Royal Bank of Canada raises Santander's target price by 44% due to cost-cutting plans and ROTE outlook

Investing.com - Royal Bank of Canada Capital Markets upgraded Banco Santander S.A. from “Market Perform” to “Outperform” on Monday and raised the target price from €8.50 to €12.25. This adjustment was made ahead of the bank’s investor day on February 25. The broker noted that market consensus is “a bit confused” due to recent performance, M&A activity, and restated financials.

Use InvestingPro for faster access to breaking news and analyst reactions — up to 50% discount

The London-based analyst team, led by Benjamin Toms, currently forecasts a tangible equity return on AT1 capital for fiscal 2028 of 19.5%, above the current market consensus of about 18%, and close to the bank’s own guidance of over 20%.

This upward revision implies approximately 14% upside potential from the current €10.76 price on the Madrid Stock Exchange (stock code SAN).

The revised target price of €12.25 is based on a segmented valuation model using fiscal 2028 estimates, discounted back to 2026 at an 11.2% cost of equity. According to Royal Bank of Canada, the implied cost of equity for the bank is about 11%, which is 110 basis points below the historical average since 2013.

The main rationale for the upgrade is what RBC calls the “self-help” cost-cutting phase. The bank predicts that by fiscal 2028, the group’s cost-to-income ratio will decline by about 4 percentage points to approximately 38.2%, about 2 points below current market consensus, driven by positive operating spreads each year during the planning period. Fixed exchange rate revenue growth over the next three years is expected to have a compound annual growth rate of about 9%, while costs are expected to grow around 3%.

In terms of shareholder returns, RBC forecasts total distributions of about €33 billion over the next three years, including €15.6 billion in dividends and €17.3 billion in buybacks, representing 21% of the bank’s current market cap of €157.9 billion.

This translates to an average total return of about 7% over three years, with the yield rising to approximately 9% by the end of fiscal 2028. The forecast for common stock dividends per share is €0.26 in 2026, €0.40 in 2027, and €0.47 in 2028.

Adjusted diluted earnings per share are expected to be €1.01, €1.28, and €1.53 in 2026, 2027, and 2028 respectively, compared to previous forecasts of €0.94 and €1.06, with no prior forecast for 2028.

On valuation, RBC emphasizes that the 12-month forward price-to-book ratio gap between Santander and its closest peer, Spain’s Banco Bilbao Vizcaya Argentaria (BBVA), is currently 0.35x, described as “unprecedented,” compared to an historical average absolute difference of about 0.12x.

“Historical discount narrowed in 2025 but widened again in 2026. We see this as a buying opportunity,” the broker stated. Santander’s stock is currently trading at 1.65 times its estimated tangible book value for 2026, with an estimated €7.65 per share tangible book value in 2028.

The firm also pointed out that in the European Banking Authority’s stress test in 2025, Santander’s worst-case CET1 impact under adverse scenarios was negative 170 basis points, one of the most manageable among European peers, demonstrating its lower-than-average profit volatility.

RBC forecasts the CET1 ratio will be 12.8% in fiscal 2026 and rise to 13.1% in 2028, assuming the bank operates at the upper end of its 12%-13% target range. Risk costs are expected to average about 110 basis points during the planning period.

Recent acquisitions—UK’s TSB and US’s Webster Bank—are viewed positively, with an estimated combined capital impact of about 190 basis points on CET1.

RBC notes these transactions should provide scale advantages for Santander in regions where returns are currently weak, with US pre-tax profits expected to grow from €1.64 billion in fiscal 2026 to €3.59 billion in 2028.

Major risks mentioned include political risks in Brazil, Spain, and the UK, M&A execution risks, unexpected regulatory capital impacts, and litigation risks related to auto finance and AXA PPI cases.

This article was translated with the assistance of artificial intelligence. For more information, see our Terms of Use.