Banco Santander(SAN) - 2023 Q4 - Annual Report

Business model and strategy This section details Santander's strategic framework, business model, strong 2023 financial performance, and forward-looking targets for continued growth The Santander Way The company's core philosophy, 'The Santander Way,' aims to help people and businesses prosper by being the best open financial services platform through simple, personal, and fair operations - Santander's purpose is to help people and businesses prosper, with an aim to be the best open financial services platform[49] - The company's operational ethos is to be Simple, Personal, and Fair in all its activities, which is intended to drive customer loyalty and strong financial results[49] Our business model Santander's business model is founded on customer focus, scale, and diversification, leveraging a 'digital bank with branches' approach to serve 165 million customers globally - The business model is centered on three pillars: Customer Focus (building a digital bank with branches), Scale (global and in-market), and Diversification (business, geography, and balance sheet)[51][52][55] Customer Base Growth | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total customers (million) | 165 | 160 | | Active customers (million) | 100 | 99 | - Operations are organized under five global businesses: Retail & Commercial Banking, Digital Consumer Bank, Corporate & Investment Banking, Wealth Management & Insurance, and Payments[53] - The bank's diversification across developing and mature markets, along with a medium-low risk profile, contributes to recurrent pre-provision profit with low volatility compared to peers[55] 2023 results In 2023, Santander achieved record financial results, including an attributable profit of €11.1 billion and revenue of €58 billion, meeting all financial targets FY'23 Key Financial Metrics (Underlying) | Metric | FY'23 Value | YoY Change | | :--- | :--- | :--- | | Attributable Profit | €11.1 billion | +15% | | Revenue | €58 billion | +11% | | Cost-to-income | 44.1% | -173bps | | RoTE | 15.1% | +169bps | | Cost of Risk (CoR) | 1.18% | +0.19pp | | FL CET1 | 12.3% | +0.2pp | | TNAVps + DPS | N/A | +15% | | EPS | N/A | +21.5% | 2023 Financial Targets vs. Achievements | Target | 2023 Target | 2023 Achievement | | :--- | :--- | :--- | | Revenue (YoY constant €) | Double-digit growth | +13% | | Efficiency ratio | 44-45% | 44.1% | | Cost of Risk (CoR) | <1.2% | 1.18% | | FL CET1 | >12% | 12.3% | | RoTE | >15% | 15.1% | 2023 Regional Performance Highlights | Region | Attributable Profit (€ billion) | Contribution to Group Profit | Efficiency | RoTE | | :--- | :--- | :--- | :--- | :--- | | Europe | 5.5 | 45% | 42.1% | 14.5% | | North America | 2.4 | 20% | 49.1% | 9.8% | | South America | 3.0 | 25% | 38.5% | 14.4% | | DCB Europe | 1.2 | 10% | 47.6% | 12.3% | Looking ahead Santander is positioned for continued profitable growth in 2024, targeting mid-single-digit revenue growth and a RoTE of 16%, guided by principles of value, customer, and global focus 2024 Group Targets | Metric | 2024 Target | | :--- | :--- | | Revenue Growth (constant €) | Mid-single digit | | Efficiency | <43% | | Cost of Risk (CoR) | c.1.2% | | FL CET1 (post-Basel III) | >12.0% | | RoTE | 16% | - The future strategy is underpinned by three tenets: Think Value (double-digit value creation), Think Customer (building a digital bank with branches), and Think Global (leveraging scale to accelerate growth)[63] Think Value, Customer, and Global The 'Think Value' principle targets a RoTE of 15-17% and a 50% payout ratio by 2025, while 'Think Customer' aims for 200 million total customers and improved efficiency 2025 Profitability and Strength Targets | Metric | 2025 Target | 2023 Figure | | :--- | :--- | :--- | | RoTE | 15-17% | 15.1% | | FL CET1 | >12% | 12.3% | | Shareholder Remuneration Payout | 50% | 50% | 2025 Customer and Efficiency Targets | Metric | 2025 Target | 2023 Figure | | :--- | :--- | :--- | | Total customers (million) | c. 200 | 165 | | Active customers (million) | c. 125 | 100 | | Efficiency ratio (%) | c. 42 | 44.1 | - The 'Think Global' strategy aims to create a simpler operating model to better serve customers, be more efficient, improve risk management, and achieve more disciplined capital allocation[68][69] Our five global businesses Santander has consolidated its operations into five global businesses, each