Santander setting the pace in European ABS

Following the end of quantitative easing in 2023, the European ABS market has gone from strength to strength and 2025 is set to overtake the post-2008 new issuance record set in 2024.

Last week was a notable one for Santander, which alone has now issued €13bn of paper to the public market in 2025 through a combination of pure funding ABS and Significant Risk Transfer (SRT) trades. For context, the entire market this year has produced €115bn of primary supply, €38bn of which has been from consumer credit sectors (RMBS, auto ABS) according to data from Morgan Stanley.

Santander has lending operations in many countries, and the bank funds and capitalises these locally. In ABS, investors finance a pool of assets (loans) rather than the issuing banks themselves, so a Santander ABS backed by German auto loans has a completely different risk profile to a Santander ABS backed by Danish consumer loans, for example. Santander is one of the most frequent issuers of ABS across Europe, but you could effectively regard them as being issued by several smaller domestic banks.

One risk profile Santander has added to its fare recently is older, underperforming mortgages, which have been moved off the bank’s balance sheet via two deals that comprised over €2bn of bonds. Santander transferred ownership of these UK and Spanish mortgage pools (a so-called de-recognition transaction) rather than doing a typical funding trade. In this case Santander now holds zero credit risk on the mortgages, but it does continue to service the clients as if they were still Santander clients. These are mortgages that may have been originated before the global financial crisis (GFC), or been through previous restructurings, had high LTVs or were in serious arrears.

A critic might say that Santander is getting rid of its dirty assets, but the bank is simply freeing up capital which allows it to continue lending to consumers. This is a core use of securitisation technology, being beneficial for Santander shareholders and private asset-backed finance investors, as well as desirable for UK regulators. From an ABS investor’s perspective, older loans like these can benefit from deleveraging and a long track record, but they also often lack complete data, which requires additional diligence (and experience). As these deals are no longer Santander sponsored, and because older mortgages do come with other risks, they do tend to offer a spread premium when compared with traditional Santander deals.

If anything, Santander’s pure funding trades last week were even more interesting, in particular the €1.4bn “Consumo Santander 9” Spanish consumer loan ABS. Just over €600m of AAA senior notes and around €60m of mezzanine bonds had already been pre-placed, not uncommon for a deal of this size, but that left plenty available. This 2.7-year deal ended up heavily oversubscribed with both the investment grade (IG) and sub-IG rated mezzanine debt 5-7x covered and the AAAs at 1.7x, following multiple rounds of spread tightening from initial guidance. The AA rated senior tranche priced at Euribor + 70bp, while the BBB and B tranches offered spreads of 140bp and 455bp, respectively.  

Outside the UK, where Santander primarily funds its mortgages through its “Holmes” RMBS programme, the bank is a very frequent issuer of both auto ABS and consumer ABS transactions, and it generally has a strong following. While this all looks great, it is also fair to say that its underlying loan performance is somewhat mixed, with default levels in some jurisdictions already approaching GFC levels, especially among so called “pre-approved” customers. If you compare Santander’s arrears data to Spanish peers BBVA and Sabadell, for example, its performance is weaker.

We have been growing increasingly wary of particular vintages of consumer ABS as performance has deteriorated more than we expected, especially when you consider where they are currently trading in terms of spread. We don’t expect to see imminent problems with these deals, but with more leverage in the structures than was typical a few years ago, we could see some downgrades. New vintages could prove more interesting, as in consumer credit, underwriting standards can be adapted quickly. 

Santander is clearly showing other banks how it’s done, and while ABS investors might not like all types of collateral or structures, there are plenty to pick from. This is a great development for the European securitisation market in our view, and we hope that other banks follow their example.