Banco Santander SA (SAN) 2006 Q1 法說會逐字稿

[Translated] Good morning. Let's begin the reporting of our financial results for quarter 1, 2006 for the Santander Group.

As usual we have divided the presentation into three different sections. In the first section I'll be looking at the Group's main highlights. The second part of the section will be a review of the performance of the business areas which as you will see have been very good in all cases. And lastly I will sum up the quarter very briefly and give you some idea of how we see the full year panning out.

As we don't have a lot of time this morning I won't be able to look into detail at all the business units, but remember on the website you do have additional presentation on the website with more details of the Group's main units such as Abbey, Brazil or Mexico. Although for regulatory reasons until 2 pm you won't have an American presentation available to you, and of course you have the usual quarterly series too.

So let's look at the Group result Q1 2006. The first thing to say is that they've been excellent. 26% has been the attributable income figure increase compared to the previous quarter in 2005 and 12% more than in the fourth quarter 2005. Excellent results then. I said that, not just because of the quantitative evolution there, so a 26% increase, but also because of the quality. All of the components forming part of that growth have been components in recurring income, excellent spreads. And also the results have been excellent because of diversification; all of the business areas have performed at an excellent rate.

Let's go to the P&L account. 19% is gross operating income. Increased costs practically 10% there. In other words we are opening up our JAWS quote unquote to 10% rate there. 30% is our net operating income figure increase, that's an excellent line. It is the line that best reflects the evolution of the underlying business. Loan-loss provisions as we had already reported to you, and you'll hear about this a little later, I will explain a little more about the generic provisions in Europe and the specific point in Latin America. Well there's a growth of 77%. So income before tax has grown over and above the 30% which takes us to a bottom line of attributable income of 26% because of additional taxes in some Latin American countries. So the impact of exchange rate factors and income and costs is between 7 and 8 points. At a results level that's a lower input because as you know all our fee results under the balance positions have been hedged except for Brazil profits and Brazil positions.

So let's take you through the income results. The net interest income has risen at around 22%. Equity accounting has reduced because of the sale of the stake in Union Fenosa. Net fees also have been growing at an excellent rate over and above 20%, that takes us to a 21% in commercial revenue growth. Trading gains is flat growth figure, even though performance has been excellent. [A fall] in treasury performance but as we will see later on in the corporate center we have made a couple of provisions there which have left this flat. So it's a 19% growth operating income increase to the bottom line there.

Let's turn to costs now and here I think we have to explain that 7% is from Central Europe a growth. If we take you through area by area, we have the Santander Banesto Portuguese networks growing less than inflation, even though we've opened up new branches. So there's a paradigm there. We've proved that you don't necessarily have greater costs because you're opening branches. Santander consumer finance growth was for largely due to the [inaudible] effect, the integration of the bank in Portugal and the UK as well. And then we have a number of Italian organic growth projects, opening up new branches and bringing in new customer funds then and the launch of Sub-Prime in Spain. So there are a number of new projects there which do explain the increase of costs; 22% growth in consumer finance. The Latin American figures are high for growth in costs.

If we look in local currency terms, Brazil has [fallen] at 6%. Chile is 4% and 7% for Mexico. Because of the exchange rate impact, you will see how significant that is. In the case of Abbey costs were 11% lower than first quarter 2005. They have been coming down on a quarter by quarter basis and that is part of our plan that we have set out in Abbey. We expected [technical difficulty] 40 million per quarter so that's a new element that we have in our figures. And the corporate projects, mainly technological projects, have had an impact totaling 20 million in this quarter.

As a result of this performance on the income and cost side we have some excellent improvements that have been made in the cost income ratio, both at a Group level and at a unit level, particularly in Abbey because of its lower starting point. But we're talking about efficiency cost income ratio including amortization and depreciation; it's around 40% in Europe and it's a 15 point improvement in Abbey. There's a long way to go. And in Latin America it's around 46%. We are still committed to continuing improvement in efficiency and cost income ratio as one of the pillars to underpin our banking success story. So with this performance we have a net operating income increasing at a rate of close to 30% compared to 2005 first quarter and 7% if we compare this quarter 2006 with the previous quarter 4 2005.

Net interest income, let's go down below loan-loss provisions, I did mention there was a 77% increase there. And I did also mention that you have to break it down according to geographical areas. Generic, that's 100 million increase in Europe and 125 million in specific terms for Latin America. There are two components in Latin America; one is exchange rate and the second component stems from the business mix we have in Latin America after the 56% growth figures that we have in consumer finance and cards in Mexico and Chile. There is a higher lending cost which is then pushed over to more specific loan-loss provisions. The credit cost goes from 0.22% to 0.30% for the Group. We had already reported about consumer businesses have much higher spreads, much higher risk premiums, but later on when we look in more detail at Latin America we'll be able to see that these businesses are very very profitable on the revenue side.

