The Beat Was a Tax Beat: Santander Reaches Our Upgrade Trigger on a Quarter That Went Backwards Sequentially

Results vs. Consensus

Santander published Q1 2026 results before the Madrid open on 29 April. This is the first quarter reported under the presentation changes communicated to the CNMV on 10 February and the first without Santander Bank Polska, which closed on 9 January. Both facts matter for every comparison below, and are dealt with directly in the basis note that follows the tables.

Q1 2026 scorecard

The consensus column is Santander's own company-compiled analysts' consensus, published before the print and built line by line from thirteen contributing analysts. It is the right benchmark for a European bank because it is constructed on the company's own presentation basis, which in a quarter with a restated perimeter is the only benchmark that is like for like.

Both columns are additive on the same convention: 5,029 less 1,250 less 219 equals 3,560; 5,114 less 1,433 less 215 equals 3,466. The net-capital-gains consensus line was contributed by seven of the thirteen analysts.

Year-on-year: underlying income statement

Sequential: the direction nobody led with

Revenue

Total income of €15,140mn grew 5.6% in constant euros, comfortably inside the mid-single-digit guide for 2026 and 0.9% ahead of consensus. The composition is better than the headline. Net interest income of €11,019mn rose 5.3% in constant euros and beat by 1.5%, which is the single line that carried the revenue surprise. Fees of €3,357mn rose 6.6% and landed 0.4% short. Around 95% of total income is customer-linked, which is the structural claim management makes for the stability of the franchise and which the quarter supports.

Two things temper it. First, the guidance commitment is that fees grow faster than net interest income, and the gap this quarter was 1.3 points (6.6% against 5.3%). In 2025 that gap was more than eight points. The guide is being met on the letter and by a shrinking margin, and it is being met because net interest income has stopped falling rather than because fees have accelerated. Second, sequentially the revenue line went backwards: total income was down 0.6% in constant euros and fees down 4.3%, which management attributed to a softer CIB fee quarter after a record Q1 2025 in Europe and to seasonality in Retail and Openbank. Both explanations are reasonable. Neither changes the direction.

The quarter's revenue standout was CIB, where total income rose 15% in constant euros and net interest income rose 37%, on 18% loan growth and a strong Global Markets quarter driven by client hedging into volatility. That is the highest-quality-sounding line in the release and the one that deserves the most scrutiny, because it is also where the sequential provision jump came from.

Costs and operating leverage

This is the part of the print that was genuinely excellent. Total costs of €6,484mn fell 2.6% in euros, 0.9% in constant euros and 4% in real terms, against revenue up 5.6%. Net operating income rose 11% in constant euros. The efficiency ratio improved three points to 42.8%, against a 2028 destination of around 36%.

The distribution matters more than the aggregate. Retail and Openbank together are roughly 75% of the cost base, and Retail costs fell 5% in constant euros and 8% in real terms, taking Retail's efficiency ratio to 40.5%. UK retail costs fell 9% in constant euros, before TSB, taking that unit's efficiency ratio down 6.7 points to 55.2%. Spain's retail efficiency ratio is 31.9%. Headcount fell to 185,243 from 196,503 a year ago, and branches to 6,589 from 7,623. None of that requires a favourable rate cycle, which is the whole point of the pillar.

The network businesses grew costs, as designed: CIB +6% in constant euros, Wealth +4%, Payments +8%, in each case below revenue growth. That is investment inside positive jaws rather than cost creep.

Earnings per share and the below-the-line items

Underlying EPS of €0.234 rose 17.3% against underlying profit up 12.5% in euros. The five-point gap is the share count: shares excluding treasury stock fell to 14,426mn from 15,052mn a year earlier, down 4.2%, and down 1.7% in the quarter alone. Statutory EPS of €0.364 rose 69.3%, but that figure carries the entire €1,895mn Poland gain and is not a run rate.

Below the operating line the quarter was worse than modelled in two places. Loan-loss provisions of €3,225mn ran 3.5% above consensus, up 6.2% in constant euros, entirely because of Argentina; excluding Argentina, group provisions fell 2%. The other gains and provisions line at €402mn was more than double the €200mn the Street carried, and holds the €207mn motor-finance charge plus higher transformation charges in Openbank Europe. Those two lines are why pre-tax profit missed, and they are both recurring in character rather than exceptional: this is the second consecutive quarter with a UK motor-finance charge and the fourth calendar year running, and Argentina has been deteriorating for two.

Segment Performance

Global businesses

Total income and underlying profit columns are as reported in current euros; growth columns are the constant-euro figures management discloses, which is why the column pairs do not reconcile arithmetically. Payments reports an EBITDA margin (33.4%, up 4.8 points) rather than an efficiency ratio.

Retail & Commercial Banking

Underlying profit of €2,009mn grew 9% in constant euros on 2% revenue growth and a 5% cost reduction. That is 7 points of jaws inside the largest business in the group, and it is the cleanest evidence of the transformation thesis in the release. Fees rose 7%, cost per active customer fell 7%, and RoTE reached 16.7% against a 2028 target above 21%. The customer interaction platform is now live in five markets after deployment in Mexico during the quarter, and Gravity is fully implemented in Spain, Mexico and Chile with Brazil scheduled during 2026.

