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We rebase our Santander model for the Poland disposal, TSB consolidation, the approved Webster acquisition, and the restated reporting basis. We credit most of the 2026-28 plan but assume roughly half the cost program, leaving 2028 returns just short of management's target.

Why it matters: Santander's 2028 targets rest on a EUR 4 billion–EUR 5 billion efficiency program taking cost/income to about 36%, a level it has never operated at and one that would place it in the top quartile globally in perpetuity. We forecast roughly half of that, leaving 2028 cost/income near 40%. Synergies from the TSB and Webster acquisitions are well-guided, but targeted merger synergies in banking often fail to materialize, and we take a conservative view. Broader gains from Santander's ongoing transformation program are less well-defined. Our revenue forecasts sit in line with guidance. Net interest income is underpinned by the structural hedges in Spain and the UK, which reprice upward regardless of policy rates, while fee growth continues to outpace it as wealth, payments and insurance scale on a broader customer base.

The bottom line: We increase our fair value estimate for narrow-moat Santander to EUR 11.30 from EUR 8.00 previously. We view the shares as fairly valued. We believe the market has fully discounted the 2026-28 plan and that further upside will have to come from outperforming the plan. We continue to assign a High Morningstar Uncertainty Rating to Santander. Integrating two banks in two jurisdictions, on top of a groupwide technology replacement, leaves management little room for error. We upgrade its Morningstar Capital Allocation rating to Standard from Poor previously. While we question the wisdom of acquisitions in its two least profitable major markets, we do have to recognize that capital deployed for organic growth continues to support profitability improvements.

We value Santander at $13 per share, equal to 1.9 times Santander's tangible book value at the end of 2026 and 9 times our 2027 earnings per share estimate.

Net interest income growth remains the foundation of our forecast, but the outlook is more balanced than for most European banks. Lower interest rates in Europe will pressure earnings from Santander's European lending businesses, but that is offset by higher contributions from Latin America and by the gradual rollover of low-yielding positions within the bank's structural hedge. As a result, we expect Santander's net interest margin to remain close to 2.9%, rather than decline materially as it has for many European peers. The funding profile also helps. Most lending is still supported by low-cost current account deposits, allowing the bank to increase volumes without having to compete aggressively on deposit pricing.

Fee income grows faster than net interest income throughout our forecast. We expect fees to grow faster than net interest income over the next several years, driven by payments, wealth management, and corporate and investment banking. These businesses generate attractive growth without requiring significant additional capital. As a result, Santander's earnings should become less dependent on the interest rate cycle and more diversified across revenue streams.

Costs are where we part company with management guidance most clearly. We forecast the efficiency ratio improving to roughly 40% by 2028 against a target of about 36%. and we do not assume Santander cuts its absolute cost base while absorbing two acquisitions. While recent acquisitions should create cost synergies, we believe those benefits will take time to emerge. Integration expenses and restructuring costs are likely to weigh on results before savings are fully realized, and ongoing technology investments will continue to absorb resources. We agree with the direction of travel but expect progress to be slower than management anticipates.

Our forecasts show return on tangible equity continuing to rise, although it remains just below management's target of more than 20% by 2028. Importantly, this is not an earnings issue. Our profit forecast is broadly consistent with management's ambition. The difference comes from capital. Santander is generating capital faster than it is distributing it, which increases the equity base and makes it harder to achieve the targeted return. Future distributions therefore matter as much as earnings growth. The planned shift toward a higher cash dividend from 2027 and the commitment to return excess capital at the end of the plan should help close that gap.

Our cost of equity of 11.1% deserves explanation, because it looks high for a bank of this quality. It rests on a beta of 0.9, below the sector average, which reflects the earnings stability that two decades of geographic diversification have actually delivered. Working the other way is a country risk premium of about 2 percentage points, which we apply for the Latin American operations. That is the central tension in valuing Santander: the same diversification that steadies its earnings and lowers its beta also raises the discount rate we apply to them.

We base our narrow Morningstar Economic Moat Rating for Santander on its cost advantage and high switching costs.

Access to cheap deposit funding is one of the critical cost advantages a bank can enjoy. Santander holds a top-five deposit position in most of its core markets and ranks in the top three for individual customer satisfaction in eight of the nine countries it measures. Its weakest positions sit in its two largest developed markets outside Spain: about 10% of UK deposits including TSB, and an 8% weighted average share of deposits across the Northeastern metropolitan areas where its US bank operates.

Santander funds itself primarily through customer deposits with limited need for institutional funding. Demand deposits, the cheapest and stickiest source of funding, make up 53% of total customer funds. A strong position in current accounts brings added benefits. Being a client's primary banker positions Santander to cross-sell other products, and loans to a primary banked client tend to carry higher credit quality, because Santander has direct insight into the client's financial health.

While banks have historically struggled to extract efficiencies across borders in retail banking, Santander seems to be an exception. We attribute the underlying advantage to the economies of scale and scope that Santander's multinational and multiproduct model generates. Santander sells products it develops centrally to clients in different countries using the same back-office infrastructure and processes. Its One Transformation program pushes that logic further by replacing local systems with a single global platform.

Under our banking moat framework, a moat from switching costs arises where banks hold strong relationships with their clients and limited competition exists between banks.

Santander's retail banking product range is commoditized, but it involves cross-selling various lending, savings, and transactional products to the same client with opaque, intertwined pricing. This makes it difficult for clients to switch banks. We like the small and medium-size company and midcorporate bias in Santander's business mix, as we view these as moaty businesses where strong client relationships and bespoke lending products based on knowledge of the client's business are key differentiators.

Santander operates in markets that are either already highly consolidated and oligopolistic or moving in that direction. In Brazil, state-owned banks account for 40% of deposits and private banks 60%. Itau, Bradesco and Santander control 70% of privately owned banks' deposits. The diminished importance of the politically controlled cajas led to increased consolidation in Santander's Spanish home market, where the top-five banks now control 66% of deposits. The UK has always been a concentrated market, where the five major clearing banks hold current account market share of close to 90%.

The acquisitions of TSB and Webster deepen Santander's presence in its two least advantaged markets. Neither transaction changes our moat rating. TSB lifts Santander only to third place in UK current accounts and fourth in mortgages, which improves scale without creating the primary-banking relationships that generate switching costs. Webster brings commercial deposits in the Northeast, a genuine funding advantage, but on a base too small to shift the group. Santander's moat still rests on Spain, Brazil, Mexico, and Chile.

Santander operates in regions with higher growth prospects and levels of profitability compared with its European peers.

A focus on retail banking and geographical diversification gives greater stability and visibility to Santander’s earnings.

Streamlining Santander's portfolio could unlock significant value.

With 70% of its earnings coming from outside the eurozone, Santander is highly exposed to currency risk, especially emerging-market currency risk.

Santander is heavily exposed to Latin America, a volatile economic and political region that has seen many banking systems collapse over the years.

Management seems reluctant to dispose of underperforming businesses.