UBS upgrades Santander as activity in Brazil picks up

UBS upgraded Santander to ‘buy’ from ‘neutral’ and raised it share price target to €5.85 from €4.15.

A strong fourth quarter prompted the broker to raise its earnings per share estimates (EPS) by 7-10% for 2017 and 2018, with the latest set of "strong" financials solidifying its view of the bank’s improved earnings momentum and profitability premium.

The broker’s more positive take is due to increased conviction on Brazil’s turnaround, less cautious view on UK/Spain net interest income (NII) and improved foreign exchange dynamics.

Brazil’s improved outlook is instrumental in the Spanish lender’s enhanced profit power. The fourth quarter reflected that with fading deleveraging pressure combining with positive net interest margin (NIM) progression in the initial phase of a monetary easing cycle, strong fee progress and more stable cost of revenue (CoR) prospects for a 15 to 20% compound annual growth rate (CAGR) 2017/18 estimate net profit growth in local currency terms.

Although the bank does not score well on the capital front with an approximate 10.5% fully loaded common equity tier 1 (FLCET1) ratio, there has been no “meaningful impact” on the broker’s valuation.

"That said, the 50bps formation throughout 2016 met guidance after absorbing a 40% cash payout, and our estimates suggest SAN reaches its 11% target one year ahead of the 18E deadline. Our take is hence pragmatic, and we see capital as having no meaningful impact on our valuation."

Santander’s share price rose 2.15% to 1122 GMT on Thursday.