(Bloomberg) -- Banco Santander SA’s earnings beat estimates as a revenue boost stemming from central-bank rate hikes offsets the impact of higher expenses and the cost of covering souring loans.

The Spanish retail-banking giant posted net income of €2.29 billion ($2.52 billion) in the fourth quarter, exceeding the consensus analyst forecast of €2.1 billion, according to a statement. 

The lender committed to double-digit revenue growth this year, while aiming to increase return on tangible equity, a measure of profitability, to above 15%. Shares rose as much as 3.1% in early trading in Madrid.

Santander benefited from a surge in margins as its loan portfolio of more than €1 trillion reprices to reflect official rate increases in a number of the bank’s key markets. As Héctor Grisi takes the reins as the lender’s new chief executive officer, his challenges include keeping a lid on cost pressures and preserving loan quality as borrowing costs rise.  

“We expect revenue growth will continue to offset cost inflation pressures and the anticipated increase in cost of risk,” Chairman Ana Botín said in a statement.

Key 2023 Targets

  • Double-digit revenue growth
  • Cost-to-income ratio 44%-45%
  • ROTE above 15%
  • Cost of risk below 1.2%
  • Fully-loaded CET1 capital above 12%

The bank reported “strong numbers and positive guidance” albeit with a “slight miss” on capital, Goldman Sachs Group Inc. analysts led by Chris Hallam wrote in a research note. The 2023 goals may imply “a meaningful upgrade” against current consensus.

Santander beat targets for profitability, revenue growth and capital it unveiled last February.

However the lender fell wide of its cost-to-income ratio goal set for the year of about 45%, with the metric coming in at 45.8%.

The bank, laden with increased salary and other costs linked to inflation, said operating expenses climbed 12% in the quarter from a year earlier.

Net loan-loss provisions rose 106% in the fourth-quarter from a year ago to €3.02 billion after the lender released provisions previously, with the bank flagging a “single name” in Brazilian corporate and investment banking exposure.

Macro Pressure

“Macroeconomic environment pressure, which led to build additional provisions in several countries, mainly in Spain, the UK and the US and higher provisions in Brazil,” Santander said.

Underlying net profit in Spain for the quarter jumped to €456 million from €73 million a year earlier, boosted by higher net interest and fee income. Profit dipped in the key markets of Brazil, the UK and US.

Cost-of-risk, a metric that tracks the ratio of provisions to expected loan losses, ticked up to 0.99% from 0.86% in the previous three-month period. As well as the higher provisions in Brazil, the bank also boosted coverage for its Swiss franc mortgage portfolio in Poland.

Earnings were also impacted by a £107.7 million ($133.4 million) fine slapped on the lender by the UK’s Financial Conduct Authority in December for anti-money laundering control failures. 

Today’s earnings presentation is the first for Grisi, who replaced Jose Antonio Alvarez at the start of this year. Alvarez had been in the post since 2014.

Santander shares are up 16% since the start of the year, outpacing the 15% gain for the STOXX Europe 600 Banks Index. 

Key Numbers

  • ROTE: 12.76% vs 13.38% in 3q
  • CET1 fully-loaded capital ratio 12.04% vs 12.10% in 3q
  • Net interest income rose to €10.16 billion from €10.05 billion in 3q
  • NPL ratio: 3.08% vs 3.08% in 3q
  • Efficiency ratio: 46.6% in 4q vs 45.6% in 3q

(Updates with shares, analyst comment from third paragraph.)

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