"Retail's underlying profit grew 9% year-over-year, driven by strong operational leverage with good revenue growth, both NII and fees and cost down 5%. Asset quality trends remained robust. In line with our expectation, with cost of risk improving year-on-year to 1.07%, excluding Argentina."
— Héctor Grisi Checa, Chief Executive Officer

Underneath the aggregate, Spain did the heavy lifting: retail pre-tax profit of €1,161mn rose 41%, on 5% revenue growth, a 7% cost reduction and a 61% fall in loan-loss provisions. The provisions contribution deserves flagging. A 61% year-on-year decline in a retail book is not repeatable, and the report attributes it to credit-quality improvement and balance-sheet optimisation rather than to a one-off release, but it is the largest single swing factor in the strongest geography in the group. Brazil's retail pre-tax profit fell 6% in constant euros on a 2% revenue decline. Mexico rose 9% with the efficiency ratio down four points to 39.8%. The UK rose 25% in constant euros.

Assessment: the pillar is doing what it promised and the sequential figures are the honest caveat: Retail's underlying profit was down 5% in constant euros against Q4. On a full-year view the business is compounding operating leverage under its own power; on a quarterly view the Q1 print is flattered by the Spanish provision line.

Openbank

Underlying profit of €290mn fell 38% in constant euros, entirely on the €207mn UK motor-finance provision and the end of US electric-vehicle tax incentives. Excluding motor finance, pre-tax profit grew 15%. The operating trends underneath are good: revenue up 5%, net interest income up 6%, fees up 13%, costs flat in real terms, and the efficiency ratio down 1.3 points to 42.8%. The funding story is the substantive one. The US digital bank has gathered €11bn of deposits since launch, worth around €150mn of annual net funding cost savings, and from 1 March the entire US auto book is funded by the group's own deposits rather than wholesale markets. Openbank Europe holds €82bn of deposits and Openbank US around €51bn.

The credit picture is the problem. Openbank's NPL ratio reached 5.51%, up 42bp year on year and 20bp in the quarter, with coverage down four points to 71%. The leasing book contracted 18% in constant euros to €13bn on lower residual values and reduced volumes. Cost of risk did improve, to 2.07%, supported by the US.

Assessment: a franchise being rebuilt competently from a monoline auto lender into a deposit-funded digital bank, with a credit book that is loosening while it happens. The funding transition is real and is worth roughly €150mn a year. The NPL trajectory (5.09% a year ago, 5.31% at December, 5.51% now, against falling coverage) is the thing to watch, and it is not being caused by motor finance.

Corporate & Investment Banking

Underlying profit of €889mn rose 16% in constant euros on 15% revenue growth, with net interest income up 37% and an RoTE of 20.9% on a 39.6% efficiency ratio. Loan growth was 18%. Fees fell 6% in euros against a record European Q1 2025. Management framed the Global Markets strength as client-driven rather than positional.

"Global markets, yes, you'll see a spike because or usually when there is volatility you have opportunities. It's mainly client business that we do in global markets. Okay? You'll see that in trading we have done pretty well, but this basically businesses with our customers, a lot of effects, a lot of hedging, as you can imagine, hedging interest rates. It's plain vanilla derivatives that we're selling to our customers."
— Héctor Grisi Checa, Chief Executive Officer

Set against that, CIB provisions rose 71% sequentially to €206mn, the cost of risk rose 16bp year on year and 9bp in the quarter to 0.23%, the NPL ratio rose 12bp in the quarter to 0.85%, and coverage fell nine points to 38%. The CFO attributed it to "some single names in Brazil and in Europe" and gave no quantum. The CEO, asked directly about risk-taking in a book growing at 18%, answered with sector examples rather than exposure figures: credit lines extended in oil because "the sector is strong, prices are going up".

Assessment: the returns are genuinely good and the capital discipline claim is supported by a 20.9% RoTE. But a book growing 18% with coverage falling nine points in a quarter, on losses management will describe only as single names, is the least transparent part of the group. Three quarters of this pattern would be a thesis problem; one is a question.

Wealth Management & Insurance

Underlying profit of €493mn rose 11% in constant euros on 5% revenue growth, with fees up 16% and assets under management at a record €545bn, up 10%. Private banking customer assets and liabilities grew 11%; insurance and asset management AuM grew 8%. Net interest income fell 7% on deposit cost inelasticity in a lower-rate environment, which is the structural characteristic of the business. The efficiency ratio is 36.6% against a 2028 target below 30% and an RoTE target above 60%.

Assessment: the highest-return business in the group and the one management flagged as the largest untapped opportunity, specifically in insurance, where the CEO said the group "punch below our weight" in every market. That is a credible multi-year fee driver and it is not yet in the numbers in size.

Payments

Underlying profit of €20mn against €4mn a year ago, on revenue up 20% and an EBITDA margin of 33.4%, up 4.8 points. Getnet total payments volume rose 11%; the Getnet account-to-account and card-processing platforms handled four billion transactions, ten times the prior year; Ebury grew active customers 32% to more than 27,000.

Assessment: the growth rates are real and the absolute contribution is not yet material at 0.5% of operating-area profit. The 2028 target is above 15% revenue growth and a c.45% EBITDA margin, so the margin is roughly two-thirds of the way there and the revenue rate is comfortably ahead.

Geographies

Current euros, as reported. Components sum to 3,559 against a 3,560 total because of rounding in the source table.

Assessment: this is the diversification pillar working exactly as advertised, and doing so under stress rather than in calm. Two units went sharply backwards, Argentina at -59.7% and Openbank Europe at -76.7%, and the group still grew underlying profit 14% in constant euros because Spain, Chile, the UK and Brazil more than absorbed them. Argentina contributed 1.5% of operating-area profit while running a 9.77% cost of risk. A group that can take that and still print a record is demonstrating the hedge rather than describing it.

