Santander Central Bank Mandatory Reserves Coverage
This summary describes equity and quasi-equity investments that Banco Santander S.A. (Santander) has in its subsidiary in Peru, Banco Santander Peru S.A. (Santander Peru), and potential additional MIGA support under the Santander Central Bank Mandatory Reserves Program in Peru. The investor has applied for additional MIGA guarantees of up to US$100 million in mandatory reserves cover for a period of up to 4 years.
Spain-based Banco Santander is one of the largest global financial institutions in the world in terms of market capitalization with retail and commercial operations in countries across Europe, Latin America, and North America. Its subsidiary banks abroad are required to maintain reserves at the central banks in their respective jurisdictions, based on the volume of customer deposits that these subsidiaries have. Mandatory reserves contribute to Santander’s overall risk-weighted assets (RWA) at the consolidated level, resulting in less headroom for other assets at a given level of capital.
This project is categorized as FI-1 under MIGA’s Policy on Environmental and Social Sustainability (2013). Santander is a universal bank with subsidiaries across multiple countries, including Peru. Santander Peru provides financial products and services to corporate clients in Peru. The MIGA guarantee will provide additional coverage for Santander’s equity investment in Santander Peru, as such, the MIGA project will support the bank’s general lending activities.
The main environmental and social (E&S) risks of this project relate to Santander Peru’s ability to identify, assess, and manage the E&S risks and impacts associated with its lending activities and the management of labor matters at the bank. MIGA analyzed the Santander Peru’s portfolio for types of transactions, tenor, size, industry sectors, and exposure to MIGA’s Exclusion List. MIGA also analyzed Santander Peru’s E&S risk management procedures in line with the requirements of Performance Standard 1: Assessment and Management of Environmental and Social Risks and Impacts (PS1), and the bank’s labor practices in line with the requirements of Performance Standard 2: Labor and Working Conditions (PS2). The applicable E&S requirements for this project will be: (i) MIGA Exclusion List; (ii) applicable E&S laws and regulations in Peru; and (iii) MIGA Performance Standards.
As of December 2020, global corporate lending totaled 54% of Santander Peru’s portfolio, with large corporates representing 32% and SMEs 14%. The main sectors financed include mining, oil and gas, agriculture, construction, and services. These sectors are mostly medium to high-risk sectors. Santander Peru has no exposures to activities on the MIGA’s Exclusion List. The bank’s overall portfolio is considered to have potentially significant E&S risks and impacts; the project has thus been categorized as FI-1.
Santander Peru is an existing client since 2018. In line with MIGA’s E&S requirements, Santander Peru implements an E&S management system (ESMS) and the bank also has an E&S team responsible for the implementation of the ESMS. The ESMS includes a detailed procedure for identifying, assessing, and managing the E&S risks and impacts associated with the activities of its clients. Transactions are screened against the applicable E&S requirements as part of the bank’s credit approval process and E&S action plans are developed to address identified gaps where required. In addition, the bank monitors the E&S performance of Santander Peru’s clients. MIGA has been monitoring Santander Peru’s performance and the implementation of the ESMS is considered adequate. To complement the ESMS, Santander Peru will be required to develop a procedure for receiving and addressing E&S concerns and requests for information from third parties, in line with the requirements of PS1. This requirement will be included in the E&S action plan for this project.
Santander Peru’s emergency response procedures are in line with the requirements of PS1. In response to the COVID-19 pandemic, Santander Peru implemented workplace hygiene and social-distancing measures to minimize the risk of exposure for its employees and clients. As an existing client, Santander Peru has in place labor policies and procedures which meet the requirements of PS2, as well as national labor regulations in Peru.
Santander Peru will continue report periodically to MIGA on the implementation of the ESMS and application of the relevant Performance Standards.
Given the weakening macroeconomic conditions and the deteriorating global outlook post COVID-19, pressure is mounting on banks to optimize capital allocation and reduce risk exposures. The aim of MIGA’s proposed guarantees is to help Santander reduce the risk of some of its assets, which would lead to a reduction in the group’s RWA on a consolidated basis. The RWA capacity that is freed up is expected to be used by Santander Peru to extend more credit in Peru, including climate finance activities.
MIGA’s proposed coverage to Santander is aligned with the World Bank Group’s strategy for Peru under its objectives of enhancing the environment for sustainable private sector investments and strengthening the management of natural resources established in the Country Partnership Framework (CPF) for Peru (FY17-FY21), updated by the Performance and Learning Review of April 2019 . The Project is also aligned with the MIGA US$6.5 billion COVID-19 response package under its pillar of countering the adverse economic impacts during the crisis.