FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):  March 5, 2015

Santander Holdings USA, Inc.

(Exact name of registrant as specified in its charter)

Virginia		1-16581		23-2453088
(State or other Jurisdiction of Incorporation)		(Commission File Number)		(IRS Employer Identification No.)

75 State Street, Boston, Massachusett		02109
(Address of Principal Executive Offices)		(Zip Code)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

£	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

£	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

£	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

£	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01.  Other Events.

Introduction

Santander Holdings USA, Inc. (the "Company") is a large financial services holding company in the U.S. with $113.5 billion in assets as of September 30, 2014.  Based in Boston, Massachusetts, the Company offers through its subsidiaries a full range of consumer and commercial banking products and services.  The Company has developed and utilizes stress testing processes that capture its unique mix of businesses, risks and geographic footprint.

Dodd-Frank Stress Test Requirements

In October 2012, the Board of Governors of the Federal Reserve System (the "Federal Reserve") issued a final rule on supervisory and company-run stress test requirements for bank holding companies ("BHCs") with total consolidated assets of $50 billion or more which, as amended on October 27, 2014,  requires the Company to publish a summary of the Annual Dodd-Frank Act Stress Test ("DFAST") results based on the Federal Reserve's supervisory severely adverse and adverse scenarios in March of each year.

The Company is further required to employ the following assumptions (the "Dodd Frank Act Stress Testing Capital Actions") regarding its projected capital actions over the forecast horizon (nine quarters, beginning October 1, 2014 and ending December 31, 2016):

 

•     No redemption or repurchase of any capital instrument eligible for inclusion in the numerator of a regulatory capital ratio.

Macroeconomic Scenarios

The Federal Reserve provides downturn macroeconomic scenarios which firms are required to employ in their annual stress testing processes.  For a complete description of the supervisory scenarios and corresponding macroeconomic variables, please see: http://www.federalreserve.gov/newsevents/press/bcreg/20141023a.htm.

The supervisory severely adverse scenario reflects substantial weakening in global economic activity, accompanied by large reductions in asset prices.  During this deep and prolonged recession, the unemployment rate peaks at 10 percent, accompanied by a decline in real GDP of 4½ percent.  Despite the decline in real economic activity, increases in oil prices result in an increase in the Consumer Price Index ("CPI") in the forecast horizon.

The United States corporate sector experiences significant financial distress leading to widening of corporate bond spreads and a decline in equity prices.  The deterioration is particularly concentrated in lower rated firms, as investors pull back from a variety of assets linked to these borrowers.  Investment grade firms are also under pressure, as spreads on investment-grade corporate bonds increase from approximately 170 basis points to 500 basis points at peak.  Mortgage rates also increase over the course of 2015.

Treasury yields across maturities are significantly lower throughout the severely adverse scenario than in the Federal Reserve baseline or consensus projections.  Short-term interest rates remain near zero through 2017, while long-term yields drop to 1 percent in the fourth quarter of 2014.

Consistent with this type of macroeconomic scenario, asset prices contract sharply.  Equity prices fall by approximately 60 percent and equity market volatility increases sharply.  Housing price index declines by approximately 25 percent, while commercial real estate prices are more than 30 percent lower at their trough.

The international component of the severely adverse scenario features protracted recessionary factors in the Euro area, the United Kingdom, and Japan, and below-trend growth in developing Asia.  Economies that are heavily dependent on imported oil—including developing Asia, Japan, and the Euro area – are materially impacted under the scenario.

Reflecting flight-to-safety capital flows associated with the scenario's global recession, the United States dollar is assumed to appreciate strongly against the Euro and the currencies of developing Asia, and to appreciate more modestly against the pound sterling.  The U.S. dollar is assumed to depreciate modestly against the yen, also reflecting flight-to-safety capital flows.

The supervisory adverse scenario is characterized by a global weakening in economic activity and an increase in United States inflationary pressures that result in a rapid increase in both short- and long-term U.S. Treasury rates.  Depository institution funding costs react strongly to rising short-term rates, as commercial deposits are drawn to institutional money funds and other higher-yielding alternatives to bank deposits.