In contrast I would say what we've seen is very high loan-loss provision growth although the NPL ratio is coming down. Because the growth is quickly into NPL ratio there it's come down. It was 1.05 a year ago. Coverage is increasing and that's true in all areas as you can see so much, 1.05 it's now 0.86 in March 2006. This low level of NPL ratio together with the high level of loan-loss allowance has meant that generic funds are close to EUR5,000 million for 8 billion so we have 5 billion in generic funds.

In summary, at a Group level, we have a quarter where EPS is growing at a rate of around 26%. Our return on equity has improved 2 percentage points compared to quarter 1, 2005. And our return on risk weighted assets has also grown by 7 basis points. Our core capital is still kept at the same level as we expected; the 6% that we have upheld up to now.

I'd like to focus now on the performance of our main business areas. As you know, I will take you through our core segment or main segment here, we'll be talking about [geography] with Europe. A 19% growth in Continental Europe. United Kingdom, Abbey attributable income. United Kingdom is Abbey. 67% is attributable income, EUR244 million, very much in line with the targets that we have set out for the year. And Latin America, in euros the growth is 47%. When I talk specifically about the different business areas, I'll be talking in dollar terms for Latin America which is the management currency.

If we look now at a secondary segment, the business areas, retail banking before tax is growing at 35%. Wholesale banking 58% once again before tax. Excellent performance of all our customer business areas there, particularly Santander Global Connect -- Santander Global Market. Asset management insurance has been hit by the effect of the closed with profit businesses in Abbey, that's why the contribution here is lower, it's only an 8% growth figure that's been recorded, even though this business in revenue terms is growing at 17%.

And finally management -- financial management and equity stakes recorded a larger loss because of greater costs, because of the hedges, particularly the euro dollar hedge. The cost there is about 20 million higher. Also lower income from [inaudible] positions, that's 20 million, and we've also had to put in a provision of 100 million for covering the low [inaudible] position for trading gains, and that explains why we have this figure for financial management and equity stakes.

If we look now at the different areas of business performance in Europe, in loans and funds the growth is excellent; a higher pace of growth than we reported to you in previous quarters. The Santander and Banesto networks high growth. [Inaudible] finance have improved its position even though the perimeter has changed slightly. And Portugal is growing very well in a weak economic environment. Abbey is already recording growth both in loan -- lending and funds and we have to look at this in light of the growth in the British market. And Latin America is continuing to have an excellent business performance, this is local currency, growth figures of 20% on the lending side and 30% in the case of -- or rather 30% in loans and 20% in funds.

Let's turn to Continental Europe now. This reflects our business model, 14% is our increase in gross operating income with control costs. 52% is the figure for the growth in trading gains; this is linked in Latin America to Santander Global Connect, treasury, retail and middle market products here largely because there has been a strong demand for treasury products. Fees, 8% is the growth with lower fees that are coming in through the Santander network because of the new approach to our customers. 7% is the cost figure because of consumer finance, so with this leverage net operating income was 20% higher. This strong revenue in this area has meant that we have the capability and the capacity to invest for future growth and also to obtain 20% growth rates in the future.

Let's go through the main units now. In Europe overall the Santander branch network has 7% gross operating income rates, close to 9 or 10% for net interest income. When we launched the plan we want to be your bank. We talked about -- around a EUR83 million cost for fees; 20 million is the figure for this quarter, that's the impact for the first quarter because we still have the costs but the inflows of revenues to keep -- to hit break even for the year have not come through yet this quarter. So that's where we have this 7% gross operating income figure. 13% net operating income growth and attributable income is growing in double figures.

Banesto, I don’t really want to talk a lot about Banesto's results, they’ve all been reported to the market but they still [at great] speed, it’s still fitting those milestones in the three year plan to improve cost income ratio and to improve the position in the SME market and other market segments.

Santander consumer finance now. 20% is the gross operating income growth rate. I talked about costs just a moment before. We are investing here in future growth. There are many different organic growth [inaudible] on the line; opening of branches; Germany, sub-prime products being launched in Spain; the business in the UK. This is still recording a 20% quarterly growth rate and it probably will continue at that rate, although there may be a one-off investment for marketing or a promotion, that will keep us more or less at this level of 20% or above.