Key KPIs

Customer, employee and branch counts for 2025 exclude Poland. The March 2025 balance-sheet columns include Poland; excluding it, loans would have been €1,026,664mn and deposits €1,028,690mn, which puts like-for-like loan growth at 4.3% and deposit growth at 3.0% in current euros, or 5% and 4% in constant euros on the company's own basis.

Credit Quality

Total loan-loss reserves ended the quarter at €23,572mn, and the group reports that collateral guarantees plus provisions cover almost 90% of total NPL exposure. Retail and Openbank account for around 90% of group provisions.

Assessment: the group headline is stable and three of the four sub-lines are not. The pattern in CIB and Wealth is the same shape: NPLs up, coverage down by 9 and 14 points respectively in a single quarter. Wealth is immaterial in absolute terms (€8mn of provisions). CIB is not, given an 18% growing book. Note also that the cost of risk, NPL ratio and coverage definitions all changed this quarter to include corporate exposures originated through private fixed-income products, so the 1.14% here and the 1.15% in our Q4 note are not measuring quite the same book.

Key Topics & Management Commentary

Overall Management Tone: confident and, on the operating story, entitled to be. The posture was noticeably less defensive than at the Q4 print, when the release landed alongside the Webster announcement and the following day's media briefing was cancelled; here management led with the cost line and let the numbers carry the argument. Where it was less convincing was on the two questions the Street pressed hardest: whether the quarter's capital generation repeats, which the CFO answered by explicitly disowning it as a central case, and where the credit deterioration in CIB actually sits, which drew sector anecdotes rather than exposure figures.

1. The tax line, not the operating line, made the beat

The pre-tax result missed consensus by 1.7% and the after-tax result beat it by 2.7%. The bridge is a 24.86% effective rate against 28.02% modelled. This was raised in the Q&A rather than volunteered in the prepared remarks, and the answer confirms it is macro-contingent rather than structural.

"In the first quarter, taxes eased, basically because of Brazil and Argentina, despite the end of the auto EV tax incentives in the U.S. As long as rates remain high in Brazil, we will continue to have a lower tax rate in Brazil. Again, the tax incentives in the U.S. means that we will have higher taxes."
— José García Cantera, Chief Financial Officer

Assessment: the mechanism is interest-on-capital deductibility in Brazil, which is worth more the higher the Selic rate. Management's own base case has the Selic falling from 14.75% to 13% by end-2026 and 12% by end-2027. The same easing cycle that management says will lift Brazilian net interest income removes this tax benefit. Investors should not capitalise the Q1 rate.

2. ONE Transformation is delivering absolute cost reduction, not just positive jaws

Costs fell in absolute terms while revenue rose, in a year with inflation, with no perimeter help. The CEO restated the mechanism plainly when asked why the UK cost line stepped down so hard.

"It's ONE Transformation. Remember, ONE Transformation is we're simplifying as much as we can. We are automatizing all processes. We're eliminating a whole bunch of people that we have in operations. We're sending that people basically to concentrate on the on the front line in order to be serving customers and trying to transform completely the way we service within the bank."
— Héctor Grisi Checa, Chief Executive Officer

The CFO extended the commitment forward into a worse macro, which is the version that matters for the 2028 target.

"Looking ahead, even in a scenario of high inflation, we expect to deliver cost reductions supported by the tangible benefits of ONE Transformation and additional mitigating actions, both firmly under our control."
— José García Cantera, Chief Financial Officer

Assessment: the strongest pillar in the thesis and the one that has been most consistently validated. A 42.8% efficiency ratio against a c.36% 2028 destination and a sub-€27bn cost-base target implies the work is roughly half done with three years to run. This is the reason the shares carry a premium multiple, and it is a defensible reason.

3. The Poland proceeds are diluting the return until the deals close

Underlying RoTE fell from 16.0% in Q4 to 15.2% in Q1 even though underlying profit was flat. The arithmetic is the denominator: tangible book value per share rose 6.4% in the quarter to €6.13 as roughly €6bn of CET1 arrived from the Poland disposal on 9 January and sat undeployed. Management addressed this directly, twice, with the same framing.

"In this concept of high capital levels, our underlying ROTE, adjusted for excess capital, would be around 16.5%."
— Héctor Grisi Checa, Chief Executive Officer

Assessment: the adjustment is legitimate and it is also an admission. The bank is carrying capital it cannot yet earn on because both destinations for it, TSB and Webster, are unclosed. The gap between 15.2% and 16.5% closes automatically when 210bp of CET1 leaves the balance sheet over the next two quarters, which means the reported return should improve for a mechanical reason before any synergy is delivered. Do not confuse that improvement with progress on the 2028 bridge.

4. Capital: 14.4% is a way-station and management said so

The CET1 ratio rose 0.9 points in the quarter to 14.4%, the highest on record. The bridge: 29bp of net organic generation (58bp of attributable profit less 31bp of capital distributions, on net-positive risk-weighted assets after risk-transfer activity), 20bp from regulatory and model updates driven by a Spanish SME model, and 42bp from markets and other items, of which 39bp is the Poland gain net of the associated buyback. The distance to the maximum distributable amount is 427bp and the CET1 management buffer is 452bp.

"The impact from TSB and Webster, which we now estimate at around 210 basis points, will be phased across the second and the third quarter."
— José García Cantera, Chief Financial Officer

Three analysts pressed the same point from different angles: at 14.4% the bank is only 140bp above the top of its own 12.8% to 13.0% year-end range, and 210bp of acquisitions are coming. The CFO's answer was that he feels "comfortable and very confident that we will be above 12.8% by the end of the year", and that a further 10bp to 20bp of regulatory headwinds are expected across the remaining three quarters.

