Banco Santander SA (SAN) 2003 Q3 法說會逐字稿

Good morning we are going to begin the presentation. Perhaps more people will join us later on. But we are going to start right away because we have to be punctual -- because of the Web casting. My presentation is going to be divided into three parts. The first one is going to be on the most relevant aspects of the quarter. First the consolidated group, then we will talk about a few details of per business area and then I will make a few comments.

The most important conclusions of the quarter are on screen. We have reached consolidated net attributable profits of 12.1% more than last year. I would like to remind you that in the first quarter I think we fell by 8% in the earnings and in the second we were up by 8% and right now we are going up by 12.1%.

And as you will see there is an excellent behavior of revenue in terms of margins and commissions, they are both growing and cost continue to go down. I think I should emphasize the magnificent behavior that we have seen all over Europe to obtain these results and this performance means that in the last three quarters we have obtained a record figure in that operating income quarter after quarter even in the third quarter which is seasonal. And this growth that we think is brilliant is based on strong growth and acceleration of the business.

So volumes are going very well. And apart from the performance in Europe we are also starting to see a change in the trend in America. We had negative figures, now we are already having positive figures in dollars. America scored by 17% in dollars, which is the currency in which we have our budget and we also see an improvement of global wholesale banking and asset management and private banking. This is the performance of our cash basis revenues or profits, which is what we will be using as of next year because although these accounting standards will inter defense on in 2005, as of next year.

This is how we are going to do our accounting so 2,405 million and we will grow it by 9% in cash basis and in attributable profits by 12%. The important thing about the third quarter is that this growth that we achieved in the third quarter is based on an excellent performance of revenue and cost.

Also if we compare these to last quarter's figures both are growing, are doing better in spite of the seasonal effect of this last quarter. The performance of the trading gains is now more regular and with the exception of a quarter because of Argentina and two quarters because of Brazil the figure is 250 million Euros per quarter.

So the performance of the most important part of the account, the net operating income is improving. There was a clear turning point at the end of last year, in the fourth quarter of last year and since then it has gone up. Here we see the net operating income with the Equity mesiad (ph) where we eliminate the seasonal effects of dividends. And provisions for loan losses are also stable. Remain stable.

We have provisions of about 300 million Euros at least per quarter and total provisions, in other words including provisions for loan losses but all the other ones, extraordinary ones. The total is a little bit more than provisions for loan losses, so the net is slightly negative. Or said in other words that there is no support to the income statement from this item.

Apart from growth in accumulated terms of 12% I think it is also important to underline the growth, quarter to quarter we are growing 21% as compared to the same quarter last year. And on the right hand side you can see what I said before or in other words the performance of accumulative profits in the last few quarters.

To understand this better I think we need to refer to the behavior of currencies and currencies has two different effects in the income statement and in the balance sheets. In the income statement what affects us is the depreciation of the average exchange rate. In other words the comparison of the average exchange rates of the first nine months of this year with that of the first nine months of last year and that still shows important evaluations not only in the local currencies, but also in the dollar, we said in Euro.

Nevertheless, when we talked about our balance sheet growth what is important is the change that currencies have had since September of last year until now. So in the comparisons we still see a certain impact of exchange rates but in the comparisons that affect the balance sheet and the final exchange rates, in Brazil for example, we see a depreciation of their currency peso with the dollar.

Although it is true that in terms of Euro that depreciation is canceled by the evaluation of dollar peso with the Euro. But in Mexico nevertheless not only is there a negative effect in the income statement but also there is a negative effect because of this effect evaluations which makes us believe that this effect is going to remain there for a few more months unlike Brazil where this effect is going to gradually disappear in the income statement.

And this is how the income statement looks as we published it in the documents. Obviously because of these effects that I mentioned before, in other words the comparison of currencies will still have a strong impact on the income statement. The revenue side is still affected. For example, the net interest revenues and commissions are still affected by this. But the most important thing here is to insist on the fact that the net operating income of the first nine months is practically flat.

It goes down by 1.3%. It is practically equal to the net operating income of last year and this is the most important message of this income statement. And then the fact that we need less net provisions means that profits are increasing by 10% or 11% in terms of profits before taxes and 12% in net attributable profits. I think I should give you an explanation of those figures of net provisions of 1024, which is the entire negative and positive effects of peso (ph) the net operating income and it is very simple.

We are spending all the capital gains that we get to amortize our good will. The 704 million that we obtained from capital gains, the most important one was the selling of Banc of Saxine (ph) to Banc of America. Well that money is used to amortize good will.

We transfer funds from special funds to provisions for loan losses in Argentina and basically what we see is a fall in provisions for loan losses, out of which half is due to the exchange rates effect and the other part is due to the fall in provisions for Latin America. From the strong provisions our access to divisions that we made last year, this year in Latin America the provisions are much lower and in Europe there is a slight increase in provisions basically due to the strong increase in volumes, which requires more generic and specific provisions and this is the explanation of what we see is below that and the bottom of the account. NPOs continue to be stable.

The NPO ratio 1.69 including everything and coverage ratios also continued to improve. I think that its obvious that this is improving and I would like to underline that if we compare these figures to last year's we see that NPO ratios are increasing by 16 points which shows NPOs are doing well and that we have been very prudent and continue to be prudent in this regard.