Portugal still is performing well. Gross operating income 9%, 15% net operating income, 22% attributable income growth for the quarter. The rest, well, this is the second top value unit, which includes three units. The most important is global wholesale banking on the European side. Asset management and insurance which we will be looking at a little later when we turn to the global banking businesses and Banesto is growing at 50% rates. Global wholesale banking is also growing at strong rates and we’ll see that later. And asset management insurance in Europe, once again, achieving high growth rates. The main weakness, as I said before, is the Abbey insurance side.

If we focus unit by unit on our main units here. Santander retail network is investing in clients. Right now, we are launching a three year plan. We’ve already started up that plan, which is to try and bring in individual customers. We have -- we started up the plan just at the end of January, so it’s only been running for two months now, so it’s too soon yet to give you full details of how it’s going, although our initial impression is that it is been very positive and we will report to you with further information over the next couple of quarters as we get more information on its results.

We’re also investing in commercial capabilities. We’ve opened up 128 new branches, but we have managed to keep a tight hold of costs. But performance has been possible because of the implementation of Partenon, which has allowed us to increase operating efficiency; opening new branches but keeping down costs.

We’re also investing in quality and we’re growing in selective terms. In selective businesses we are growing more quickly than in the fourth quarter 2005. The year-on-year growth rates have therefore improved so we’re expecting growth. There should be no further impairment on the credit quality at all, which should mean further loan-loss provisions. It’s just a result of the increase because of the generic provisions.

Banesto now. As I said before Banesto has already reported its results to the market, so I don’t need to take you through in detail the accounts there, but it will continue to improve its market share to grow and improve on all its income fronts. Loan-loss provisions have increased, once again, for the same reason as in Santander because of generic ones but because its credit was improved.

Santander consumer finance next. The volumes are -- our products with higher spreads are growing and obviously over 20% for [inaudible] current and for – and it’s over 30% for cars and other loans. We’re starting to integrate Interbanco, the new acquisition. All of our revenue lines are growing in line, as expected. I talked about the cost of different growth regions; mainly organic growth but figures are in line with the activities, so a record quarter for us on all of these fronts for Santander consumer finance, which is still performing at an excellent pace.

Portugal now. It is a weaker environment there for Portugal but the growth figures are high. We are growing at a rate of around 11% and I think the new -- in fact it's 21% for growth in SMEs. We are also gaining further market share in Portugal in lending and also in the more attractive products that we’re offering there. We’re expanding in Portugal; we’ve opened up new branches, 48 in 12 months. Also good growth in revenues from fees. Our efficiency has improved and 15% is the leap in net operating income. I would say that the Portuguese franchise network is still going to gain further market share, particularly with regard to our revenue.

Let’s look at the second area of business here in Europe now, United Kingdom Abbey. I would say to summarize that Abbey’s earnings were in line for the revenue and costs plans, the three year plan. We are on target for revenues and costs. We did talk about 5 to 10% increases for revenues; it’s now 11% growth. For gross operating income compared to Q1 2005, costs are down 12%, so we’re now seeing 63% as a growth rate for net operating income. I'm comparing here Q1 2005 with Q1 2006. The attributable income in growth is 65% now, so the run rate for the rest of the year is for us to hit the target for the full year.

The key points of Abbey’s plan, which I will focus on a little later are as follows. We want to improve our market share -- increase our market share; improve on loans and other basic products and being selective.

Let’s look at the key highlights then. We are currently in a process to improve the quality and profitability of our sales for growth lending -- growth mortgage lending. We already have a 9.8% market share, which is in line with our global overall market share which is around 9.7% but in redemptions, we are still under our global market share, so the net lending figure is 6.5%. That’s better than quarter 4 in 2005 and here we expect to get a lending market share of around 9.5% by the third or fourth quarter of the year, which will be more in line with what we expect for our global position -- our overall position.

Loans are going well. Credit quality is good. People are now opening switcher accounts which is working very well. Then the net savings flow, this has also improved, 1.3 is the figure for the improvement there. So essentially -- these are figures in millions of pounds. So productivity is increasing. We are seeing a consistent trend towards more constant flows into Abbey.

If we review for a moment, I know I’ve already taken you through some of these points, but let me just review the commercial situation -- the retail situation for you. This is what we present to you when we talked about the plan for mortgages. Remember that I said we’d hit our market share by the end of the year. Then savings and investment, particular in investments, we are making substantial improvements there because we are passing on low spread products to more profitable products in current accounts. We are bringing in more current accounts, particularly switcher accounts, which bring in higher revenue to us. UPLs, I mentioned those before, are personal loans. We are going at very positive rates. For cards we reached an agreement with MBNA. This year will be a transition year for us and by next year, we will have an Abbey integrated card operation, so by 2007/2008, then we will definitely see growth in our card business. Productivity has improved. Employee productivity, the products sold by the banking advisors -- mortgage advisers are growing at very high rates.