Assessment: the year-end target is reachable but there is no slack in it. Start at 14.4%, subtract 210bp of acquisitions and up to 20bp of regulatory charges, and organic generation has to deliver roughly 65bp across three quarters to land at 12.8%. That is a touch above the 29bp-per-quarter run rate just posted, and the CFO explicitly declined to underwrite the run rate.

5. Asset mobilisation is doing the risk-weighted-asset work, and it may not repeat

The 29bp of organic generation rested on zero risk-weighted-asset growth, and that rested on mobilising €10bn of risk-weighted-asset equivalent through significant risk transfer in the quarter, roughly the same annualised pace as 2025. The CFO was unusually candid about the dependency.

"We obviously depend on the markets and demand for private credit in the next three quarters to be able to meet that condition. As long as the conditions remain, that part will continue to perform as it performed in the first quarter, but it is not entirely under our control."
— José García Cantera, Chief Financial Officer

Assessment: this is the least appreciated fragility in the capital story. A meaningful share of the group's reported capital generation is a market-contingent distribution activity, not a retained-earnings activity. It has worked for years and demand was described as strong, with credit selling at spreads similar to or tighter than 2025. It is still a channel that closes when private-credit appetite closes, and it would close at exactly the moment the group would most want it open.

6. The UK cost step-down arrived before TSB

UK retail costs fell 9% in constant euros and 13% in euros, taking the efficiency ratio down 6.7 points to 55.2% and pre-tax profit up 25% in constant euros. This is before TSB contributes anything.

"You will continue. I mean, that trend will continue even without TSB because we believe that we can run that bank in a much leaner way. We had a lot of manuality. We had a lot of complications. We're simplifying in a very important way. Yes, you will see costs coming down in the U.K. towards the end of the year."
— Héctor Grisi Checa, Chief Executive Officer

The offsetting UK line is funding. Deposit competition was described as intense ("we're killing each other for deposits"), net interest margin fell sequentially, and the structural hedge was roughly flat in the quarter at around GBP 101bn with a 2.5-year duration and a 3.0% yield. The CFO said the lengthening of that hedge "has had a very limited impact in the first quarter" and should contribute more over the next two quarters, with new investments going on at around 4%.

Assessment: the UK is the clearest evidence that the cost programme travels outside Spain, which was the specific doubt we flagged in February. The revenue side is the harder half and the hedge is the lever management is pulling; that lever is a rate position rather than a franchise improvement, and it should be scored as such when it starts contributing.

7. Motor finance, for a fourth year running

A further €207mn gross charge for potential UK motor-finance dealer-commission complaints, following €214mn in Q4 2025. The stock provision now stands at €725mn, or GBP 633mn. Our Q4 note recorded 2025 as the third consecutive year in which the group took a charge on this matter; 2026 makes four.

"In the U.K. Motor Finance, it's important to say, okay, we booked an additional EUR 207 million pre-tax provision this quarter. Current stock provision on this matter is at, sorry, EUR 725 million. That's GBP 633 million. I do believe that we're very well covered on our expectations."
— Héctor Grisi Checa, Chief Executive Officer

Assessment: the CEO went on to say "We believe we're done, on that", while acknowledging in the same breath that "this is always a moving target". At the Q4 print management characterised these charges as one-offs it did not expect to repeat, and then took another €207mn a quarter later, so we would not model the charge to zero. The more useful framing is that the charge has become a predictable annual drag of a few hundred million on a business earning €3bn of pre-tax profit before it, rather than a solvency question.

8. Argentina is the diversification hedge paying out a claim

Argentine underlying profit fell to €52mn from €129mn and the cost of risk reached 9.77%. The description of the mechanism was unusually direct: a disinflation programme that has drained pesos from the system, real rates near 40%, and a consumer book that could not carry them.

"Cost of risk went all the way to 9.77%, okay? We believe that it should normalize at around 7%. That's what we expect, and we are under control completely because we're not lending to consumer anymore, okay? We believe that if the government continues the way it goes, real rates should come down towards the end of the year, and we could come back to the market to start lending again."
— Héctor Grisi Checa, Chief Executive Officer

Assessment: the response is the right one: stop originating, lend only to dollar-earning corporates, wait. Argentina drove the entire group provision increase, and excluding it group provisions fell 2%. A unit contributing 1.4% of operating-area profit and taking a 9.77% cost of risk without moving the group's 1.14% is the diversification pillar being tested and holding.

9. Brazil and Mexico: a deliberate retreat from mass-market credit

Both large Latin American franchises are being repositioned toward funding quality and away from open-market consumer lending. In Brazil, deposits grew 6% year on year against 2% customer loan growth, with the yield on assets up 68bp and the cost of deposits up 58bp. In Mexico the credit card portfolio shrank 7% year on year, with the cost of risk around 2.7% and guided below 3% by year end.

"What we're doing right now in Mexico and Brazil mostly, we're not on the open market on credit cards and personal loans. We're only lending to our customers. We're growing the customer base, as José explained you, very much concentrated on payrolls because when you have the payrolls, you have all the information, you see what the customer does, you see the trends on how they consume, and then we give them credit."
— Héctor Grisi Checa, Chief Executive Officer

Assessment: a coherent and conservative posture, and the reason Brazilian retail pre-tax profit fell 6% while the Brazil geography grew 6.5%. It also means Brazil's contribution to the 2028 bridge, which requires that country's return to move from around 15% toward 20%, depends on rate relief rather than on volume. Management is assuming the Selic falls to 13% by end-2026, and quantified the sensitivity at €60mn of net interest income per 100bp.