with distinct strategies and 2025 targets to drive growth and efficiency Global Business 2025 RoTE Targets | Global Business | 2023 RoTE | 2025 RoTE Target | | :--- | :--- | :--- | | Retail & Commercial Banking | 15.1% | c.17% | | Digital Consumer Bank | 11.5% | >14% | | Corporate & Investment Banking | 17.5% | >20% | | Wealth Management & Insurance | 72.2% | c.60% | - The Payments business, through PagoNxt, is targeting a >30% EBITDA margin and c.30% revenue growth (CAGR 22-25) by migrating volumes to common global platforms to gain scale[87][88] 2025 ESG Commitments | Metric | 2023 Status | 2025 Target | | :--- | :--- | :--- | | Green finance raised (since 2019) | €114.6 billion | €120 billion | | Socially responsible investments (AuMs) | €67.7 billion | €100 billion | | Financial inclusion ( People) | 1.8 million | 5 million | Responsible banking This section outlines Santander's commitment to ESG principles, detailing its responsible banking strategy, progress on sustainability targets, and ethical conduct towards stakeholders Responsible banking overview Santander's responsible banking strategy is integral to its purpose, on track to meet 2025 ESG targets, and recognized for its efforts in green finance and financial inclusion Progress on Key ESG Targets | Metric | 2023 Progress | 2025 Target | | :--- | :--- | :--- | | Green Finance (cumulative) | €114.6 billion | €120 billion | | Socially Responsible Investment AUM | €67.7 billion | €100 billion | | Financial Inclusion (people) | 1.8 million | 5 million | - The bank has set new 2030 decarbonization targets for its corporate auto manufacturing and European auto lending portfolios as part of its net-zero ambition[97] - In 2023, Santander invested €174 million in communities, including €105 million to promote higher education, employability, and entrepreneurship, benefiting 2.7 million people[99][117] - The sustainability strategy focuses on three pillars: supporting the transition to a low-carbon economy, promoting inclusive growth, and ensuring strong governance and culture[121] - ESG targets related to climate, green finance, financial inclusion, DE&I, and SRI are included in variable remuneration schemes for all units and long-term incentives for senior executives[135] Materiality assessment Santander's 2023 double materiality assessment, aligned with GRI and CSRD, identified Climate Change, Consumers and End Users, and Business Conduct as key sustainability matters informing its strategy - A double materiality assessment was conducted, covering both impact materiality (how the business affects people/environment) and financial materiality (how sustainability affects financial results)[137][138] - The assessment identified three material sustainability matters: Climate Change, Consumers and End-users, and Business Conduct[140] Impacts, Risks, and Opportunities of Material Topics | Sustainability Matter | Impact | Risk | Opportunity | | :--- | :--- | :--- | :--- | | Climate change | Positive impact by financing customers' transition to a low-carbon economy | Physical or transition risks could lead to increased default rates or reduced collateral value | Supporting customers' transition is a key business driver, with a target to facilitate €220 billion in green finance by 2030 | | Business conduct | Influence on markets due to leadership position | Inadequate conduct could lead to fines and reputational risk | A solid corporate culture (Simple, Personal, Fair) can earn customer trust and create a competitive advantage | | Consumers and end-users | Positive impact by promoting access to financial services and financial health | Lack of transparency or data privacy events may hamper customer trust and increase default risk | Robust data privacy and financial inclusion propositions can boost revenue by building trust and attracting new customers | Supporting the green transition Santander is committed to achieving net-zero carbon emissions by 2050 through portfolio alignment, customer support, reducing its own impact, and embedding climate in risk management - The bank's ambition is to achieve net-zero carbon emissions by 2050, supported by a four-part strategy: portfolio alignment, customer support, reducing its own impact, and embedding climate in risk management[146][153] Key Green Transition Targets and Progress | Metric | 2023 Status | Target | | :--- | :--- | :--- | | Green