And I’d like to focus more on our information systems. At what stage are we at with the roll out of Partenon, which as you know, is the crucial element in this commercial overhaul of Abbey. We’re starting to roll out the very first modules as part of the Partenon platform. We have now one single centralized telephone platform, that means all our call centers can be integrated together. It’s improving our quality, the quality of the service, allowing us to be much more proactive through the telephone banking channel. Right from the start of the year -- MIS we’re getting means that we can get information from branches on volumes and prices and by the second quarter, we should have our commercial agenda available. It will improve our contact work with customers and we will have one single Partenon customer database.

In summary, the message I would like to convey to you is that the implementation of Partenon, the roll out program is on schedule and we’re starting to get the first elements that will allow us to improve the MIS, the Management Information System we have, in the first stage of Partenon and then the commercial productivity of branches will gradually improve – branches and other channels, which is our ultimate objective with the roll out of Partenon.

Let’s take a look at Latin America now. What do we see? Latin America in general terms, in banking terms of course is a very sweet spot. We’re growing very nicely, not only in terms of our activity but also in terms of our results. The margins, as you can see, are stable. The income is stable or growing. There’s an interesting mix, strong growth, as you can see, which – and here we’re talking in dollars by the way. We’re talking about in euros 47%, in dollars 35%.

If we compare with the first quarter last year – I said before that the exchange rate definitely impacts on the results. In the region here, we’d be talking about 11 points against the US dollar, that’s what you can see here. But this growth is thanks to high income, 28%, that’s times two. You see that’s 48, that net operating income. If we were talking in local currency it would be minus 11 points, so it would be a very healthy growth.

Now why is this major growth? Why? Well a mix, a very relevant mix in the major countries. We’re talking about more personal loans, more credit cards. This is extremely profitable and this talks of course about higher provisions; we saw that before.

As you can see on the left, what do we see? We see that this is [consistent] quarter on the quarter and this reflects very broad business customers, stronger links with customers, so we’re building a commercial bank, a retail bank, which is resulting in very health recurrent growth. That is exactly what we attempted to do in Latin America.

Now let’s break this down by country. Let’s look at the different units. Let’s differentiate perhaps between the different rates of exchange. I want to focus a little bit on our net operating income and we’re talking in local currency. In Brazil, in dollars, it’s a very healthy growth; practically 50% in local currency. And what do we see but attributable income. Look at it rocketing, 35%. Here we see two leaps in our net operating income; the provisions on the one hand, I’ll talk about that. And then there was a corporate tax rate which rose in the [inaudible].

But Mexico now. Let’s look again, 52% in our net operating income, in provisions also. The tax rate, as I say, brings us toward flattening. In Mexico, this tax goes from 7 to 16. In Brazil, we’re talking about 29 to 34.

Chile. Chile is the most consolidated of all. Look at the numbers. They reflect nicely the underlying growth rate. We’re talking about 45% growth rate in our net operating income. And the rest of the countries are doing very nicely also. Santander private banking, that’s our Group, is growing, differently perhaps but growing. We see healthy growth in both operating income and attributable income doing both over 30%.

Let’s break this down by countries now. Let’s see what the main highlights are. Remember last year we talked at the end of the first quarter about that technological success. We’re growing on market share in the more profitable products; consumers, [bonds]. Let’s see a little bit what happened with our commissions; 15 local currency -- 25, our ROS are a little bit less, our lower trading gains. This year we have not had any portfolios though but we’re doing about some 300 to $400 million dollars, so at least, well these are healthy.

Again, costs now. We see them shrinking 6% in local currency, which explains that our net operating income is just booming. Now we would talk about that risk -- that issues are taken into account but if we extrapolate the first quarter to the rest of the year, we’ll see that one-off components, I would perhaps talk about 15 to $20 million dollars. In the first quarter we are seeing some credit issues which have to do with our corporate banking, which explains that difference which we expect vis-à-vis the rest of the difference. And also there’s a normalization of corporate tax rates from 29 to 34% of the increase and well, we would be talking about our standardization.

Mexico now. Let’s see those key assets. The system is growing. You see those growth rates, 29 for loans, savings 17. Margins, fees 7%. We continue to grow our market systematically in all of the different areas in Mexico. As you know, we’re doing very nicely, 11 to 18%, depending on the market segments we’re looking at and our aim is to make the 20. I would say there's a change, a major change when we look at the make up of our credit portfolio; 50 to 60% in retail, in consumer owned credit cards, but there are reductions. There's less in the institutional loans, which have to do with [IPAV] and [inaudible].

