dividends to its owners.

In 2010 return on shareholders’ funds was 11.28% compared with 2008 and 2009 which had 15.05% and 12.76% respectively (Santander.com). The decrease in the ratio in 2010 was as result of decrease in earnings and trend is downward sloping indicating that the shareholders’ funds have increased over the three years. The return on capital employed was 1.24% in 2010 compared to 2009 and 2008 with 1.29% and 1.12% respectively; this means a decrease of 3.9% in 2010 and an increase of 15.2% in 2009 occurred (Santander.com). This was as result of increase in long term liabilities.

Liquidity ratio

Liquidity ratios measures the firm’s ability to meet its short term maturity obligation as and when they fall due; they measure liquidity risk of the firm whereby, the lower the liquidity ratio the higher the liquidity risk and vice versa (Meir).

In the financial year 2010 the Santander bank current ratio was 1.56 compared to 2009 and 2009 which had a ratio of 1.75 and 1.51 respectively; this indicates an increase of 15.9% in 2009 and a decrease of 10.9% in 2010 (Santander.com). The firm is more liquid in 2010 compared to 2008, but less liquid in respect to 2009 and its current ratio is low in 2010 which means that the bank is safe since the ratio is more than the required margin of safety for all the three years (Santander.com); it means that the firm is able to meet its short term obligation as and when they fall due. Thus the liquidity is satisfactory for the firm.

Gearing ratio

Gearing ratios on the other hand measures the extent to which a firm uses the assets which have been financed by non-owners supplied funds i.e. they measure the financial risk of the company. The higher the ratio, the higher the financial risk of the firm. A firm should then have an appropriate mix of debt and equity (Meir).

In the year 2010 the debt ratio was 95.80% compared to the financial year 2009 and 2008 which had 95.84% and 96.37% respectively; a decrease of 0.04% in 2010 and a decrease of 0.55% in the year 2009 (Santander.com). This implies that the shareholders’ funds increased throughout the three years.

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Investment Ratios

The investment ratios are used to calculate the overall performance of the company and are used to determine the company’s dividend policy, the effect of a proposed finance option and also to predict the effect of right issue on the company. The investors can use investment ratio to determine the theoretical value of company’s securities and ascertain whether the securities are overvalued or undervalued (Microstrategy.com).

In the financial year 2010 the bank paid dividends of 13.91% compared to the year 2009 and 2008 of 24.37% and 29.82% respectively; this means that in 2010 the bank paid less dividends to its shareholders. The 2010 years profit was able to cover dividends 7.19 times compared to 2009 and 2008 which covered dividends 4.10 and 3.35 times respectively; the higher ratio in 2010 was as a result of less dividends paid in that year. The bank earnings per share were EUR 0.9418, EUR 1.0454 and EUR 1.22 in 2010, 2009 and 2008 respectively (Santander.com); in 2010 the share earnings were low because of decrease in the year’s profit. A price earnings ratio of 8.42, 11.05 and 5.53 for the year 2010, 2009 and 2008 respectively; the price earnings dropped because of decrease in the share price in the year 2010. In the year 2010 the book value per share was 8.58 compared to 2009 and 2008 of 8.04 and 7.58 respectively; the increase in 2010 was as a result of increase in the total equity.

Research and findings

Risk Management

All financial institutions operations are open to the element of risk. The institutions aim at achieving a trade-off between risk and return; risk can be minimized by carefully identifying risk that the bank is exposed to, measuring it and then using the right tools to manage the exposure (Santander.com. The bank is exposed to risk such as market risk, operational risk, and credit risk (Santander.com).

The bank’s bad debts levels and coverage are superior than the industry average in the parts of the world that’s the bank operates in. The entire bank is concerned in risk management, from its subsidiaries to the parent company. Santander bank has formulated some risk management principles which it describes as

“independence of the risk function, support of the business while maintaining credit risk quality, committee-based decisions, the use of cutting-edge tools and systems to measure and analyze risk and the strong involvement of all governing bodies in the management of risk, starting with the Board of Directors” (Santander.com).