finance facilitated (cumulative since 2019) | €114.6 billion | €220 billion by 2030 | | Electricity from renewable sources | 97% | 100% by 2025 | | Thermal coal power & mining phase-out | €4.9 billion exposure | €0 by 2030 | - In 2023, two new 2030 decarbonization targets were set for the automotive sector: a -31% emissions intensity reduction for auto manufacturing and a -35% to -45% reduction for the European auto lending portfolio[158][178][181] - Climate risk management is integrated into the business through a dedicated governance structure, the 'Klima' management tool for physical and transition risk assessment, and the inclusion of climate factors in the risk appetite framework[169][172] Responsible investment Santander is advancing its responsible investment goals, aiming for €100 billion in Socially Responsible Investment (SRI) Assets Under Management (AUM) by 2025, reaching €67.7 billion by end of 2023 Socially Responsible Investment (SRI) AUM Growth | Metric | 2023 | 2022 | YoY Growth | | :--- | :--- | :--- | :--- | | SRI AUM (EUR billion) | 67.7 | 53.2 | +27% | - Santander Asset Management (SAM) holds €48.1 billion in SRI AUM (+28% YoY) and is part of the Net Zero Asset Managers initiative (NZAMi), with a target to halve net emissions for 50% of its AUM in scope by 2030[255][258][260] - Private Banking's SRI AUM from third-party funds reached €19.6 billion, with over 80% of its global fund list compliant with SFDR articles 8 and 9[255][265] - The insurance business has extended its offering of products aligned with the Sustainable Finance and Investment Classification System (SFICS) to 8 countries, covering assets, activities, and vulnerable individuals[267][268] Acting responsibly towards employees Santander aims to be an employer of choice by focusing on talent, employee experience, and organizational change, achieving significant progress in DE&I and employee engagement - The bank's strategy for employees is based on three pillars: having the right talent and skills, creating a great employee experience, and driving organizational change[270] - Talent attraction for technology roles was bolstered through the 'BeTech!' program, which offers a specific employee value proposition for STEM talent, and new tech hubs were opened in Malaga, Warsaw, and Valencia[271] Diversity, Equity & Inclusion (DE&I) Progress | Metric | 2023 Status | 2025 Target | | :--- | :--- | :--- | | Women in senior executive positions | 31.4% | 35% | | Equal Pay Gap | c. 0% | ~0% | - The 'Your Voice' employee survey showed an engagement score of 8.5/10 and an employee Net Promoter Score (eNPS) of 62, which is 22 points above the finance sector benchmark[302][303] Acting responsibly towards customers Santander's customer strategy focuses on being Simple, Personal, and Fair, prioritizing financial inclusion, consumer protection, data privacy, and cybersecurity - The bank ranked in the top 3 for customer satisfaction (NPS) in seven of its core markets in 2023[329] - A new financial inclusion target was set to include 5 million people between 2023 and 2025; in 2023, 1.8 million people were financially included through access and finance initiatives[347][349] Microfinance Activity | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total credit disbursed (million euros) | 1,172.3 | 950.0 | | Total supported micro-entrepreneurs (million) | 1.2 | 1.6 | - Santander promotes cybersecurity awareness through global campaigns such as 'Cyber Heroes' and the award-winning fiction podcast 'Titania', which has over 1 million plays[358][361] Supporting communities In 2023, Santander invested over €174 million in community initiatives, primarily supporting higher education, employability, and entrepreneurship through its Santander Universities program 2023 Community Investment | Area | Investment (million euros) | People Helped | | :--- | :--- | :--- | | Higher education, employability, and entrepreneurship | 105 | 498,930 | | Other community support programmes | 69 | 2.2 million | | Total | 174 | ~2.7 million | - The Santander Universities program has invested over €2.3 billion over 27 years, helping more than 1.5 million people and businesses in partnership with over 1,200 universities[362] - The bank has set a target to invest €400 million between 2023 and 2026 to foster education, employability, and entrepreneurship[362] Business conduct Santander's business conduct