Now what about our forecast for loans. In line with what we expected. We expect to see the same results because of the change in our business mix. And what we see in Mexico is a growth, a very important growth in our benefits before taxes which turns of course into much growth. In the first quarter 2005 we had a tax rate of 3% and in the same period in 2006, it’s 16.5%. We expect a normalization that will have been completed in 2007/2008 and we’re talking about 29 to 30%.

Chile. In Chile what do we have. We have thought about maintaining the same policy as we've had in the past two years. We continue to grow consumption, mortgages, consumer. We see how the corporate activities have low spreads. We expect an improvement in our spreads and at this point in time it allows us also to think about additional income. We’re growing. We are opening up branches in Chile. We continue to see an increase in our markets; we’re talking about 25% roughly. And the results are in line. This is a very healthy landscape and this is the reference bank. We are the benchmark, as it were. We continue to grow at a healthier rate than the competition and this, I think, is reflected by excellent, excellent results.

The rest of Latin America now. Just a few comments about the other units, let's begin with Argentina. What do we see in Argentina? Normalization, 47 million results in the first quarter. Our strategy, perhaps, looks at this same action as done in Spain in 2002 and we want to reduce the Group’s exposure to the public sector and now we’re doing the same with our private customers. We see that we have a nice increase there.

A little bit of information about Puerto Rico. Last year we sold a portfolio and this year there is no sale of a portfolio which explains the results. On the other hand, the rest is going up 13% so it's a one-off.

Santander private banking, I talked about this before a little bit specifically. We have assets under management of 25 billion very recurrent and we see these results are systematically making the 20%.

We've taken therefore a look at the different geographies and now let's take a look at our global businesses; global wholesale banking, insurance. Our quarter has been a follow up as it were but it speaks about a very systematic trend. We have systematically seen improvements. If we look on the right-hand side we'll see what the results have been. We see that we're talking about equity 31%, and here we would talk about another component which grows a little bit less; the more value added products are growing at [inaudible], 50% in the treasury. As you can see global markets are doing 79%. So we've had a good trading quarter, results have been doing 37% which leads us to think that we're talking about a 44% growth. Costs are growing at 16% but the net operating income is averaging 58% so we could talk about in terms of income 13/14 points because this is an area which includes Brazil, Mexico, Chile and other Latin American countries.

I began my presentation by saying that we were witnessing a systematic improvement. We've observed this excellent performance over the past few quarters. We have a model which involves 250/270 customers and we see that the results are increasingly better; we're growing Santander Global Connect which is how we have called our product and some treasury products to the middle market. We're basically reaching out to Latin America, we're extending; we have Chile and Mexico.

And then we have project finance. Again here we are developing products to grow these areas. And then we have the transactional projects which attempt to recover market share in what we call core markets; cash management, trade finance. In other words products which involve corporate customers or clients. Of course there's much more [recurrent] than before because we are growing. As you can see on the right, cash and trade and custody is growing, and investment banking is growing also; 50%. Then we have the costs, more costs of course because we're launching products. But our efficiency levels are improving.

So two messages to take home; we are consolidating this global shareholding activity. Our results are good, they're solid so our global wholesale banking activity is going to be as fruitful as we hoped.

Let's see now, management and insurance -- asset management and insurance. Follow me to the right. The revenue contribution, approximately EUR1 billion. So this is very important, this is very important. They're growing very nicely at an average of 17%; 20% in mutual funds, 15% pension funds and 14% in insurance. Let's look at what we have in the area. Let's see what we have, this growth rate of 12% in gross operating income. That's just a few million euros which results basically from the costs that results from integration of the insurance companies, the new technological platform, asset management. We're talking about some [hikes] which perhaps are not that very important. 8% income before tax; only 8%. Why? Well because of the so-called [gold] fund, that Abbey product with-profits, that was important; the with-profit fund which we remember from Abbey.

What are we doing then? We are advancing towards a global model. We have this platform, we are growing our own projects in Europe, we are preparing to sell alternative funds via optimum platforms. This of course is once legislation in Spain so allows.

In insurance we have seen the merger of insurance companies in Spain. We've strengthened the sale of our own products in our network and the area is -- in other words bancassurance is growing very nicely.

And Abbey, well we have that with-profit negative impact but investments are doing very well in terms of Abbey. So we have the negative impact of closed books and pushing sales in branches and direct channels.