Market risk

The likelihood of loss on reserves or business operations is referred to as the market risk and the equity markets depression is one of the major large-scale events that can amplify the portfolio risk (Santander.com). The information on total assets and securities that the Santander bank holds for trade or exchange both historical and current are valued periodically depending on the market performance. This market valuation method exposes the bank’s asset and securities at exchange rate risk, inflation risk, country risk and interest rate risk (Santander.com). This kind of information is stored on the trading book while the securities held by the bank to maturity are stored in the banking book (Mysmp.com). The bank measures banking book risk through the use of Stress testing or through the use of Value-at-Risk (VaR) (Santander.com).

Operational risk

This identifies risk that emerges from within the firm and is responsible for employees’ negligence, legal risk and fraudulent operations (Mysmp.com). As such, the banks are obliged to set aside capital reserves that cover it from bank’s operational risks (Mysmp.com). Santander bank uses advanced measure approach which complies with the industry standards; this type of risk measurement uses a home-grown risk management policy (Mysmp.com).

Credit risk

This is a risk of failure to pay the amount owed to another party; there is a relationship between market and credit risk, the market prices and risk premiums increases as credit risk rises and examples of credit risks include counterparty risk (Santander.com). Counterparty risk arises where one party to the contract fails to honor his/her part of the contract. There is also default risk faced by the bank when the debtor fails to pay back the principal plus interest (Mysmp.com); in addition, the banks also faces credit rating reduction and credit risk. Santander bank credit rating is done by rating agency such as Standard & Poor, Moody’s, Fitch and Dominion Bond Rating Services (DBRS) (Santander.com).

Rating Agency Moody’s Standard & Poor Fitch DBRS
Investment category Aaa
Aa
A
Baa
AAA
AA
A
BBB
AAA
AA
A
BBB
AAA
AA
A
BBB
Speculative category Ba
B
Caa
Ca
C
BB
B
CCC
CC
C
BB
B
CCC
CC
C
BB
B
CCC
CC
C

Source: Adopted from Santander pp 1

The ratings can be modified, withdrawn or cancelled by the credit rating agency at any time (Santander.com).

Market segment

Santander bank is based in Spain and it has various subsidiaries in different parts of the world for example UK, Mexico, Brazil, Germany, Spain, Chile, Us, Portugal and Argentina (Santander.com). Santander bank has attained a higher market share in all of these geographical regions in the Retail banking. The bank segments its market through geographical regions and this corresponds with the Santander group tier 1 of management and mirrors the bank position in the planet’s main currency region that is the Dollar, Euro and Sterling pound (Santander.com). The market segments include Latin America, United Kingdom and Continental Europe while at the business level the bank segment its operations in various division such as Retail Banking, Global Wholesale Banking, and Asset Management and Insurance (Santander.com).

External Regulatory

All banks in Spain are exposed to similar score on regulatory surroundings. Santander’s Board of Director approves the banks financial reports; which encompass consolidated Income statements and Balance sheets. International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) regulate preparation and presentations of consolidated financial reports of the bank (Santander.com).

The Santander Group’s website complies with “Article 117 of Securities Market Act, Circular 1/2004 of the National Securities Market Commission and Ministerial Order ECO/3722/2003” (Santander.com).

External Environment

The financial crises in the international market led to world economic recession in 2007 to 2009; as a consequence it triggered the loss of confidence in the financial institutions. In that period Spanish economy remained fragile as the economic and financial tension in the United States spelt over to other developed world; thus dragging down the world economy with it (Ordonez). In contrast, emerging markets growth forecasts were adjusted downward on a marginal basis.

Following this crisis the Spanish economy took action on financial institutions regulations; these compelled the financial institutions to embark on risk management activities so as to sustain stability in their operations and also to make sure they are liquid in the midst of the present and potential clients (Ordonez). The banks are creating new products and they are becoming more innovative and the technology in Spain is increasing at a higher rate as shown by the services provided by the bank (Ordonez).