is governed by its General Code of Conduct, supported by a whistleblowing channel, and guided by policies on environmental, social, and climate change risk management and financial crime prevention - The General Code of Conduct (GCC) is the core of the bank's ethical framework, promoting equal opportunity, non-discrimination, and human rights; all employees receive mandatory annual training on the GCC[374][377] Ethical Channel (Canal Abierto) Reports | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Received reports | 3,611 | 3,935 | | Closed reports | 2,929 | 3,477 | | Disciplinary action | 655 | 907 | | - which led to dismissal | 366 | 387 | - The Environmental, Social and Climate Change (ESCC) risk policy sets standards for financing in sensitive sectors like oil and gas, power generation, and mining; in 2023, 41 projects were analyzed under the Equator Principles[394][401] - The bank actively engages in public-private partnerships to combat environmental crime, such as the United for Wildlife's Financial Taskforce and the UNODC's private sector dialogue[408] - In 2023, 3,001 suppliers, representing 43% of those providing risk services, completed a Group certification that includes ESG aspects such as codes of conduct, anti-corruption policies, and human rights[420] Corporate governance This section details Santander's corporate governance framework, including board structure, shareholder engagement, remuneration policies, and internal control mechanisms 2023 Overview In 2023, Santander focused on consolidating operations under five global businesses and executing disciplined succession planning, maintaining a diverse board and effective governance - A key strategic initiative in 2023 was consolidating all activities under five global businesses, a process the board will continue to monitor in 2024[732] - The board composition remains balanced and diverse, with 15 directors, of which 66.67% are independent and 40% are women[725] - An external board evaluation by Spencer Stuart concluded that the board operates effectively, while identifying areas for improvement which have been incorporated into a 2024 action plan[734][744] - Priorities for 2024 include overseeing the transformation to a digital bank with branches, consolidating the five global businesses reporting structure, progressing ESG commitments, and delivering long-term shareholder value[778][779][780][781][782][783] Ownership structure As of December 31, 2023, Banco Santander's share capital was €8.09 billion, with a diversified shareholder base of 3.7 million investors and no single shareholder holding more than 3% of voting rights on their own account Shareholder Structure (as of Dec 31, 2023) | Type of Investor | % of Share Capital | | :--- | :--- | | Institutional | 58.75% | | Retail | 40.05% | | Board | 1.20% | - As of year-end 2023, no shareholder held a significant interest greater than 3% on their own account; BlackRock Inc. (5.426%) and Dodge & Cox (3.038%) hold significant positions on behalf of third parties[797][798][799] - The bank executed two share buyback programs against 2022 results and initiated a new program against H1'23 results, leading to share capital reductions; since November 2021, share capital has been reduced by c. 9%[785][786][816] - The board has authorization to issue contingent convertible preferred securities (CoCos) and had several tranches outstanding at year-end, which would convert to shares if the CET1 ratio falls below 5.125%[793][796] Shareholders and general meeting Santander maintains a robust framework for shareholder engagement, upholding key shareholder rights, and achieved high approval rates for proposals at its 2023 Annual General Meeting - The bank's policy on shareholder communication ensures equal treatment, fair disclosure, and regular engagement through various channels, including AGMs, results presentations, and investor days[825] 2023 AGM Key Metrics | Metric | Value | | :--- | :--- | | Quorum | 67.564% | | Average votes in favour of board proposals | 98.08% | | Votes approving corporate management | 99.72% | | Votes approving remuneration policy | 90.78% | - Shareholder rights are based on the 'one share, one vote, one dividend' principle, with no limitations on voting rights or restrictions on share transferability, and no takeover defenses in the bylaws[843][844][845] - The 2024 AGM will propose a final cash dividend