We don't usually look at this by units. I think we are going to that this morning. NPO ratios and coverage ratios per units in space in retail banking and Santander (inaudible) saw NPO ratios continue to go down. They have very good NPO ratios. Portugal has gone for a turning point because of the economic situation of the economy. We already see symptoms of reactivation and consumer financing.

We had a peak limit of last year until the beginning of this year. Since then MPL's are going down as far as coverage for these and Latin America remains stable if we eliminate Argentina instead of that brought forward into (inaudible) it should be 3.11. And Global Wholesale Banking is also improving. Coverages were the same. Vision of going up everywhere in all the units.

With this decrease in MPL's and the provision systems that we have at present in Spain, our specific statistical and generic provisions, this means that in sometime the retail banking - the retail banking business is staying more than 12% more than double provisions than MPS and three time more in Vanesto (ph), a 123 in Portugal, a 147 almost a 150 consumer financing, in America 121 if we eliminate Argentina that would be 144 and in Global Wholesale Banking a 160. Therefore, a very comfortable we're in. In cost to income is the management of our cost. That group continues to be very aggressive. You know that we have a strategic target.

We want to continue to be very aggressive, very tough in this regard. But the important thing here is that the units of the group, the basic units of the group are all making an effort in terms of cost to income, and this is something that we don't usually show you at these presentations, but here we see that the main units are reducing, are improving their efficiency, improving their cost to income. Among others, Brazil, with a cost to income of about 42%. We've gone down by 3 points, 49%, and we are getting closer to our long-term trend. The return on equity is at levels above those of 2002 and in volume the significant return on equity is a cash basis return on equity, which is the one we're going to use as of next year. So, 1760 and going up.

The other business parameters obviously are doing very well. And now we're going to give a few comments for our business area, Europe, European Retail Banking. I said before that we're getting record figures in net operating income and it's growing by 14.9% in Europe, not only because of what we're doing in Spain, but what we're doing in consumer finance, and in Portugal. 866 million and we're achieving this increase in the margin with an excellent behavior of expenses. Very good figure for expenses.

The profits have been affected by the provisions because of the increase in volumes. It means that the growth rate for profits are not the growth rate for the net operating income. But this is due to generic professions and the fundsae provisions not the specific provisions, which obviously is a way of increasing the reserves of the bank. There is also a certain impact in minorities and in the tax rate. This explains the difference between the net profits and the profits before taxes but the figures are doing very well. Per unit this net operating income of 14.9 and in Spain is 13.9, 12 in Vanessa, 5 in Portugal, 31 in consumer finance, which is doing spectacularly well.

The process had an impact that I mentioned before and even more so in case of minority interest in Vanessa. If you take a look now at the network of retail banking or sometime they're in Spain. The most important thing here is that the net interest revenue continues to grow.

And it grows in a quarter were margins are shrinking, as we will see later. But this is been offset by the excellent growth in volumes. To such an extent that seasonality has not been noticed that much this quarter. And also young season commissions growth in different point something percent in retail banking in Spain. This based on the higher value commission so there are more link to business.

Commissions for pensions and mutual funds are going up for cards as the other commissions are going up that much. Overall they are going up for some items because of more activity. Retail banking we are improving the cost income and we are improving net operating income, not only because we are reducing expenses but because we are doing that but we're also increasing revenue.

Revenue is increasing by 3.4%, the expenses are falling by 4.0% and this means that net operating income is reaching maximum levels historical maximum levels in retail banking in Spain. This I think best extracts of what happening with the income statement, how the business is doing in retail banking in Spain. Well the business is going very, very well. We have increased our growth rate for loans. Right now it is growing at 17.1% as compared to 12% in June or 9% in March. I remind you that the market as a whole is growing by 13% and banks at 18.9% and Santander bank.

Here we have adjusted our growth as that of the market with securitization to make it more comparable. We have securities, as you know important amounts this year. And the distribution per product and per segment is what you see on the right hand side. I think it is very important also to underline that not only we are recording in mortgages we are recording a great deal in 22% in we're production going by 60% and the network, but we are also growing in companies, the companies we are going by 20% and in digitals 14% in high income 24% -- much of it took in mortgages.

In customer funds, in the Santa (ph) network we are growing by 5%, 4.8% also we a strong interment trend and in this case we are going below the market average, we are still growing a little bit below the market average and we think that we will at the en drove as a same rate as a market in growing. This is the comparison of Santander retail banking network, if you see the resources managed in Spain, the front managed in Spain for the whole group in Spain, we are growing by 9%, what Ban's in growing, what Pentagon is growing, Barnes's (ph) etc.

If we take all these and took onward going by 9.5%, so we are not losing market share in Spain, and for the Santa network we are still losing the little bit of market share basically because we are doing that very strong policy to reduce the term deposits in another words weare focused a great deal in the margins and we have been a more aggressive in term deposits, so that more expensive part of customer funds is going down, but I should say that current accounts are by 12% and mutual funds are going by 13% and pension funds by 20%.

We recently represented its earnings results, I don't think we should exists very much on the excellent evolution of basis revenue, net revenue income and etc., so the bank is in virtual circle. The results of Banesto are the best I think. I don't think any body else yet has to publish their results, all published there results and Banesto are the best in the Spanish market, which proves the excellent management as a excellent business model that Banesto has implemented. The growth rates for Banesto are better than those of any other banking intuition in Spain. 19% growth in funds, but if and if we exclude the talk we had from the Spain Courts system the results are never the less excellent.