Global financial crisis also led to size deterioration of the international markets and many financial institutions were affirmed bankrupt. This resulted to some institutions gaining a competitive edge as the bank suffered more than other sectors; this means that the market share competition has raised as businesses strive to survive (Ordonez).

Financial Forecasting

The financial forecast will be done through the use of past and present bank information available and the analysis will use Percentage of Sales Method (Santander.com). In order to carry out the forecasting effectively items that vary directly with gross income will be isolated and used to determine the bank future financial requirements.

In 2010, 2009 and 2008 the gross income varied by 6.8%, 17.6% and 14.6% respectively, therefore in 2011 the varying percentage will be 13%; the average of the 3 financial years (2010, 2009 and 2008) (Santander.com).

Financial Forecasting

The financial forecast will be done through the use of past and present bank information available. The analysis will use Percentage of Sales Method. In order to carry out the forecasting effectively items that vary directly with gross income will be isolated and used to determine the bank future financial requirements (Santander.com). In 2010, 2009 and 2008 the gross income varied by 6.8%, 17.6% and 14.6% respectively, therefore in 2011 the varying percentage will be 13%; the average of the 3 financial years (2010, 2009 and 2008) (Santander.com). The inflation rate is expected to rise to more than 3% due to increase in oil prices; therefore we assume that all operating cost increased by 3%. Also assume that provisions will decrease by 10.5% as a result of decreased demand of Sovereign, the UK, SCF, Latin American ex-Brazil.

Santander Bank
Performa income statement
2011 2010
Million Euros Million Euros
Net interest income 33023.12 29224
Dividends 307.7 362
Income from equity-accounted method 19.21 17
Net fees 10999.42 9734
Gains (losses) on financial transactions 2944.78 2606
Other operating income/expenses 119.78 106
Gross income 47414.01 42049
Operating expenses (18742) (18196)
General administrative expenses (16744) (16256)
Personnel (9609.9) (9330)
Other general administrative expenses (7133.8) (6926)
Depreciation and amortisation (1998.2) (1940)
Net operating income 28672.13 23853
Net loan-loss provisions (10361) (10258)
Impairment losses on other assets (475.7) (471)
Other income (1082.7) (1072)
Profit before taxes (w/o capital gains) 16753.12 12052
Tax on profit (3010.7) (2923)
Profit from continuing operations (w/o capital gains) 13742.43 9129
Net profit from discontinued operations (10.8) (27)
Consolidated profit (w/o capital gains) 13731.63 9102
Minority interests 1013.1 921
Attributable profit to the Group (w/o capital gains) 12718.53 8181
EPS (Euros) 1.527018 0.9418
Santander Bank
Performa Balance sheet
2011 2010
Million Euros Million Euros
Asset
Cash on hand and deposits at central banks 87710 77785
Trading portfolio 176763 156762
Debt securities 65255 57871
Customer loans 851 755
Equities 9979 8850
Trading derivatives 82392 73069
Deposits from credit institutions 18285 16216
Other financial assets at fair value 44517 39480
Customer loans 8769 7777
Other (deposits at credit institutions, debt securities and equities 35748 31703
Available-for-sale financial assets 97238 86235
Debt securities 89856 79689
Equities 7381 6546
Loans 866956 768858
Deposits at credit institutions 50525 44808
Customer loans 806927 715621
Debt securities 9504 8429
Investments 308 273
Intangible assets and property and equipment 16445 14,584
Goodwill 27764 24,622
Other 55140 48901
Total assets 1285131 1217501
Liabilities and shareholders’ equity
Trading portfolio 154223 136772
Customer deposits 8850 7849
Marketable debt securities 412 365
Trading derivatives 84884 75279
Other 60077 53279
Other financial liabilities at fair value 57530 51020
Customer deposits 30605 27142
Marketable debt securities 4824 4278
Due to central banks and credit institutions 22101 19600
Financial liabilities at amortized cost 924769 898969
Due to central banks and credit institutions 82837 79537
Customer deposits 591385 581385
Marketable debt securities 193229 188229
Subordinated debt 33975 30475
Other financial liabilities 23343 19343
Insurance liabilities 11790 10449
Provisions 18860 15660
Other liability accounts 34717 23717
Total liabilities 1201888 1136586
Shareholders’ equity 77334 77334
Capital stock 4165 4165
Reserves 66258 66258
Attributable profit to the Group 12718.53 8181
Less: dividends (1308.1) (1270)
Equity adjustments by valuation (1000) (2315)
Minority interests 6909.1 5896
Total equity 83243.1 80914
Total liabilities and equity 1285131 1217501