10. The share count is finally moving, and the buyback is suspended for a month

Shares excluding treasury stock fell to 14,426mn from 14,678mn at December and 15,052mn a year ago. The issued count is unchanged at 14,689mn, because repurchased shares sit in treasury until cancellation, so the TNAV-denominator count is the one that reflects the programme's economics. The Second 2025 Buyback Programme of up to €5,030mn started on 4 February, comprising €1,830mn of ordinary distribution against H2 2025 results and €3,200mn of extraordinary distribution equal to about half the CET1 generated by the Poland disposal. Around 70% of the at-least-€10bn 2025-26 commitment has now been executed, and total shareholder remuneration against 2025 results is €7,050mn, split roughly evenly between cash and buybacks.

The footnote worth reading is that the programme is suspended between 24 April and 26 May 2026, ahead of Webster's stockholder meeting, for regulatory reasons.

Assessment: this is a genuine improvement on the February position, when we established this pillar as at risk because the 35% stock consideration for Webster looked likely to neutralise the programme. A 4.2% year-on-year reduction in the TNAV denominator is real, and it is most of the five-point gap between underlying EPS growth of 17.3% and underlying profit growth of 12.5%. The pillar is not resolved: the Webster stock consideration, roughly 2.05 Santander ADSs per Webster share against the 35% of a $12.2bn price, is still ahead and will issue new shares into the same window.

11. Capital allocation discipline was restated without being asked

Asked about inorganic opportunities in Mexico, the CEO used the answer to re-commit to the acquisition moratorium he set in February.

"Also important that we told the market that we are right now very concentrated on the TSB and Webster. We told the market that we're not gonna do any significant inorganic transaction, for the next two years, and we will continue to do that. We need to concentrate on integrating those two, and so far that's exactly what we're doing."
— Héctor Grisi Checa, Chief Executive Officer

Assessment: we flagged in February that any deviation from the stated moratorium would be a governance event rather than a data point. It was volunteered rather than extracted, which is the right sign. The one thing to note is the horizon: the executive chair's February formulation was three years; this one is two.

Guidance & Outlook

Every target was reiterated and none was raised. This is the first quarterly print since the Investor Day of 25 February 2026, so the guidance set here is the Investor Day set rather than a new one.

The 2026 targets exclude Poland, TSB and Webster; the 2027 targets include TSB and Webster; the CET1 targets include every inorganic impact. Investor Day also set 2028 destinations by business: Retail efficiency below 35% and RoTE above 21%; Openbank below 32% and around 16%; CIB below 43% and above 20%; Wealth below 30% and above 60%; Payments revenue growth above 15% with a c.45% EBITDA margin.

Implied run rate: the 2026 revenue target is mid single digit in constant euros and Q1 delivered 5.6%, so the year starts at or slightly above the bar. The cost target is an absolute reduction in constant euros and Q1 delivered 0.9%, which is a narrow margin: a single quarter of adverse mix would put the full-year commitment in question, and management's own framing is that the target holds "even in a scenario of high inflation" because of mitigating actions. The efficiency ratio at 42.8% is already inside the sub-43% full-year level implied by the revenue and cost guides, which was put to management directly and drew a confirmation that the trend continues rather than a specific quarterly path.

Street at: the pre-print consensus embedded €14,999mn of total income and €3,466mn of underlying profit for the quarter. Both were exceeded, and no full-year figure was revised on the call.

Guidance style: conservative and, this quarter, conspicuously so. Q1 came in at or above the bar on revenue, costs, efficiency and capital, the CEO called it "a great start of the year", and nothing was raised. That is consistent with the pattern set at the Q4 print, where the group also guided to a level it had effectively already reached. It leaves room for a raise later in the year and it also means the current guide contains no information about upside.

Analyst Q&A Highlights

Whether the quarter's capital generation repeats

This was the dominant topic on the call, raised in the first question and returned to twice more by different questioners. The bank generated 29bp of organic capital against a backdrop of zero risk-weighted-asset growth, and sits 140bp above the top of its own year-end range with 210bp of acquisitions to absorb. The response was notable for refusing the flattering interpretation: management declined to treat Q1 as a run rate, and named the two specific dependencies (asset mobilisation volumes and the valuation of deductions) that are outside its control.

Q: "Just to follow up on capital, because if I look at, I think it's slide 25 on the capital bridge, it does look like you're going to be above that 12.8%-13% range based on what you've produced in Q1. José, can you sort of walk us through the rest of the year in terms of organic? I know you've touched on the capital headwinds. If you are above 13%, extraordinary distributions on the cards potentially if you end up above 13% this year?"
— Alvaro Serrano, Morgan Stanley

A: "In a perfect scenario where everything behaves well, et cetera, can we have three quarters more or less in line with the first quarter? It may be, but again, that I don't think should be our central scenario."
— José García Cantera, Chief Financial Officer

Assessment: the answer is more useful than a confident one would have been. It tells you the year-end 12.8% to 13.0% target is a genuine target rather than a floor management is sandbagging, and it removes the extraordinary-distribution speculation without saying no. The question about above-13% distributions was not answered, which is the correct answer three quarters ahead of the decision.

The UK cost step-down and whether it is durable

UK retail costs fell 9% in constant euros in a quarter, before any TSB contribution, which is a large enough move to raise the question of whether it is structural or a timing artefact. The answer located it in the same programme driving group costs and extended the commitment through year end.