Portugal which is a market with - where the weak economic situation has it's impact well we see in the net operating income that were growing and in the last seven -to -seven quarter , we are getting record figures in net operating income, and profit are of 50 something billion Euros becoming stable and PL's have gone down, they are taking very good advantage of a situation of cash liquid in the inter Portuguese market, which leads although local banks to have to raise deposits or funds and we are in our bank of focusing on raising Mutual funds and commissions are going up a 25%.

In Portugal the idea is things of stabilizing and will continue to improve in the future, I think with consumer lending was a spectacular business, its improving on a daily bases very high growth rates I think I read report by Goldman Sachs, which said something there was one of the biggest banks in consumer finance and our sometime there consumer finance is the fifth in Spain after Banesto in terms of solid PNL account as the separates institution and its PNL account is at record levels and production is going very well. Hispamer (ph) last year had market share of 25% and now has 28%. Hispamer in Spain is increasing the number of finance units by 18 (inaudible) number of cost financed and you will know car market in Spain is not going that much. So I think that 18% figure is proof of its success of the business model introduced by Hispamer.

Are we seeing Europe, net operating income at 15%. All the businesses are doing well volumes commercial activities are all very strong now what about Latin America. I think its now reached the turning point and I think its important to stress that it is growing in dollar terms that is a net operating income is growing by 16.3%.

We have to remember the devaluation of that American currencies against the dollar most of our account are in dollars, our business units they have a commitment too, figures in dollars and we can see that there are still a significant impact of over the exchange rate. But Latin America is leaving negative figures behind and is going into the block again. Brazil is doing well, the second quarter Brazil was quite weak although explain why later on.

Truly these business as usual first quarter was not so good but things then went back to normal and Mexico is suffering devaluation and following interests rates but interest rates but we think this situation will soon be stabilized and the other smaller countries have performed better in terms of provisions extra. And here we have total of Latin America. I think this is very important image this is fees and net attributable income.

Net attributable income is the second largest after all in seven quarters. I think this also a turning, I think the turning point was reached to the end of the last year first quarters this year and all of this is based on good revaluation of business fair, each country has a different focus, its adopting to the radio synchronies of its market under strong focus or in defending net interest revenues and as I said adaptations to the local environment.

Brazil is growing although rates are fallen, lending with 17% and funds 21% in local currency. These business growths are actually higher in dollar rates because they are all has gone up against the dollar. In dollars this growth would be even bigger. And we are also witnessing strong stability in customer margins despite the volatility of the intervention rate.

On this a positive tax effect last year we paid a great deal of taxes in Brazil in reals, we paid a lot because our local result if you remember where much higher than consolidated results and basically for coverage port folios because their market and here we are hedging, so this year we have stayed a lot less taxes so this has had a positive impact in PLs are still under control and ordinary margins in Brazil are basically in lined with the first quarter of last year.

There are some trading games although some of these are due to extraordinary income but those commissions are net interest revenues are doing well and profits are back to normal. And here we have the explanation of net interest revenues, which I think is something that surprised so as our last quarter, here we have the three components of the margin customer spread in retail customer margin blew with little triangles in that linked bond portfolios and the other line is basically every thing else is from the balance sheet.

So you can see that the index bond portfolio is highly volatile and makes the very high contribution in the third, fourth and the first quarters. This margin a hedge-- its hedging actually, its excellent hedging against the devaluation of the rate when the rate of sales wholesale inflation increased and that provided us with natural hedging.

This year the rate has appreciated a bit so the impact has been very low even negative in the second quarter and that is the explanations for the second quarter. Our estimate is well this the portfolio easily gets a positive margins 3,4,5 points and not the margins of the past seven and normal situation we would be getting 3 or 4 or 5 percentage points as margin and in moment of evaluation, appreciation it's national hedge.

Volumes are growing and the reduction in customer margins is small. We are thinking that in Brazil there will be more pressure on margins and we need to cover that violent increase in volume, which is what we are actually achieving. In Mexico things are evolving influenced by the following interest rates, we started the year at 9% they are down to 5% and the bank is doing its business very well in terms of its balance sheets, credits or loans are growing excluding the IPAB which tends to disturb things a bit was seeing there a lot of seize and commissions were generated, 11% increase on credit cards 35%, and billing on cards 47% and its great stability and we think well at the end now of this process, so in Mexico we are starting to see greater stability because of this growth we believe that things will start to take off again in Mexico.

Chile is somewhat similar to Portugal, its quite a mature market with bank penetration rate Our bank is an excellent bank in Chile and since the merger we have focussed growth on more profitable areas we have lost market shapeup this was voluntary, and investment in retail banking growing 10 or 15%. Ordinary margins have been consolidated and our banking actually is $85 million for a quarter and no problem about that. In asset management and private banking, there is stability and upwards trend, the group is now managing more than 100 billion Euros in funds with an average fee of 1.50

A 100 billion Euros in funds with an average fee if 1.50 because these are retail funds. Funds have grown 14% and this product is a strategic one, its high value and it is providing the bank with revenues of 15%. And 1.4 billion Euros a year. In Spain, we are doing very well in mutual funds and in insurance. In Latin America we are also getting good growth in mutual funds. I think growth rate in the region for mutual funds and to local currencies is 19% rate of growth in Brazil almost 50%.