Conclusion

In conclusion, this report evaluated the impact of the 2007-2009 financial crises on the Santander bank. It also discusses the bank external environment and its effect on the bank’s operation. The financial analysis section presents the Santander bank Balance sheet and Income statements; these statements show how the bank utilized its asset to make profit and how these changed over the three years (2010, 2009 and 2008). Since the banks deals with more liquid assets, it therefore means that they are highly exposed to risk. This report therefore analyses risks that Santander bank is faced with and how the bank mitigate the risks.

Works Cited

GoldmanSachs.com. “BRICs.” 2011. Web.

Meir, L. Financial ratio analysis, 2008.” Web.

Microstrategy.com. “Financial Analysis, 2011.” Web.

Mysmp.com.com. “Fundamental Analysis, 2011.” Web.

Santander.com. “About the group, 2011.” Web.

Ordonez, F. “ADB Annual Meetings, 2008.” Web.

Appendices

Appendix 1 Ratios from 2008-2010
Santander Bank
Profitability Ratios 2010 2009 2008
Return on Shareholders’ Funds 11.28% 12.76% 15.05%
profit after tax/total equity
Return on Capital Employed 1.24% 1.29% 1.12%
(Assume Capital Employed equals Total Equity
plus Total Non-Current Liabilities)
total equity+total non-current liabilities∞ 1,928,678 1,776,044 1,654,378
Liquidity Ratios
Current Ratio 1.56 1.75 1.51
total current assets/total current liabilities
Gearing Ratios
Gearing Ratio 95.80% 95.84% 96.37%
total non-current liabilities/capital employed
Investment Ratios
Dividend payout 13.91% 24.37% 29.82%
Dividend/ Profit for year *100
Dividend cover 7.19 4.10 3.35
Profit for year/Dividend
Earnings per share (pence) 0.9418 1.0454 1.22
Profit for year/number of shares
Price/Earnings Ratio 8.42 11.05 5.53
share price/total basic EPS
Book value per share 8.58 8.04 7.58
Total equity/number of common shares
Price/book value 0.92 1.44 0.89
Market value per share/Book value per share
Santander Bank
Performa income statement
2011 2010
Million Euros Million Euros
Net interest income 33023.12 29224
Dividends 307.7 362
Income from equity-accounted method 19.21 17
Net fees 10999.42 9734
Gains (losses) on financial transactions 2944.78 2606
Other operating income/expenses 119.78 106
Gross income 47414.01 42049
Operating expenses -18741.9 -18196
General administrative expenses -16743.7 -16256
Personnel -9609.9 -9330
Other general administrative expenses -7133.78 -6926
Depreciation and amortisation -1998.2 -1940
Net operating income 28672.13 23853
Net loan-loss provisions -10360.6 -10258
Impairment losses on other assets -475.71 -471
Other income -1082.72 -1072
Profit before taxes (w/o capital gains) 16753.12 12052
Tax on profit -3010.69 -2923
Profit from continuing operations (w/o capital gains) 13742.43 9129
Net profit from discontinued operations -10.8 -27
Consolidated profit (w/o capital gains) 13731.63 9102
Minority interests 1013.1 921
Attributable profit to the Group (w/o capital gains) 12718.53 8181
EPS (Euros) 1.527018 0.9418

Forecast for 2011 balance sheet.

Assets, Liabilities (trading portfolio and other financial value at fair value) = 2010 gross income forecast x relationship with gross income.

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