Q: "In particular what stood out to me was U.K., very large step-down. Can you sort of maybe talk to that step-down in cost in U.K., and is that sustainable? Can we see more, even ahead of TSB?"
— Alvaro Serrano, Morgan Stanley

A: "That trend will continue even without TSB because we believe that we can run that bank in a much leaner way. We had a lot of manuality. We had a lot of complications. We're simplifying in a very important way. Yes, you will see costs coming down in the U.K. towards the end of the year."
— Héctor Grisi Checa, Chief Executive Officer

Assessment: a direct commitment with a date attached, which makes it gradeable next quarter. In February we flagged that the transformation had been deliberately slowed in the UK and the US pending the acquisitions; this quarter contradicts that concern in the UK specifically, and it does so on the cost line rather than in narrative.

Motor finance: whether the provision is finally complete

The second consecutive quarterly charge and the fourth calendar year running, and the second question in a row on the topic from a different questioner. Management disclosed the running stock provision, which had not been in the release, and then made a completion statement while hedging it in the same answer.

Q: "I don't know if you could comment a little bit about the U.K. core financing charges and if you consider it done for the current level."
— Andrea Filtri, Mediobanca

A: "We booked an additional EUR 207 million pre-tax provision this quarter. Current stock provision on this matter is at, sorry, EUR 725 million. That's GBP 633 million. I do believe that we're very well covered on our expectations. You know that this is always a moving target, given that some of the customers basically can go and sue directly, et cetera. We don't expect that to be much more than we have already have done. We believe we're done, on that."
— Héctor Grisi Checa, Chief Executive Officer

Assessment: the GBP 633mn stock figure is the useful disclosure and it was extracted rather than offered. The completion claim is worth less: the same claim, in similar words, has preceded each of the last several charges. Treat the annual charge as a modelling assumption rather than as a tail risk.

Argentina, Mexico and where credit is actually deteriorating

The most comprehensive credit answer of the call, covering the retreat from Argentine consumer lending, the deliberate shrinkage of the Mexican card book, and an unprompted sizing of private-credit exposure. The Argentine numbers are severe in isolation and the group absorbed them without moving.

Q: "With recent macro volatility, are there any areas or geographies of caution emerging? Specifically on Argentina and Mexico, where cost of risk has a step-up quarter-on-quarter, can you walk us through the key drivers and how should we think about the run rate for the rest of the year? Also following recent stress cases in private credit, how should we think about Santander's posture and risk controls in this area?"
— Cecilia Romero, Barclays

A: "In terms of private credit, look, this is not a core business for us, as you know. It's less than 1% of the total portfolio of the bank. We are very much concentrated in the very good names in the market. 70% of what we have outstanding there is subscription lines to the best names in the industry. We don't foresee any problems at that. The other risk that we have is very much concentrated in what we know best, which is project finance, which is energy."
— Héctor Grisi Checa, Chief Executive Officer

Assessment: the private-credit answer is the model for how the CIB single-name question should have been answered and was not. It sizes the exposure (under 1% of the book), characterises it (70% subscription lines), and names the residual risk (energy project finance). Applied to the same disclosure standard, the single names driving a 71% sequential provision increase in CIB would have a number attached to them.

Significant risk transfer: the volumes, the regulator, and roll-over risk

A well-constructed question that put a multi-year series next to the capital bridge and asked whether the mechanism survives a worse macro. The answer confirmed the pace, credited a durable competitive position, and then conceded the dependency.

Q: "My first question is just on the asset rotation and the SRTs. You have done quite a lot on this front in recent years. I think back in 2024 you did around EUR 60 billion, last year I think EUR 40 billion, this quarter EUR 10 billion. If I do like back of the envelope calculations, I get the quite meaningful capital impacts. What is the regulator saying about all this asset rotation, and how confident are you that you can roll it over, especially if we have kind of deterioration in the macro environment?"
— Sofie Peterzens, Goldman Sachs

A: "We mobilized EUR 10 billion in risk-weighted assets equivalent. Times four is 40, more or less at the same rate we did last year. One could have expected that with the current market conditions, the demand for these assets would have been less. Well, probably because we've been doing this for a long time, investors know our systems and the quality of the assets that we sell. I think we have a competitive advantage relative to other market participants."
— José García Cantera, Chief Financial Officer

Assessment: the demand evidence is concrete (credit sold at spreads similar to or below 2025 levels, with more investors participating) and the caveat is explicit: management would "readjust our capital hierarchy immediately" if the channel closed. The supervisory half of the question was not addressed at all. Given that this activity substitutes for retained earnings inside the reported capital bridge, the regulator's view of it is a material unanswered question.

The tax rate that made the beat

The only question that went directly at the earnings-quality issue, and it came late in the call as the third part of a three-part question. The answer confirmed both the driver and its impermanence.

Q: "Just lastly, on the tax rate, which was, I guess, lower than expected this quarter, you're doing more interest on capital in Brazil, I guess. Should we expect the tax rate to be hovering around the 25% for a while, or what would be your expectation for the full year?"
— Britta Schmidt, Autonomous

A: "It's, it's, you know, difficult to forecast, but I would presume that we are gonna see a slight increase, gradual slight increase in the tax rate towards the end of the year. Again, it very much depends on the level of rates in Brazil."
— José García Cantera, Chief Financial Officer

Assessment: management did not dispute the premise, which is that the rate was lower than expected. Nobody on the call connected the rate to the profit beat out loud, and the connection is the whole story of the quarter: the 316bp gap between the 24.86% posted and the 28.02% modelled is worth more than the entire beat.

The Spanish bond build and whether it lifts Spain net interest income

A precise question that identified a roughly €6bn quarterly increase in the bond portfolio concentrated in Spain and asked whether that creates upside to the low-to-mid-single-digit Spanish NII guide in a higher-rate world. The answer restated the guide and described the deposit franchise without engaging the balance-sheet question.