Finally now, our conclusions. Let's see what the main elements are. We've had a record quarter with very high quality results. Strong growth in all operating areas. The results are recurrent, there's nothing extraordinary, nothing leaps out. So we have improved efficiency and profitability and we have excellent credit [quality], we maintain our core capital levels. And we talked about this [inaudible], we have another series of expansion projects E08 is how we call them -- or I08 I'm sorry, I08. So it's been a very positive quarter for us which encourages us to be optimistic. We believe that we are in fact going to surpass our initial expectations. We are even more optimistic now than we were just a few months ago when fiscal year 2005 wrapped up.

And now we are available should there be questions. Please, how do we go about this?

[Translated] We have some questions and then we will be launching the conference call.

Good morning ladies and gentlemen. [OPERATOR INSTRUCTIONS]. The Q&A session will start after the webcast questions. Thank you.

[Translated] [Inaudible] says that we've talked about our card business as a global business. Do we have ambitions he says to penetrate new countries and specifically are we interested in Korea?

[Translated] Yes, my answer is yes, it's true. The card business is a global business for us. We are hard at work in this area.

At this point in time we have been actually for the past 18 months, we've been learning and sharing best practices. Now we have undertaken the globalization of our activities and we are actually pushing forward in different scenarios. In Spain and in Mexico which is what's most growing; Brazil also is a place where we have come very far. In Brazil our share is very long and in [Abbey] also. We do believe that this is a core business; cards are a core business for us. The income levels are excellent and we hope to have very good news to share with you as we continue with our globalization.

Now as to the specific question, you asked about the LG card in Korea. Well I called the person in charge of cards. I just wanted to know what that business was. We are not interested, we have not analyzed the business. I believe LG Cards is in Korea, it is a Korean card brand.

Other questions?

[Translated] There are a number of questions which have to do with Brazil. Some refer to provisions, some refer to what the new platform allows us.

Ignacio Cerezo from JP Morgan and Mario Lodos from Ibersecurities ask in principle what would be the recurrent provision that we could think of for the future? And up to what point does the technological platform envisage continuing to maintain the cost levels?

[Translated] My answer is regarding provisions I made a reference to that. Perhaps I wasn't sufficiently detailed in my presentation. We expect in this quarter to have some components which cannot be extrapolated and some additional components. We believe that in view of the business mix we have in place, in view of our growth -- our business growth, the recurrent provisions will be at about $20 million quarterly, less than what we had in the first quarter; 20 million less.

The second question has to do with our technological platform. Well the technological platform actually allows for two possibilities. On the one hand, income; I talked about credit cards, that's our operation in Brazil which we felt to be weak. We had some four card processors, now we have an holistic approach and [inaudible] talking about cards but I could just as easily be talking about any other one of our business areas, we will be able to better take advantage of the market, we'll be able to grow much more healthily in these areas.

And for the second element I believe that Ignacio made a reference to that; the element or the issue of costs. Cost we believe [back] to the new technological platform. Thanks to our current perimeter we will be maintaining the costs, we'll be limiting them to inflationary levels I would say for a two or three year period. I'm talking about local currency, I'm talking about local inflation so that is our timeline and that is our expectation.

[Translated] A question from Pablo Beldarrain who poses, as always a very long list of questions which I think is going to allow us to really sweep our corners. He asks about Spain, he asks why in Spain have we seen this net interest revenue. Why has it gone down by that 1% despite the fact that credit had grown?

[Translated] Well in Spain financial income, I believe we're talking about customers and spread, we saw that it continues to improve. Previous quarter 3, current 310, basically because of deposits 154 to 171. So in the case of customers and spread there is no element that would explain this reduction in our net interest revenue, we're doing fine. The customer spread's doing fine too. We do have to take into account wholesale funding. We believe that this effect basically is in Euribor for three months. The increase in rates of 50 basis points could have impacted by say 40 -- 40 something but it has not shadowed credit [inaudible]. As you can see it's only going 17 basis points if we compare with -- I'm sorry the spread is shrinking 7 basis points if we compare with the previous one. So impacting is due to this basically.

There's another element which is perhaps more time specific and it has to do with the opening up fees and other elements which are not core volatile, less ROS and opening fees -- overdrafts and fees. Now if we look at the margins we don't see a major difference in the spreads, at least not in the major market segments, and we believe that the customer yield spreads will continue to be improving. Where we grow more in credit, more than in deposits, we'll continue to see these spread levels.

Another question?

[OPERATOR INSTRUCTIONS].

[Translated] I have a question about the P&L account, two questions. The loss in fees and commissions has been less; this 20 million that had been forecast. What's been at the root of this?

And secondly, what products are currently allowing for these good trading results? That's the two questions.

[Translated] Yes regarding the fees and commissions, well our estimate was of 20 million but there are some securities issues which last year were present. So we've seen these preferential products, if my memory doesn't fail me, there was that quarterly impact which this year has not been in place. So these are the reasons.