of 9.50 euro cents per share, the appointment of two new independent directors (Carlos Barrabés and Antonio Weiss), and the re-election of five directors[865][874] Board of directors Santander's Board of Directors comprises 15 members, with a strong majority of independent directors and 40% women, supported by seven specialized committees and confirmed as effective by an external review - The board consists of 15 directors: 2 executive, 10 independent (66.67%), and 3 other external directors; women represent 40% of the board[881][963][966] - An external board effectiveness review was conducted in 2023 by Spencer Stuart, which concluded that the board and its committees operate effectively; an action plan for further improvement was approved for 2024[744][1053] - Key board changes in 2023 included Héctor Grisi becoming CEO, Glenn Hutchins being appointed Lead Independent Director, and the nomination of two new independent directors (Carlos Barrabés and Antonio Weiss) for the 2024 AGM[741] - The board's governance structure includes seven committees: Executive, Audit, Nomination, Remuneration, Risk Supervision, Responsible Banking, and Innovation and Technology, each with specific oversight functions[1012][1013] Senior management team This section provides profiles for the 14 Senior Executive Vice Presidents who constitute the senior management team, excluding the two executive directors, leading key global functions and businesses - The senior management team is composed of 14 Senior Executive Vice Presidents who lead the Group's main functions and global businesses[1168] - Key roles within the senior management team include the Group Chief Risk Officer (Mahesh Aditya), Global Head of Retail & Commercial Banking (Daniel Barriuso), Group Chief Financial Officer (José Antonio García Cantera), and Global Head of Corporate & Investment Banking (José María Linares)[1169][1170] Remuneration Santander's remuneration policy aligns with shareholder interests, promotes long-term value, and manages risk effectively, with executive directors' variable pay linked to quantitative and qualitative performance metrics - The remuneration policy is designed to be competitive, align with long-term shareholder value, and be compatible with rigorous risk management; variable pay is linked to financial, sustainability, and value-creation targets[1175][1178] - For 2023, the executive bonus pool was determined by quantitative metrics (109.22% achievement), a relative performance multiplier (1.02), a qualitative assessment (+11.93%), and an exceptional upward adjustment (+15.57%), resulting in a final pool of 138.91%[1204] - The proposed 2024-2026 remuneration policy simplifies the bonus calculation and maintains long-term metrics including RoTE, relative TSR, and ESG targets (women in senior roles, financial inclusion, SRI, and supporting the green transition)[1264][1266] - Executive directors' variable pay is deferred, with 60% paid out over five years; the final three payments are contingent on meeting multi-year performance targets related to RoTE, relative TSR, and ESG goals[1199][1217] Group structure and internal governance Grupo Santander operates through legally independent subsidiaries under a Group-Subsidiary Governance Model (GSGM), ensuring local autonomy while benefiting from Group synergies and centralized oversight - The Group is structured around a Group-Subsidiary Governance Model (GSGM), where legally independent subsidiaries are managed locally but adhere to Group frameworks[1380][1381] - Subsidiaries are autonomous in capital and liquidity, which limits risk contagion and reduces systemic risk; the model is supported by a Corporate Centre that provides strategic, control, and support functions[1381][1383] - The GSGM also applies to the five global businesses (CIB, Retail, Wealth, Consumer, Payments), with Country Heads remaining responsible for budget, strategy execution, and financial delivery[1382] Internal control over financial reporting (ICFR) Santander's Internal Control over Financial Reporting (ICFR) is based on the COSO 2013 framework, overseen by the Board and Audit Committee, and employs a three-lines-of-defence model to ensure financial information reliability - The ICFR system is based on the COSO framework and is overseen by the Board of Directors and the Audit Committee[1397][1414] - A three-lines-of-defence model is employed: Business functions (1st), Risk and Compliance (2nd), and Internal Audit (3rd)[1399][1401] - The control environment is supported by a General Code of Conduct, a confidential whistleblowing channel ('Canal Abierto'), and mandatory training for employees involved in financial reporting[1403][1405][1408] - The Internal Audit function, with 1,227 employees, independently assesses the effectiveness of internal controls and reports directly to the Audit Committee[1437][1438] Economic and financial review This section provides an overview of the global economic and regulatory landscape, Santander's key financial performance in 2023, and its outlook for 2024 Economy, regulation and competition In 2023, the global economy showed resilience amidst geopolitical tensions and higher interest rates, while the regulatory environment focused on implementing Basel III, sustainability disclosures, and digitalization Estimated 2023 GDP Growth in Key Markets | Region/Country | Estimated 2023 GDP Growth | | :--- | :--- | | Eurozone | +0.5% | | Spain | +2.5% | | United Kingdom | +0.5% | | United States | +2.5% | | Mexico | +3.5% | | Brazil | +2.8% | - The banking sector proved resilient to financial turmoil in early 2023, benefiting from monetary policy tightening and strong labor markets, which helped maintain portfolio quality[1656] - Key regulatory discussions in 2023 focused on four areas: capital requirements (Basel III implementation), sustainability (EU Taxonomy expansion), digitalization (instant payments, Digital Euro), and retail banking (consumer credit, Retail Investment Strategy)[1660][1661][1662][1663] Group selected data This section provides a high-level summary of Santander's key financial and operational metrics for the fiscal years 2021, 2022, and 2023, covering balance sheet, income statement, profitability, credit quality, solvency, and customer data Group Selected Data (2021-2023) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Balance Sheet (EUR million) | | | | | Total assets | 1,797,062 | 1,734,659 | 1,595,835 | | Loans and advances to customers | 1,036,349 | 1,036,004 | 972,682 | | Customer deposits | 1,047,169 | 1,009,722 | 900,554 | | Income Statement (EUR million) | | | | | Total income | 57,423 | 52,117 | 46,404 | | Profit attributable to the parent | 11,076 | 9,605 | 8,124 | | Profitability & Solvency (%) | | | | | RoTE | 15.06 | 13.37 | 11.96 | | Fully-loaded CET1 capital ratio | 12.3 | 12.0 | 12.1 | | Credit Quality (%) | | | | | NPL ratio | 3.14 | 3.08 | 3.16 | | Customers (thousands) | | | | | Total customers | 164,542 | 159,844 | 152,943 | | Digital customers | 54,161 | 51,471 | 47,489 | Group financial performance Santander delivered a record attributable profit of €11.1 billion in 2023, driven by strong revenue growth and improved efficiency, while maintaining a robust balance sheet and capital position Condensed Income Statement (EUR million) | | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Net interest income | 43,261 | 38,619 | 12.0% | | Total income | 57,423 | 52,117 | 10.2% | | Operating expenses | (25,425) | (23,903) | 6.4% | | Profit before tax | 16,459 | 15,250 | 7.9% | | Profit attributable to the parent | 11,076 | 9,605 | 15.3% | Key Balance Sheet Items (EUR million) | | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Loans and advances to customers | 1,036,349 | 1,036,004 | 0.0% | | Customer deposits | 1,047,169 | 1,009,722 | 3.7% | | Total assets | 1,797,062 | 1,734,659 | 3.6% | | Total equity | 104,241 | 97,585 | 6.8% | - The fully-loaded CET1 ratio ended the year at 12.3%, up from 12.0% in 2022, driven by strong organic capital generation of 119 bps[1867][1869] - The Group's Liquidity Coverage Ratio (LCR) was 166% and its Net Stable Funding Ratio (NSFR) was 123%, both comfortably above regulatory minimums[1829][1835][1837] Financial information by segment This section details the financial performance of Santander's primary operating segments for 2023, with Europe as the largest profit contributor, and introduces a new reporting structure effective from January 1, 2024 2023 Attributable Profit by Primary Segment (Underlying) | Segment | Attributable Profit (€ million) | YoY Change (constant €) | | :--- | :--- | :--- | | Europe | 5,483 | +46% | | North America | 2,401 | -23% | | South America | 3,011 | -16% | | Digital Consumer Bank | 1,210 | -26% | | Total Operating Areas | 12,105 | +4% | - Europe's