Q: "Firstly is on the NII. I saw that your bond portfolio increased by around EUR 6 billion in the quarter, excluding Poland, I think mainly in Spain. I think that there may be upside related to your guidance for NII in Spain particularly we have a higher interest rates."
— Borja Ramirez, Citi

A: "The most important factor is the extremely good management of our deposits. The cost of deposits in Spain is being kept under control while we are growing volumes. We are actually growing asset market share in deposits substantially, basically because we are growing payroll. Now our outlook for NII in Spain is up year on year, low, low to mid-single digits increase in NII in Spain in 2026."
— José García Cantera, Chief Financial Officer

Assessment: the question asked about the securities book and the answer was about deposits. Both are true and only one was asked. The size, yield and duration of the Spanish ALCO portfolio were not given, and this is the second consecutive quarter in which a growing structural interest-rate position has been described qualitatively rather than sized. It matters because the thesis distinguishes revenue earned from the transformation, which the multiple pays for, from revenue earned by taking duration, which it should not.

What They're NOT Saying

1. The quantum of the CIB single names. Provisions rose 71% sequentially, coverage fell nine points to 38% and the NPL ratio rose 12bp, on a book growing 18%. Two separate questioners approached it and both got sector characterisation rather than exposure figures. Management had just demonstrated, on private credit, that it can size an exposure when it wants to.
2. The size, yield and duration of the Spanish ALCO portfolio. Asked directly about a c.€6bn quarterly increase concentrated in Spain, management answered on deposits. A structural rate position that is growing while retail loan growth is 1% is a different earnings source from the one the transformation story describes.
3. Any quantified walk from 15.2% to above 20% RoTE by 2028. The target was reaffirmed in the prepared remarks and named the group's "financial North Star". Investor Day supplied destination targets by business; it did not supply the bridge. This is now the third consecutive results event at which the target has been restated and not decomposed.
4. What the supervisor thinks of the risk-transfer programme. The question explicitly asked what the regulator is saying about the scale of asset rotation. The answer covered investor demand and competitive positioning and did not mention the regulator once.
5. Any Webster synergy progress. The $800mn cost-synergy programme with a full run rate by end-2028 was the central justification for the February acquisition. It was not mentioned in the prepared remarks and no analyst asked. With the deal unclosed there may be nothing to report, but the absence means the first data point on the largest capital-allocation decision in years is still ahead.
6. Whether the buyback suspension changes the 2026 execution schedule. The programme is paused between 24 April and 26 May for the Webster vote. This appears only as a footnote in the release and was not raised on the call, despite three separate questions about capital and distributions.
7. Any acknowledgement that the profit beat was a tax beat. The prepared remarks led with a record profit and an eighth consecutive record quarter. Neither speaker connected the after-tax outcome to the pre-tax shortfall, and the tax question, when it came, was the third part of another analyst's question.
8. The composition of the corporate centre's other-income line beyond a partial answer. Asked what sits in it, the CFO named "the valuation of Merlin and some equity stakes". The equity-method line rose to €313mn from €161mn, contributing to the other-operating-income beat, and was not sized item by item.

Market Reaction

• Pre-print setup (Madrid, currency of record): the ordinary shares closed at €10.37 on 28 April, up 3.0% year to date, up 9.3% over the trailing 30 days and up 61.3% over twelve months, inside a 52-week closing range of €6.34 to €11.16. The shares had closed the quarter at €9.49 on 31 March, 5.8% below the December level, and then rallied into the print.
• Reaction session (Madrid, 29 April): opened at €10.47 (+1.0%), traded a €10.32 to €10.54 range, and closed at €10.47, up 1.0%. Volume of 22.8mn shares was 0.7x the 30-day average.
• Reaction session (NYSE ADR, 29 April): opened at $12.23 (+1.3%) from a $12.07 pre-print close, traded $11.96 to $12.26, and closed at $11.98, down 0.7%, on 7.0mn shares against a 10.5mn 30-day average. The S&P 500 was unchanged on the day.
• Reconciling the two lines: EUR/USD fell 0.32% on 29 April, which accounts for roughly a fifth of the 1.7-point divergence. The rest is session timing. Madrid closes four and a half hours before New York; the ADR opened consistent with Madrid's gap and then gave the move back through the US afternoon, closing near the low of its range.

The most informative feature of the reaction is what did not happen. A quarter that printed a record profit, a three-point efficiency improvement, an all-time-high capital ratio and a 3.1% beat on statutory profit moved the shares 1.0% on seven-tenths of normal volume. That is not a market that disbelieves the numbers. It is a market that had already paid for them: the stock rose 9.3% in the four weeks into the print, from €9.49 to €10.37, so most of the good news was purchased in advance.

The second feature is the fade. Both lines opened up and Madrid held its gain while New York surrendered it. Where a US session has the whole release, the presentation and the full call transcript available, and Madrid traded largely on the release and the call in progress, a fade in the later session is consistent with the print reading better in headline than in detail. The pre-tax miss, the doubled other-provisions line and the tax-driven bridge to the beat are all findings that require the income statement rather than the press release.

Positioning explains the muted response better than the print does. Entering the day the shares were up 61.3% over twelve months and within 8% of the 52-week closing high, having already absorbed the Poland monetisation, the Webster announcement and the Investor Day. On that setup, an in-line-to-slightly-better quarter with a soft pre-tax line is a hold, not a buy, and the tape said so.

