Digital Expansion And AI Personalization Will Drive Stronger Long-Term Banking Performance

Catalysts

About Banco Santander (Brasil)

Banco Santander (Brasil) is a leading universal bank in Brazil, providing retail, SME and corporate banking services with a growing focus on digital channels and data driven customer relationships.

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

• Rollout of the global One App and open finance multibank capabilities should deepen primary relationships, lift transaction volumes and cross selling, and support mid single digit growth in client driven revenue and fee income while keeping acquisition costs contained, which is positive for earnings.
• Ongoing shift of the funding mix toward lower cost, transactional retail deposits and away from wholesale funding is structurally reducing liability costs, which should sustain wider spreads and improve net interest income and net margins even in a lower Selic environment.
• Expansion of AI first and hyper personalized interactions across acquisition, collections and loyalty journeys is already improving conversion and recovery metrics, and at scale should allow revenue growth to outpace headcount and branch costs, driving operating leverage and higher profitability.
• Disciplined reallocation of risk weighted assets from lower quality mass retail into higher quality mortgages, SMEs and select corporate exposures is improving portfolio mix and expected loss, which should gradually lower cost of risk and stabilize provisions as a share of revenue, supporting stronger net income.
• Faster growth in scalable fee rich businesses such as cards, consumer finance with bundled insurance and SME transaction banking leverages the existing customer base without commensurate balance sheet growth, enhancing fee income density per client and lifting return on equity as revenues compound.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Banco Santander (Brasil)'s revenue will grow by 26.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.3% today to 20.7% in 3 years time.
• Analysts expect earnings to reach R$20.4 billion (and earnings per share of R$5.33) by about December 2028, up from R$15.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, up from 8.1x today. This future PE is greater than the current PE for the US Banks industry at 8.1x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 22.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Execution success in the AI first and hyper personalization agenda, including the rapid scaling of the One App across products and geographies, could deepen customer primacy and transactionality faster than expected. This could lead to stronger client NII growth, higher fee income and structurally better net margins and earnings.
• The deliberate remix of the loan book toward lower risk, higher quality segments such as mortgages, SMEs with strong collateral and select corporates, combined with tighter renegotiation standards that purge legacy vintages, may drive a sustained decline in cost of risk. This would boost net income and return on equity above what a flat share price would imply.
• The strategic shift in funding towards lower cost, more loyal retail and transactional deposits, supported by better digital journeys and PIX based solutions, is already improving spreads. Continued progress in this mix could further compress liability costs and lift net interest income and net margins.
• Ongoing efficiency gains from technology, global platform sharing and structural cost actions, including headcount and branch rationalization and the group wide infrastructure carve out, support the ambition of nominal expense growth near zero. If sustained, this would drive a markedly better efficiency ratio and stronger earnings growth than a stable share price assumes.
• Completion of the 18 month ALM and hedging program that reduces NII sensitivity to interest rates, together with disciplined capital allocation and the potential for higher pre tax profits as legacy DTAs are amortized, could produce a more predictable earnings profile with rising profitability. This would undermine the expectation that the share price will remain unchanged.

Valuation

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

• The analysts have a consensus price target of R$34.46 for Banco Santander (Brasil) based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$43.0, and the most bearish reporting a price target of just R$27.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be R$98.7 billion, earnings will come to R$20.4 billion, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 22.8%.
  
• Given the current share price of R$32.32, the analyst price target of R$34.46 is 6.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.