And then as to Santander Global Connect, we talked about trading. Basically these products have to do with interest rates. Some are structured, others are sold basically to the middle market; SMEs, micro corporations, the middle market. I don't think that I would define it as extraordinary because we've seen these excellent systematic levels over the past months and I think that the results continue to be healthy. I made a reference also to the fact that this is one of the projects which we are currently implementing in other countries, just recently in Chile.

[Translated] Pablo Beldarrain from Morgan Stanley and Carlos Berastain from Deutsche Bank have a question regarding the evolution in Abbey of net interest revenue figures. We're talking about spreads and volumes. Why is this decrease in the net interest revenue?

[Translated] My response here is that in Abbey this was the core business; mortgages, deposits, UPLs, it's doing nicely. It's stable with a little bit of a peak every once in a while. It is true that last year operations were sold -- [leafing] operations which were inherited from the PBU, it's a legacy. I believe that in Abbey's presentation there's a slide which divides this net interest revenue into the two elements; the more structural one and another one which just last year was [inaudible]. This is the other. We're talking about net PBU that's what's shrunk. And perhaps more specifically it's 301 million net interest revenue in the fourth quarter, 297 in the first. But in others it was 46 million pounds in the first 22 million. That I think is what explains it. It doesn't have to do with the recurrent business of mortgages and deposits.

[Translated] Again, Pablo Beldarrain and Eva Rubio have another follow-up question. This one has to do with the evolution of net interest revenues in Mexico. We're talking about major portfolio growth and they would like to understand that. They want to see what happens to the global income. Does it affect non-customers? Could this be justified?

[Translated] Well Mexico, what we have in Mexico is the net interest revenue in non-customers. We saw that portfolio which was doing well so we see more of a net interest revenue if we compare with last year. And in the rest of the business if we see the spreads -- if we look at the spreads, the credit spread basically is stable. The total goes from 4.5 to 4.6 -- 445/446, that's because of the mix. And there is a reduction in the spread in savings. This has to do with the [raise] in the first quarter, so it's 2.6 now it's 2.4. So it's the Alcom that explains that improvement in the spread if we compare with the previous year. We're talking about 7.5 rates, now they continue to decrease. Just last year it was practically 10% -- high 9s/10. So in Mexico we see an improvement in the spread thanks to the mix in liabilities and core deposits in Mexico. This is very important. And Alcom, as I say this year is hedging, that's what it's been designed to do actually.

[Translated] Arturo de Frías from Dresdner has a question. Could you please talk a little bit more about the corporate center which generated higher losses than forecast? And how would you explain your coverage or hedging? How does that impact?

[Translated] The answer here is that I gave a little bit of background information in my presentation. In hedging operations we have a position which is short dollar long euro, there's a carry over. The carry is 225, that’s the rate between -- the difference rather between euro and dollar. This differential is higher -- or spread is more than it was a year ago and it's a higher position than last year because the expectations are higher also. That explains that 2.5 billion -- 3.5 billion that's our short position. So we have more volume, negative carry. So that I think explains the 20 million impact in the quarter. That’s the negative carry which would go to our net interest revenue. Again we see increase in the rates, 35, 40 points less again in the Alcom that explains that 20 million.

Now what is more salient? Well it's the change in the corporate center which has to do with financial operations, that was discussed very briefly. We in fact have restructured, EUR100 million is the amount which I think is the item that would explain this, and these are the elements. This I think is what explains the variation from one year to the next. ROS in the quarter and soon from the hedge is not significant.

[Translated] And the last question before we go to those calls via webcast is what does -- this is Pablo Beldarrain from Morgan Stanley. What is our interpretation of Brazilian spreads? Up to what point can they continue to increase at the rate they’ve been increasing recently? And what are our expectations for the coming two years?

[Translated] My answer is that it's true that those spreads have grown in Brazil. This of course has to do with the change in the mix. It is true that the spreads in Brazil, if we compare with peer products, are higher than what we would have in other countries. Also in Brazil we see a decrease in rates. You know that in Brazil the effect that in Mexico is perceived in [inaudible] core deposits doesn’t happen in Brazil because 70% basically of those core deposits are there, so when the rates vary up or down we don’t see the kind of effect that we would with this in Mexico because of that deposit issue.

So I would interpret that we're referring here to asset spread. I think that in the future the spreads in wholesale activities have decreased, so the underlying element here is the change in the mix and in the case of some specific products in [inaudible] we've also seen notable decreases. So the higher spread is explained by these two issues.