And so assets, total assets and management over a 100 billion Euros, to such as that in Spain and we have a lot of traditional mutual funds at 73% although we are now starting to see that alternatives funds are becoming more important we have set up a new business area some time their alternative investments in order to channel a whole load of activity in order to gain market share.

Because actually have five bureaus under management. And I don't think I need to stress the fantastic results in Spain. Average fees are increasing and you can only do that if you do a great deal of micro marketing and really taking care of client, making sure that their investment are the most profitable possible we have one third of the sectors revenues, which increased revenues by 1.7points and growth rate instantaneous growth rate, of our mutual funds in Spain is 18%.

That in terms is revenues that's (inaudible) increase in volumes. We are also seeing that our next (inaudible) equity stakes were directing the historic deficits in insurance policy sold through our branch network and we went up 100% of the insurance business we have 60 (inaudible) Germany 21 of 100%, as a big increase in quarters and now a hundred million Euros and it's growing 71% so far this year. That is what I said in September last year.

And the final area I would like to look at is global wholesale banking. I think what we are seeing is greater stability here now. Results are much more stabile this year there is very high potential here all is being saying that thinks would stabilize and I think in the next quarter we will be seeing very good growth in the very about a year it will have to double it's contribution to the group.

And now I would like to focus on investments banking and cash position, which is the most volatile side of the business. The important thing here is the Arorx (ph) were the biggest broker in Spain were the biggest incorporate finance were the biggest in almost all markets, so the overall improvement of financial markets is helping us both in terms of seize on cash position and in our financial management and equities states we call our corporate center, there is also an improvement in results, were to the writing of the good will, it made a negative contribution last year.

This year it's come down to negative contribution of 164 million. This change is due to an improvement in trading gains and currency hedging of a dollar basically, we can give more comments later on and if you like. So to conclude I would say that, we are on the road to eagerly meeting our target of 2.5 billion we don't think there will be any problem in meeting that.

In Europe, there is quality and profitable growth in Latin America, we are studying secrets selective growth in asset management. We are really working hard to improve our positions. Global wholesale banking is already improving and our equity stakes are also doing well.

So, there are greater expectations for the next few quarters, and we think that there is good accumulation of volumes in Europe this will have a positive impact in the next few quarters. And we will see a good recovery of margins. In Latin America, the macro out look is much better, the stability of average exchange rates or mean exchange rates and we think that we can be a lot more optimistic about Latin America and in asset management and whole sale banking we are seeing that the overall improvement for financial markets is having a positive impact there.

We are working very hard on developing all the products in ours three year plan. And there are no external targets, but all business units are under pressure to improve revenues, and so I don't have anything more to tell you so we can take your questions.

Hello, good morning. In view of the possibility of fall in interest rates in Brazil from say 20 to 15 or even lower, how will you manage the situation? I'm saying this in view of what's already happened in Mexico.

The fall in interest rates in Brazil or Mexico or any country is the best scenario for a bank that operates in Brazil. That's what we expected when we started to work in Brazil.

That means the economy can grow. It means that the banking sector will have to finance that growth and we can have a better mix for growth and for credit. I mean, I don't know if on a practical level it will have a short-time impact on my margins, but we've seen that although there is a fall in interest rates, customer margins are not falling, although we did expect that this margin would fall. But when the investment margin, which is 14 percentage points in Brazil is not falling, deposits have 3%. So the driver there is investment.

If rates do fall, it may have a pressure on the interest - on investment spread, sorry. But history has shown that loans in Brazil grow with a two or three quarter luck when nominal real interest rates fall. So, if you analyze the last two three years, you'll be able to see that there could be growth rates in loans of 25%. So we don't think there'll be any problem with regard to loans.

For deposits, a drop in interest rates have fallen. Interest rates is usually accompanied by a fall in deposits, in compulsory deposits. This offsets the fall in interest rates and makes an additional contribution. So although interest have come down from 26 to 19, our liability margin is higher than it was. So a lot depends on the increase in investment, increase in fees, etc.

And in the more, most financial aspect of inflation, what we've seen on the balance - the rest of balance sheet what we retained, I think the falling interest rate is the best possible environment for a bank like ours in a country like Brazil. I can give you more information from our Brazilian experts.

There's a question here from Inigo Vega from Dexia Equities. He wants to know about our customer spread in Brazil in the third quarter was 14.9, 13.7, 15.2 and 14.7 this quarter.

That was starting fourth quarter last year and that the liabilities spread is very stable always between 3 and 4?

I think there is another question over here.

Good morning. I have three very specific questions. One is the equity method, have you for this third quarter - have you included dividends, because it seems to have changed a lot. Is this because of the equity method? Secondly, in consumer lending there has been an increase of 13% compared to zero growth in the second quarter, is this all recurrent? Is it linked to the integration of Patagon's deposits? And the last question is on one of your slides you showed that the target was $2.5 billion and now you say its more. You think you are going to outperform your target?

