Digital Transformation And Fee Businesses Will Drive Stronger Earnings Power Ahead

Catalysts

About Banco Santander

Banco Santander is a globally diversified retail and commercial bank that delivers banking, payments, wealth and corporate services across Europe and the Americas.

What are the underlying business or industry changes driving this perspective?

• Rapid scaling of ONE Transformation, Gravity and other global platforms is structurally lowering the cost base while improving customer experience. This should support sustained positive operating leverage and expanding net margins.
• Accelerating shift toward fee driven businesses in CIB, Wealth and Payments, including record assets under management and high growth in PagoNxt and Cards, positions the group to grow revenues more resiliently as rate tailwinds fade. This may lift earnings quality.
• Digital first Retail and Consumer franchises, supported by AI powered apps, end to end journey digitalization and product simplification, are driving strong customer acquisition and higher digital sales. This should increase revenue per customer and improve efficiency.
• Reallocation of capital toward higher RoRWA activities, combined with asset mobilization and SRTs, is raising the return profile of new business. This supports structurally higher RoTE and faster earnings growth than implied by current valuation.
• Beneficial interest rate dynamics, with easing in Brazil and Europe and expanding structural hedges in key markets like the U.K. and Spain, are expected to stabilize or grow NII. At the same time, lower funding costs and higher volumes support revenue and net income.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Banco Santander compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Banco Santander's revenue will grow by 19.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 26.3% today to 30.2% in 3 years time.
• The bullish analysts expect earnings to reach €24.1 billion (and earnings per share of €1.8) by about July 2029, up from €12.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €19.1 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 9.8x on those 2029 earnings, down from 13.6x today. This future PE is lower than the current PE for the GB Banks industry at 13.6x.
• The bullish analysts expect the number of shares outstanding to decline by 4.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.41%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged period of very high real interest rates in key markets like Brazil and persistently extreme real rates in Argentina could keep credit demand subdued, pressure borrowers and force Banco Santander to prioritize balance sheet derisking over growth. This would limit loan volume expansion and put structural pressure on revenue and earnings growth over the long term.
• The bank’s strategy of shifting toward higher quality, lower margin portfolios in Brazil and other markets, while prudent for credit quality, may structurally cap yields if competitive pressure prevents full repricing. This could constrain net interest income growth and weigh on net margins even as volumes recover.
• Execution risk around ONE Transformation and the rollout of global platforms such as Gravity, Payments Hub and other duplicated systems could lead to a longer than expected period of dual running costs, delays in mainframe decommissioning and higher than planned investment needs. This would erode the anticipated efficiency gains and compress net margins and future earnings.
• Rising regulatory and litigation pressures, including banking levies in Spain, evolving conduct and motor finance reviews in the U.K. and potential capital headwinds postponed to 2026, may structurally increase the group’s tax and compliance cost burden. This could reduce the sustainability of current profitability levels and diminish earnings and return on tangible equity over time.
• The increasing reliance on fee based businesses in CIB, Wealth and Payments to offset less favorable interest rate environments exposes the bank to market, capital markets and asset management cycles. A downturn in market activity, weaker assets under management or lower transaction volumes could slow fee momentum and undermine the diversified revenue engine that underpins long term earnings resilience.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Banco Santander is €14.4, which represents up to two standard deviations above the consensus price target of €12.79. This valuation is based on what can be assumed as the expectations of Banco Santander's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €14.4, and the most bearish reporting a price target of just €8.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be €79.8 billion, earnings will come to €24.1 billion, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 8.4%.
• Given the current share price of €11.91, the analyst price target of €14.4 is 17.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.