profit growth was driven by a 27% increase in net interest income due to higher interest rates, coupled with a 5.2 percentage point improvement in the efficiency ratio[381] - South America's performance was led by Brazil, which contributed €1.9 billion to profit, and Mexico (part of North America), which saw profit grow 11% in constant euros[385][389] - A new reporting structure based on five global businesses (Retail & Commercial Banking, Digital Consumer Bank, CIB, Wealth Management & Insurance, Payments) will be implemented from January 1, 2024[420] Research, development and innovation (R&D&I) Santander's R&D&I strategy focuses on digital transformation, leveraging cloud technology, data, and AI to enhance customer experience, operational efficiency, and cybersecurity - The 'One Transformation' program is a key strategic initiative to implement a common operating model and technology platform for retail and commercial businesses across all markets[1693] - The bank is migrating its core banking platform to the cloud with its proprietary software 'Gravity', aiming to improve efficiency, innovation, and time-to-market[74] - Santander is leveraging data and artificial intelligence to personalize customer offerings, improve risk models, and enhance operational efficiency[428] - Cybersecurity is a strategic priority, with a focus on protecting the Group through advanced defense mechanisms, generating trust with stakeholders, and promoting a strong security culture[429] Trend information 2024 For 2024, Santander anticipates a gradual global economic slowdown with easing inflation, setting financial targets including mid-single-digit revenue growth and a RoTE of 16% - The macroeconomic outlook for 2024 anticipates a gradual slowdown in global growth, with inflation continuing to ease, potentially allowing for central bank rate cuts in the latter half of the year[431] 2024 Group Financial Targets | Metric | 2024 Target | | :--- | :--- | | Revenue Growth (constant €) | Mid-single-digit | | Efficiency Ratio | < 43% | | Cost of Risk (CoR) | c. 1.2% | | Fully-loaded CET1 | > 12.0% | | RoTE | 16% | - Regional outlooks for 2024 include: Europe benefiting from positive NII sensitivity and efficiency gains; North America focusing on transformation in the US and Mexico; and South America aiming for profitability leadership in its markets[434][435][436] Risk, compliance & conduct management This section details Santander's comprehensive risk management framework, covering credit, market, liquidity, capital, operational, compliance, and ESG risks Risk management and control model Santander's risk management is built on a strong risk culture and a 'three lines of defence' model, governed by the Board and its committees, with a core Risk Appetite Framework - The risk management framework is based on a 'three lines of defence' model: business units as the first line, specialized risk and compliance functions as the second, and internal audit as the third[459] - A strong risk culture, known as 'Risk Pro', is promoted throughout the organization to ensure responsible risk-taking is embedded in daily activities and decision-making[460] - The Risk Appetite Framework (RAF) is a core element that defines the level and type of risk the Group is willing to assume, approved by the Board and cascaded down through the organization[461] Credit risk Credit risk is Santander's most significant risk, with a total exposure of €1.2 trillion in 2023, maintaining solid indicators despite increased cost of risk due to normalization and specific provisions Key Credit Risk Indicators | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total credit risk exposure (€ trillion) | 1.2 | 1.2 | | Non-performing loan (NPL) ratio | 3.14% | 3.08% | | NPL coverage ratio | 66% | 68% | | Cost of risk | 1.18% | 0.99% | - The credit portfolio is well-diversified, with 58% in Europe, 18% in North America, and 17% in South America; by customer type, 58% is with individuals and 42% with companies[467] - The increase in the cost of risk to 1.18% was driven by normalization in the US and Mexico, provisions for Swiss franc mortgages in Poland, and portfolio growth in Brazil[1740] Market, structural and liquidity risk Santander manages market, structural, and liquidity risks through a comprehensive framework, maintaining low market risk, positioning its balance sheet to benefit from rising rates, and