I said that we think we will easily make the target and dividends, well my colleague will answer that and in our consumer lending figures there is nothing there from Patagon. Patagon is not integrated with in the consumer financing unit. It depends - it is not linked to that at all. Patagon is contributing to that. Is there anything extraordinary, there is a reclassification of certain items from the second quarter. No, it is ordinary margin. My team is telling me.

There is very high growth, lot of insurance fee is there and for dividends, I think that in the third quarter, these are dividends from the Royal Bank of Scotland and that is why it is good to look at the whole of the equity method. There was this big leap from May to June and that is why there is a such a big leap.

Microphone please. I am sorry this person is not using the microphone.

Something else about dividends?

It is the Royal Bank of Scotland again. We made an estimation or a calculation and used the equity methods and then we introduced corrections where these definitive results are published. The Royal Bank published in June. They were much better than we expected, so we had to introduce this correction. In the first quarter we said $32 million, in the second 24 and in the third quarter 73. That is the explanation because that first semester was also better we had actually estimated.

OK, more -any more questions from the audience

Good morning, I have a couple of questions about Brazil again. I saw that loans have grown about 17% year-on-year, could you explain in what sectors, what segments there is higher growth and what is the outlook for next year within this increase in lending because of lower interest rates and another question on Brazil, total revenues have increased a lot in this last quarter and you did mention something about trading, what was the contribution of trading in this third quarter. And where exactly are these trading gains coming from.

Well, this quarter, from the sale of securities portfolios, we have made the most of volatility and when what you asked about loan increases. Growth in loans, I mean in dollars, it's actually a lot more. I think Alfredo has the data in dollars as much higher growth because of the appreciation of the Riyal against the Dollar. And in the Riyal it's 70% in dollars, it's a lot more. And in Euro's, its 31%, 30 to 50% almost in dollars. So there is a 17% increase in Rials, 50% in dollar terms.

The cooperate segment is about half of that, so the dollar total Brazil is $5.4 billion gross credit, gross loans, cooperate $2.3 billion and SME's $700 million, so that's 20 and in visuals that is 62 % increase, so I think we will see that in individual lending that will actually continue to grow a lot. Loans in the whole system are not growing that much, that is not yet this springboard effect but we are expecting 25% growth in loans in the system as a whole next year.

There are two questions, I would like you to answer, one from Kosaloroko (ph) from Suntenden Histion and just what are the reasons for the deterioration of lending in Chile

Well, I think that she is referring to NPO's. NPO's appeared last year and the first quarter of this year. We made provisions for these and they had a very clear calls which was the integration of both banks and the implementation of unified criteria for both loan portfolios and the implementation of the concentration criteria for some clients.

This has now been stabilized and the second and third quarter, we have seen no impact of that and the situation of loans in Chile should remain stable and should actually improve. What's she is referring to is the negative lending figures, well because of the business mix, we have to reduce our corporate portfolio by 30% and a redrew by 10% and the retail portfolio and has already been stabilized.

Here is a question coming from Coston Whirly (ph) from Westobe. He is asking two things about Latin America, he asks why are the trading gains so high, where did they come from and what would be a sustainable level.

Well trading gains are high. Well first of all, that they aren't that high and then they are high in Brazil. This quarter, I think we explained this. Brazil continues to be the country where the interest rates are higher and there is more volatility, so obviously, it is surgical for most of the trading case to be concentrated there.

But as we said before, there is an extraordinary contribution, I don't know whether I should call it extraordinary but certainly it is a one of contribution because of the selling of some interest rates, the risk positions which gives them almost a $100 million but that is part of - that's normal. It is an absolutely exceptional.

So we do believe that in Latin America, we will continue and as there is something as I said that has happened in the past years, so we think that we will continue to have the same level of trading gains. Remember that our cash management or treasure departments in Chile and Mexico and Brazil are the best in the market and this also explains the strain gains and then the second question is what is the proportion of the mortgage portfolio over the total loan portfolio, 61% mortgages similar to the system.

I have another question on Brazil from Graca Moura from BPI. But I think I already answered when I answered the question about trading gains in Brazil, in European banks and industrial, 5000 for such a 52 million Euros.

We have another question.

I have a couple of questions; one is the margins in Spain, as you said before, they are falling, that's more than you expected. I imagine that the main component is the depreciation of your mortgage portfolio and I would like you to tell us when do you expect that this will stabilize.

They are some positive effect but there's a negative effect which is when I mentioned, when do you think these effects are going to be all set and we are going to see more stable margins in Spain and my other question is try to go back to Brazil again, but I think the increase in volumes there are surprising 60% growth and for individuals in dollars.

Well yes, but in rial list, that would be 31% even so its much better then the industry average, why is this happening? And this 25, 30 in dollars for next year could you break that down into as semi's individuals and so on and my third question is about Spain, I have seen important growth in volumes particularly in mortgages, do you think that this same rates can be maintained next year or do you think we are in a credit that demand peak what growth in London do you expect next year and also a question of a new accounting legislation, does that affect you in any of equity holding, I am referring to the royal more specifically. I guess you will say that you will see no problem for the royal that you will go continue to use the equity asset. Well, this is not a very relevant issue but we have to respond. Now regarding the margins, any fact, what has an impact on this, is your re-appreciation of the market portfolio.