Street Perspective

Debate: is the revenue self-manufactured or rate-assisted

Bull view: the cost line settles it. Costs fell in absolute constant-euro terms while revenue grew 5.6%, headcount is down 5.7% and branches down 13.6% in a year, and the efficiency ratio improved three full points. No rate cycle produces that. The revenue mix reinforces it, with around 95% of income customer-linked and fees growing faster than net interest income again this quarter, as guided.

Bear view: the fee-over-NII gap has collapsed from more than eight points in 2025 to 1.3 points here, and it closed because net interest income stopped falling rather than because fees accelerated. Meanwhile the securities book grew roughly €6bn in the quarter, concentrated in Spain, against 1% Spanish retail loan growth, and management would not size it. The UK plan for net interest income improvement runs explicitly through lengthening a GBP 101bn structural hedge into 4% paper.

Our take: both are right about different halves of the income statement. The cost half is self-manufactured beyond argument and is the reason to own the shares. The revenue half is becoming more rate-dependent, not less, and the disclosure around it has thinned at exactly the point it should be thickening. We would score the transformation pillar as confirmed and put the fee-mix pillar on watch.

Debate: does the capital position support a bigger distribution

Bull view: 14.4% is an all-time high, 140bp above the top of the year-end range, with a 452bp management buffer and a 427bp distance to the maximum distributable amount. Organic generation ran at 29bp in the quarter, the Poland proceeds have been half-returned already, and the group has completed roughly 70% of a €10bn buyback commitment. If organic generation holds, there is room above 13% by year end and therefore room for an extraordinary distribution.

Bear view: 210bp of acquisitions land across the next two quarters, another 10bp to 20bp of regulatory charges are guided, and the CFO explicitly refused to make Q1's generation the central case because it depended on mobilising €10bn of risk-weighted assets into a private-credit market whose appetite is not the bank's to control. Start at 14.4%, subtract 230bp, and reaching 12.8% still needs roughly 65bp of organic generation across three quarters.

Our take: the bear framing is management's own. The year-end range is achievable and it is not comfortable, and the honest read of the CFO's answer is that he was steering the Street away from extrapolating. Anyone underwriting an extraordinary distribution this year is underwriting a private-credit bid three quarters forward.

Debate: is 1.7x tangible book the entry point or the fair value

Bull view: tangible book plus cash dividend per share is compounding at 19%, the shares de-rated from 1.93x in February to 1.71x here, and the 2028 target of an above-20% return would warrant well over 2x. The share count is now falling on the measure that matters, and two acquisitions close this year into a bank that has proven it can cut costs.

Bear view: at a 15.2% underlying return, an 11% cost of equity and 3% terminal growth, the warranted multiple is 1.53x, so 1.71x is a 12% premium to what this quarter's return justifies. The gap is entirely a bet on the 2028 bridge, which has been reaffirmed three times and quantified zero times. And the return that closes the gap arrives partly for a mechanical reason, when excess capital leaves for TSB and Webster, rather than through delivery.

Our take: the market is currently paying roughly for the excess-capital-adjusted return management quoted (16.5%, warranting 1.69x against a 1.71x spot) and nothing for the 2028 plan. That is a reasonable place for the shares to sit and it is not an inefficiency. The upside case requires the bridge to become credible; the downside case requires the transformation to stall. Neither happened this quarter.

Model Update & Valuation Framework

Valuation. Tangible book value per share was €6.13 at 31 March, up from €5.76 at December and €5.46 a year earlier. Against the 29 April Madrid close of €10.47 that is 1.71x tangible book, down from the 1.93x at which we initiated in February and up from the 1.55x at which the quarter ended on 31 March.

On the same framework we have used since initiation, an 11% cost of equity and 3% terminal growth, the warranted multiple is (RoTE less g) divided by (CoE less g):

The range is skewed upward and the base case sits almost exactly on spot. Two comparisons make the move since February concrete. At initiation, the same 15.2% return warranted 1.525x on a €5.76 book, or €8.79, against an €11.09 share price: a 26% premium. Today the identical calculation gives €9.35 against €10.47: a 12% premium. The premium halved, and it did so through a 5.6% fall in the share price and a 6.4% rise in tangible book rather than through any change in the return.

Valuation impact: the risk/reward has genuinely improved and it has not improved enough to change the rating. Roughly 11% of downside to what this quarter's return warrants, against 24% of upside if a target reaffirmed three times and quantified never is delivered in full.

Thesis Scorecard Post-Earnings

Scored against the standing thesis established at initiation in February 2026, pillar for pillar.

Overall: the thesis is modestly stronger than in February and its shape has changed rather than its conclusion. The operating pillar strengthened, the capital-return pillar started to prove itself on the share register, and two of the four bear points de-escalated. Against that, the fee-mix pillar weakened, consumer credit escalated, and the quarter's headline beat was manufactured by a tax rate management expects to reverse. The valuation constraint eased by roughly half and remains the binding one.

Action: hold. In February we said we would move to Outperform on a de-rating toward 1.7x tangible book or on the first credible evidence that the Webster synergies are landing. The first condition was met: the shares traded at 1.55x on 31 March and closed the print at 1.71x. We are not upgrading on it, and the reason is timing rather than reluctance. The de-rating that satisfied the trigger has already been given back, with the shares 10.3% above their 31 March close before this print, and this quarter's earnings quality does not justify paying up for a rally that has happened. The second condition is untouched, because Webster is unclosed and its synergy programme was not mentioned. We would upgrade on a return to roughly 1.55x tangible book, which is €9.50 on today's book, or on the first quarter in which the 2028 return bridge is decomposed rather than reaffirmed.