The U.S. experiences a mild recession as real GDP falls ½ percent and unemployment rate increases to 8 percent.  A considerable rise in core inflation results in headline CPI inflation rate of 4 percent by 3Q15, remaining elevated through the forecast horizon.  Short-term interest rates reach 2½ percent by the end of 2015 and 5¼ percent by the end of 2017.  Longer-term Treasury yields increase by less, resulting in a yield curve that is both higher and flatter relative to consensus expectations.

Corporate financial conditions tighten, reflecting both higher long-term Treasury yields and somewhat wider investment-grade corporate bond spreads.  Household financial conditions are assumed to tighten broadly in line with movements in similar-maturity Treasury yields.  Equity prices fall 25 percent, equity market volatility rises somewhat, and house prices and commercial real estate prices decline by approximately 13 percent and 16 percent, respectively.

Outside the United States, recessions occur in the Euro area, the United Kingdom, and Japan, and below-trend growth occurs in developing Asia.

Description of Risks Included

 

The Company considers and evaluates all material risks facing the Company in its capital adequacy and stress testing processes including, but not limited to, the following:

 

 

 

Description of Methodologies Employed

 

The Company employs various methodologies in its stress tests for balance sheet, income statement, and capital projections.  In general, the Company utilizes multiple modeling techniques in developing its stress test estimates, including regression-based modeling, transition analytics, business analytics, and other objective, quantitative forecasting methodologies.  Additionally, the Company may incorporate expert judgment to apply management overlays in the analysis of the stress test estimates.

Pre-provision Net Revenue ("PPNR"):  PPNR forecasting methodology consists of multiple models used in conjunction to forecast individual line items for the balance sheet and income statements.  Balance sheet and non-interest income and expense are forecasted through utilization of ordinary least squares and logistic regression on macroeconomic factors.  Net interest income is primarily forecast based on interest rates projected and applied to the modeled loan and deposit balances within asset/liability management tools.  These results are subject to management review and adjustment.

Credit Loss Estimation: For the purposes of capital planning and loss forecasting, the Company has developed loss forecasting models driven by macroeconomic variables across its commercial, retail and automotive portfolios.  Credit loss estimations and PPNR estimations use balances that are internally consistent.  These results are subject to management review and adjustment.

Operational Loss Estimation: The Company used a loss distribution methodology utilizing internal, external and scenario-generated loss data for the estimation of operational risk losses.  These results are subject to management review and adjustment.

Provisions for Loan and Lease Losses: The credit loss stress test models create estimations for expected reserve levels (both allowance for loan and lease losses and contingent) and related provision expenses that the Company will incur under the macroeconomic stress scenario.  The Company's reserve level is determined based on an expectation of future net charge-offs and accumulated to absorb those future credit losses.  Provision expense is taken at each forecast period to adjust the reserve levels up or down to the necessary levels.

 

Capital and Risk Weighted Assets:  The methodologies described above translate identified risks into potential revenue and loss projections over the nine-quarter planning horizon.  These projections are aggregated into net income / loss estimates over the planning horizon.  These estimates then feed the Company's regulatory capital estimation process.  These regulatory capital calculations are based on existing regulatory guidance as well as proposed guidance when applicable.  Risk-weighted asset calculations are based on Basel I generalized and Basel III standardized prescriptions where applicable.

Results – Supervisory Severely Adverse and Adverse Stress Tests

Santander Holdings USA, Inc.

The results presented below contain forward-looking projections that represent estimates based on the supervisory severely adverse scenario and supervisory adverse scenario, which involve economic outcomes that are more adverse than management expects to materialize over the forecast horizon.  The estimates reflect capital ratios which include the "Dodd Frank Act Stress Testing Capital Actions" described above.

³ The Tier 1 Common ratio is based on the Basel I capital framework throughout the forecast horizon.  The Common equity Tier 1 and Tier 1 leverage ratios are calculated based on the Basel III capital framework, including transition provisions throughout the forecast horizon.  The Tier 1 capital and Total risk-based capital are calculated based on the Basel III Standardized Approach framework including transitions starting in Q1 2015.

⁴ For Q4 2014, risk-weighted assets are calculated using the general Basel I risk-based capital approach.  For each quarter in 2015 and 2016, risk-weighted assets are calculated under the Basel III standardized capital risk-based approach, except for the Tier 1 common ratio, which uses the general risk-based capital approach for all quarters.