Spanish bank Santander expects it will take three years for profits to return to normal as higher regulatory and funding costs bite while the credit cycle gradually improves.
The euro zone's biggest bank expects its return on equity to improve by between 3 and 6 percentage points over the next three years and sees profits in emerging markets growing by at least 10% in the short to medium term, compared to "single-digit growth" in profit in mature markets.
"With our solid business model and a great effort from all our units, it is within our reach to return to levels of RoE of 12-14%," said Alfredo Saenz, chief executive. The bank's RoE dropped to 9.4% in the first half of this year.
Rivals including HSBC , Barclays and BNP Paribas are also trying to lift profitability that has slumped due to the need to hold more capital. Banks are selling assets to shrink balance sheets and cutting costs.
Santander outlined its expectations as it began meetings with investors and analysts in London on Thursday and Friday.
The bank said its British arm plans to spend almost 500 mln pounds ($783 mln) in the next two years to improve returns to 16% of tangible equity as it gears up for a flotation of the unit.
It is expected to spin off and list its British operations in 2013, delayed from this year due to due to the uncertain impact of regulatory change, financial market turmoil and a delay in its integration of branches bought from RBS.
Santander expects losses from bad debts to start improving next year in Spain and Portugal, and will aim to "regain lost profit" and generate 2 bln euros in excess free capital a year in 2013 and 2014.
It expects the Spanish retail loan book to shrink by 3% and deposits to rise by 5% a year through 2013, as it focuses on attracting profitable customers.
The euro zone's biggest bank, in line with other Spanish banks, has suffered from continued exposure to the country's moribund economy, where one in five is unemployed. Spain remains a weak spot for Santander, despite a decade of aggressive expansion abroad.
Santander said it is targeting a compound annual growth rate (CAGR) in gross income of 6% between 2011 and 2013.
By 1130 GMT Santander's shares were up 0.64% at 6.12 euros, underperforming a 0.86% rise by the European bank index. Santander's shares have dropped 29% since the end of April.
RETURNS RECOVERY?
The expected recovery in profitability takes into account the high costs of new regulations and funding and will come about through a normalization of provisions in mature markets.
The current low-interest rate environment could favour future results, Saenz added.
Santander said it generates attractive returns in both emerging markets and mature economies, and the high levels of free capital generated in mature countries supports emerging markets growth.
The bank said it expects profits in Brazil to grow by 15 percent both next year and in 2013 and it plans to open 300-360 branches there in the next three years.
"Brazil has been the growth driver for Santander over the last couple of years and it seems that the bank is not worried about that market overheating, which many economists have forecast," a US asset manager based in London said.
In Chile, the bank predicts growth of over 10 percent, while profits in Mexico should rise by 15-20 percent in 2012 and 2013.