If you take a look at the margins of our production of our new productions, some margins, they are going up and mentioned that several times, what we are taking now has a higher than what we signed last year, but the re-appreciation of the mortgages does have an impact.

New production, to give you an idea, from the January to September last year the experience of new mortgage production was 0.82 to 1.32, individual 0.36, now it's 1.13, for some products like discount a commercial discount to 36 and 132 and individuals 4.42 to 4.82. So this rates are going up but we still see a re-appreciation effect as when did the interest rates start to fall in May or March, well from there, on we will se the impact of until the end of the year and this is being offset as we have seen they are not set very well.

The customer spread and SCH has gone down from 2.87 to 2.37. I think that this is being an offset by the volumes and I think although all the things were doing in Spain, all this things have to be appreciated. We have gotten ahead of this we anticipated this. So we anticipated this. Then on the liability side we've been very strict. We were very strict with the cost of liabilities taking into account that we'll get very good financing in the markets.

The spreads are almost double A and it's much cheaper. We've been very demanding, the mutual fund, structured funds and so on. And then your next question was about growth. You asked how -- what growth we expect next year. Well, we're going to grow, the GDP is going to grow. So I think there must be a better behavior of consumer loans and company loans. And volumes, we like to do our budget, calculating that volumes are going to grow by 1.5, 1.6 the nominal GDP. This year it's been much more than that. But that is our starting point.

Also bear in mind that we have outdoor coverage and that is giving us almost $200 million in margin, $193 million in margin as you see in the brochure and the spread year-to-year gives us 40% more I think, the out go, yes 40% more. So, we continue to manage the balance sheet very actively. So, we're not concerned about that. And then fees and commissions are behaving very well and in the businesses that give more value where these are more recurrent.

It isn't just changing the tariff or the rates. Now two commissions are growing strongly. And you also asked about Brazil. Brazil has a very wide customer base and we're growing in dollars. So, the growth we're experiencing there is because of a greater effort that has been made in our management.

We've gone through the three phases, we've restructured the bank, then we worked on efficiency which is practically what we do with all our investments and right now we're focusing on growth and it has our own customer base, which is what they're focusing in. And we will see an increase of consumer loans in Brazil when real interest rates go down, nominal interest rates go down, consumer loans grow and that is what is trying to happen.

But we're optimistic. Season commissions are also behaving very well they are growing well. So, we see clear signals of improvement. And then you asked about the new regulations, the new international accounting standards. Well as you know it's basically goodwill and with the equity message the general rule is that it's going to make it very difficult to use the equity (inaudible) of all our holdings of less than 20% although it also says that this has a great ingredient of industrial or investment relations.

I think we will continue to use the equity measured with the royal, because their chairman is Director of our Board and vice versa. There are quarterly strategic committees that meet on a regular basis every quarter to see how they are doing and how we are doing and what things we have to do? There are different common activities I think that this is something more than a financial investments for us.

But I can't say for certain now because among others things I myself don't know what are the final International Accounting Standards. The drafts, they're being discussed but the royal, yes, certainly with other investments our relations aren't that strong and therefore if its less than 20% we wont be able to use equity method. And they have a current amortization of good wills that's another thing.

If not I haven't been this very well defined yet the NPO's another is just have not yet been clearly defined have several questions the first one is on Mutual funds, thy grooved it very well this year some we already starting to appreciate some reversions on your market share in the years there is going to be strong competition what is going to be the strategy of sometime there, in a market where you have been particularly successful, do you think that is a sustainable and what about the competition we have already seen the impact on the competition in September and October.

And then in Latin America can you tell us although it might be to soon, what might be the contribution of Latin America to the group? Last year you did a forecast, which is going to be met this year. So can you give us an idea of how you see that? And then into the industrial portfolio with the new accounting factors, what is going to happen with your industrial portfolio and with Success, and lastly with the Bank of America is there anything new in terms of business and the agreement and is that operation going to affect you in any way? Thank you.

I am going to answer about the Mutual funds. I am going to answer that question what was in terms so far is to increase our position not only in nominal terms but also in the revenue share, which is the main point of interest of a bank.

Focus not only in earning nominal shares in given products but you try to get more wallet share let say more product of the market so that's done on our customer to customer basis. Obviously there is more competition and the people have to react because with being very active and they have not reacted, but our position is very sound and we should know how defend it and notice that the group is getting ahead on these ends.

We have been very active in some lines of products that now is being copied by the competition, we have launched after the what we call (inaudible) Alternative Management. We've launched products from other families and for the customer, who is looking to measure himself against benchmarks but against the alternative return of banking deposits, these are excellent products and they're growing.

We've launched our (inaudible) Alternative investments we have $5 billion, nobody can get that figure in Spain. We're by far ahead of them and we always want to be ahead of them. We want to look at the competition but we want to see them always behind us. The instantaneous growth that I had mentioned before, in other words if you project the volumes plus the commission mixes we have forward that's going to give us 18, so we are going to start off very well next year.

And one of our big contribution of Latin America. Well we talk about business units more than anything else. But we're very optimistic. We have to be optimistic because the environment is completely different. If we were able to repeat last year, if we were able to improve somewhat this year in difficult environments. Well next year's environment makes us be very optimistic.