ensuring robust liquidity ratios - Market risk exposure is low and concentrated in the Corporate & Investment Banking (CIB) trading book; the average Value at Risk (VaR) in 2023 was €31 million[477] - Structural interest rate risk is managed to control the sensitivity of net interest income (NII) and economic value of equity (EVE) to rate changes; the balance sheet in Europe is positioned to benefit from rising interest rates[480] - Structural exchange rate risk is managed by hedging the capital ratios of subsidiaries in non-euro currencies, primarily the US dollar, pound sterling, and Brazilian real[484] - Liquidity risk is managed through a decentralized model with autonomous subsidiaries; the Group maintains robust liquidity ratios, with a Liquidity Coverage Ratio (LCR) of 166% and a Net Stable Funding Ratio (NSFR) of 123% at year-end 2023[485][1829][1837] Capital risk Capital risk management at Santander ensures the Group maintains sufficient high-quality capital to support its business strategy and meet regulatory requirements through its Internal Capital Adequacy Assessment Process (ICAAP) - The primary objective of capital risk management is to ensure sufficient, high-quality capital to cover all material risks and support the business strategy[489] - The Internal Capital Adequacy Assessment Process (ICAAP) is the core tool for managing capital risk, involving capital planning and stress testing under various scenarios[489][1893] - Capital planning and stress tests are used to analyze solvency over a multi-year horizon, ensuring compliance with internal and regulatory capital objectives even in adverse conditions[1910][1912] Operational risk Santander manages operational risk, defined as potential loss from inadequate processes, personnel, systems, or external events, through a comprehensive framework focused on identification, assessment, mitigation, and robust cybersecurity - Operational risk is managed through a corporate framework aligned with the three lines of defence model, focusing on identification, assessment, mitigation, and reporting of risks[491] - Technology and cybersecurity are critical components of operational risk management, with a strategy focused on protecting systems, defending against attacks, and building trust[493] - The Group has a business continuity management system to ensure the resilience of critical processes and services in the event of disruptions[494] Compliance & conduct risk Santander manages compliance and conduct risk through a dedicated function, focusing on preventing regulatory breaches, financial crime, and misconduct, supported by a global transformation program and ethical conduct framework - The Compliance and Conduct function operates as the second line of defence, responsible for managing risks related to regulatory breaches, financial crime, and misconduct[497] - A global transformation program, 'One Financial Crime Compliance' (One FCC), is being implemented to standardize and strengthen controls against money laundering, terrorist financing, and other financial crimes[498] - Customer conduct risk management ensures products are designed and sold fairly, with a focus on transparency and protecting vulnerable customers[500] - The General Code of Conduct and the 'Canal Abierto' whistleblowing channel are key tools for fostering a culture of integrity and ethical behavior[497] ESG risk factors Santander integrates Environmental, Social, and Governance (ESG) risks into its overall risk management framework, with a focus on climate and environmental risks, and active management of social and governance risks - ESG risks are integrated into the Group's risk management framework, with climate and environmental risks identified as the most material[507] - Climate risks are categorized into physical risks (acute and chronic) and transition risks (policy, technology, market, reputation), which can translate into traditional financial risks like credit and market risk[508] - The bank manages climate risk by incorporating it into its risk appetite, conducting materiality assessments of its portfolios, and integrating climate factors into credit processes and stress tests[509] - Social risks, such as human rights violations and inequality, and governance risks, like misconduct and greenwashing, are managed through dedicated policies, due diligence, and the bank's conduct framework[510][511]