I would say that our focus is to improve the mix of results from Latin America. Now that the environment is good, now that we have restructured and we've become more efficient, we'd like to focus much more on the mix of growth, the mix of retail banking. Therefore, we're optimistic in terms of nominal growth, but we're even much more optimistic in the composition of the make up of those results. Small countries are well focused. Puerto Rico is going to grow in terms of market shares, it's going to reach levels of 100 million. Chile is going to have a much better year next year. We're much more optimistic about this year too. And with that can you ask the last question?

Yes, I think we've always said the same thing about our industrial holdings. It's a business line, a line of business and what we do is to take advantage of an opportunity to sell or to buy. That's what we have done traditionally and will continue to do in the future. I don't think there's anything else to add there.

What about the accounting standards - near accounting standards. Well I don't think it's going to have a great impact. No, no impact of the International Accounting Standards in the volume of our revenue because we're talking about the holdings of less than 20%. And the last question that you asked which agrees with the question of Basil Fultelo (ph) from UBS on the equation of Bank of America.

We think it is an excellent aberration for Bank of America now it is a in the first league we could say at they did it very well. This has no repercussion for us with the exception that we have a relationalism in Mexico and we have an excellent partner there. We found about the transaction yesterday or so, there are several questions here that I am going to try to answer. John Piezde asks about the domestic market, he says it is very strong how much is due to new product and what are the expectations for the mortgage market in Spain?

I believe that the market is very strong I do no the mortgages it is strong and when some companies recurring by 20% in corporate clients and this is surprising for us all. Before I said that we are planning to have to enter growth rate itself to 9% to 10% which is 1.6 or 1.7 times nominal inflation.

A fall in the mortgage market well obviously the growth mortgage market must slow down because growth rates right now are extremely high but the other lying factors are there. There is an important demographic factor a foreign investment also has an impact immigrants change of homes if that one buys and other sells. So the improvement of the economy plus the low interest rates are also same side of an impact there so we think it will continue to be a very interesting mortgage market now something quite decent are the prices of housing but the mortgage market will continue to be very strong.

Cadula and Dhunase asks about from JP Morgan asks about the contribution of notention fund to the net interest revenue in Brazil in the first quarter I think that we mentioned in the presentation I think it was $26 million oh sorry 26 million Euros.

George Karamanos from Foxpitt Kelton asks something that I think we already answered on the customer merchants, customer spreads, the potential and impact on our improvement of the yield curve slope? Well I already answered this but I would like to insist on this point. It is true that we have seen a reduction and notice that the reduction of the customer spreads in Libya's age network was 4.09 in the third quarter last year. Now it is 3.77 it is come down by 30 points almost which is 8% or so.

We are growing at 17- we are able to recover and that we will see a far even greater in the next quarter and even also in the first quarter of next year so very optimistic there and don't forget about the impact of the Alco portfolio we don't see any problems there, what is important though and I said this during my presentation is that accumulation of all volumes (Ph) that we are having plus the positive curve that we are starting to see is very important with the market turn around we have in the group. In Spain 10 points in the slope of their curve is 40 million Euros or 60 million Euros of more margin. So is this year it was almost flat and next year it is 30 basis points, well you can do your own calculation.

And from Oppenheimer Research. The question is the test of capital of gains of the port folio after the important follow which is in Latin America and in Europe.

Well they are very strong, a capital base in Latin America I think $400 million. They concentrate basically in Brazil and Mexico and in Mexico we have an ALCO portfolio of $4500 million. So they are very strong and the recovery this is how we have been our aesthetic capital gain but if we compared to last year we have improve by $770 million. And in Spain the capital gains we have our $200 million more or less. So 400 in Latin America, 200 in Spain but these are this is our portfolio where we managed the interest rate.

Davide Serra from Morgan Stanley. Can you give us detail of the training gains of Europe versus America. How much comes from clients, how much risk, and can you split between equity, securities and bonds and currency?

You have a $132 million. It is actually in the brochure. Europe 132 million basically in cash position in Madrid, in Latin America, $412 million basically from Brazil and then Mexico, Global Wholesale Banking in $59 million, financial management in equity takes $224 million, basically from ALCO and currency trading that gives us $840 million in total and the trading games from customer business and to your positions, its was more difficult to answer.

Our estimate is, because customer business generate certainly against both directly and indirectly. Though in general our composition in both Spain and Latin America is 50-50, probably may be even more 60-40 in Europe and 40-60 in Latin America, but not all the business is visible in trading gains. I mean there are profits but then gone to other headings.

There's another question about the break down of equity volumes on currencies.

This basically fixed income on currencies. We don't have the exact break down but we could do it for you.

Are there any more questions from the audience before we continue with the internet questions?

We have a question from Fred Rizzo (ph) from Kelton International (ph). Are the high consumer finance revenues sustainable or is it -

We've already said now that all our units are going well. So there's no reason to think that there will not continue to be good growth in consumer finance. And American fees are very high in this quarter. Well they are high because there's a lot of growth in investment funds and in customer business. So, there's no specific reason for that, Brazil is growing, Mexico is growing in cards, Brazil's mutual funds surely is growing in more diversified business. So, there's a - that's why you see revenues are so good. And Mexico is growing 17%, Chile 12%, and Brazil 9.7, each for different reasons, but they all have very good growth. And the Banc of America's high position of Boston, what impact will this have on Santander (Ph)? Well not really, just means that we have a much bigger part now. We think that's brilliant.

And from I&T (ph) asks about CAPEX of Wholesale Bank clients this quarter and how it looks in the next few months.

Well I presume you're referring to capital consumption in wholesale banking and plans for the next few months. Wholesale banking is not really demanding a higher volume of economic capital because since the beginning of this year that model has changed a great deal and we'll continue to see that. It's a lot more targeted to added value products, less focused on balance sheet consumption. So, there's no increase in capital use.

Javier Echanove from UBS asks us to what extent the political situation in Brazil could contribute to our cost reduction program.

Well the political situation in Brazil is mutual on that point because the conditions are the same. It's the country environment that is changing, and it's a lot more positive and the bank is a lot more focused on growth. So, the political situation is having an influence there and that the environment has changed but nothing else.

Leonardo Roberto from Foxpitt Kelton (ph) asks about positive income. He says because there are almost all the ones we shipped were below our group level. Which ones are above?

Well obviously are the ones we didn't show. Basically the small Latin American countries and Argentina because as you know net interest revenues are basically zero so that means the groups average is slightly higher than the units that we show on the slide.

Then you asked about our position in San Paulo. How much capital did we invest? Do we have capital gains?

We had 7.7% and we had capital gains of 120 million and its equity methods of cost is 7.7 of the theoretical accounting of book value and he asks about the return on equity for our main business areas. I think it is in the brochure. It is there on page 25.

And there is a question about the tax rate in the third quarter, why is it higher? Do we have a target for the whole year?

I suppose you are referring to the groups tax bracket. It is going up to 32% basically because of Mexico and the end of the tax exemptions there.

And another question is about SEPSA?

I think we have already answered about SEPSA.

Then from Femino Morgardo (ph) from Fidelity has asked about the equity method.

That is because of the financial and industrial holdings of Royal Bank 70.

That is a good question about the corporate center. SEPSA 76, UNION FENOSA 16 those are the biggest contributors in the third quarter. And why are provisions going down in the third quarter for the corporate center.

I would say that basically there were huge provisions for loan losses because of the transfer in country risk. In order to comply with Bank of Spain legislation we all had to provision for losses in Argentina. We went ahead with those provisions but not against loan losses and then in June we took I think it was a 189 million from then. We transferred them basically to loan loss provisions. That was a transfer there haven't been any of the movements in the third quarter and why to have such low tax rate in the third quarter for the Global wholesale banking to entries I can't remember.

In the third quarter that was only an 11%. In the third quarter, we closed our brokerage officers in Milan Frankfurt and Milan and we were able to deduct cost from that is the explanation for the lower tax rate. For is small enough from SCH asks whether in 2002 you had full size and that leaves in Spain and enough 300 people less or even continued to reduce head count and what about early retirements, will we be charging any thing to reserves. Head count reduction this year would be slightly higher, but we don't have any specific redundancy plan that are voluntary early retirement and agreed exits.

And yes earlier retirement will be played for out of reserves that we (inaudible) from Morgan Stanley would like to know whether about loans in Spain why has that been a drop in the third quarter, I think you know up until the 15th of September in Spain people don't start to do anything after the holiday period the - the fact is the Bank of America's board fleet Boston will that mean any change which the regards to just have seen. And will they excise the fourth option. I don't think so.

Thus there is an option and I think the fourth option was that saw thinks market place so typical for that any investor would have because surfing is always with company so that was this option to list that or not is just that typical safety close, but we don't have any intention of floating surfing growth in net interest revenue is re sustainable, I suppose you are referring to Europe well we have discussion for into Europe growth is strong because last year there was a sort of digestion of Alkave was integrated into the group of cost reductions policies increase in synergies and now we are seeing results of all of that and in the future growth will not be spectacular. But sir, again what will happen with that sir. Well only time will tell us the old sum goes. We think our actions are best and to protect the value of our stake there Pedro Ramos

More details on the results of wholesale banking and compared to the BBVA results. Well, in wholesale banking I think we said the most important things cooperate banking is doing well, it's 18 cent year-on-year growth in investment bank here in is becoming stable and that link to the changes that we have introduced in the model, we will mean that they will make bigger contribution in a reasonable period of time according to our IO6 plan, and I don't think I need to say any thing else.

And question from Perdilia Neir (ph) about the Latin America, revenues fall when what about normal level of provisions in Latin America, well we think the current one we don't think last year will be repeated we think in fact things well get better because the Latin American economies this year, have it been brilliant, but they should be round about this years figures and I didn't answer a question about whether I must about a comparison with BBVA I think the perimeters are different.

I think that in that in wholesale banking BBVA is the bank of volatile purchase institutional and our institutional is not included in our whole sale banking and then have their what they call the real estate portfolio which we don't have so, I don't think we can really compare that to, but our wholesale banking business in good, we have good positions and we have done a lot to improve it's contribution, specially with regards to it's global, regional reach, which hasn't achieved. We've acted as a sort of series of local cooperate banks and recently we've started to lease a lot more, so we are more optimistic about that's groups contribution.

And question about provisions in Latin American?

-- which is unset and then average fee for asset management we gave the figure for Spain and not the Global figure, I think the Global figures 1.46.

Well since there is no more questions, thank you very much and we hope you continue to give your good news in the future.