Now if we look into the future, well it would be thinkable that if the system continues to grow as it has grown in the recent past and we consider there to be 30 or 40% growth rate, well there will be a certain pressure on the spreads in assets. Not in liabilities because in the area of liabilities those deposits have [inaudible], and as we said both core deposits are there. We have that consolidation of the system which would explain a slight decrease in the area of assets we have at reserve because at some point the central bank might perhaps affect in a positive way -- probably in a very positive way that net interest income.

[Translated] Alright before we give the floor to other speakers, there's an investor who wants to know whether the bank is going to maintain its payout policies and if so what dividends can be expected for this year.

[Translated] My answer here is that we said that our payout is at about 50% that’s our policy -- 50%. So yes that’s our expectation.

[Translated] Very good. In which case I am going to give the floor to questions posed over the webcast. The very first question is from Mariano Colmenar who is on behalf of Credit Suisse. Go ahead with your question.

[Translated] Good morning. I have a couple of questions for you. The first question has actually already been partly answered with regard to the allowances that have been put into the portfolio and the fact that trading gains have been impacted for the first quarter. Will you have to make any further adjustments in future quarters this year for your trading gain portfolio, just to give us some idea of the results for financial operations -- trading gains for the rest of the year?

And the second question is a little more tricky because the asset management and wholesale division in Continental Europe, I believe the figures are being calculated by default but I think the revenue side is very strong; trading gains and financial operations in particular and also net interest income. So my question is how recurrent are those figures for those particular lines for that division in Continental Europe for the rest of the year? Thank you.

[Translated] The impact -- your first question, the impact has been a one-off impact in the first quarter 2006. We don’t expect any further impact for further allowances for the rest of the year.

Your second question I'm not so sure whether you were talking about others or asset management there.

[Translated] I think it's more about trading gains is the comment, than rest of Europe.

[Translated] Trading gains, okay I see in the rest of Europe. So you're talking about wholesale banking really if you're talking about trading gains. I did say earlier that in the wholesale banking division our customer related business activity is recording strong growth. But on the trading side -- on our holding side there isn’t any big differences there in the proprietary trading side, mostly the differences have been on the Latin American side than in Europe although it's true that Europe is also performing well. So there I don’t believe that we can focus any main adjustments or differences but trading is by nature a volatile activity. And what I would focus for that area I think that today are good increases for customer related activities, the pipelines we have for investment banking and customer treasury are very good. We can get good business in the future quarters but trading in general is difficult to predict because it is so volatile but I would say that this level we have is high and will be high.

[Translated] The second question is from Luis Pena representing [MIG], go ahead with your question.

[Translated] I have a number of questions actually which have more or less been answered already but could you please clarify two things here. You’ve been talking about average net interest income and you’ve talked about core management and others. And I believe there's been a fall off there between quarter 4 2005 and quarter 1 2006. Could you give us some idea of the performance in future quarters of that particular line?

And then the second question is about costs in Brazil. I was quite pleasantly surprised by your cost figures there. I had believed there was a pretty big advertising campaign ongoing in Brazil, I had understood that, because that would have a big impact on the costs this quarter. Maybe that was last year and maybe I misunderstood. Perhaps you could clarify that point for me? Those are the two questions I have for you. Thank you.

[Translated] Net interest income for Abbey first of all. I already have mentioned that that is linked to PBU activities which have disappeared so for future quarters this year that we wouldn’t expect any big changes to be seen there. So the levels you will see in the next few quarters will be in line with what we've had this quarter.

As for Brazil I'm not really up-to-date on what we've done with the advertising campaign. I believe we've calendared the costs there but I'm not quite sure what the effect -- yes all the expenditure there has already been calendared into the account. Yes this is accrual there, yes. So it has been put into the quarter already yes. We've had a lot of questions about Brazil already so perhaps I should tell you our view on Brazil today, leaving out exchange rate possible changes and the impact that that might have there because that is really the only position that we aren’t totally covered against. Nevertheless I would say that our forward view on Brazil is perhaps even better than the view we gave you in November and in investor days. I think we can say today that we expect higher growth rates than we reported to you on that day.

The IT integration roll out has been going very well and we expect that that will help us to get higher growth rates. So the outlook we can give to you today is a lot more positive than we gave you for this quarter.

The next question comes from Kato Mukuru from Citigroup. Mr. Mukuru please go ahead, thank you.

Hello Kato Mukuru from Citigroup. I just had three quick questions. Given the negative impact of the with-profit funds on your insurance performance in the UK, are you now more open to selling these funds than you were in the past? That's the first one.

Secondly, given the integration of your insurance business domestically, are there any one-off costs that we should factor in or any potential revenue synergies that we should factor in in our forecasts?

And lastly you mention that you are more optimistic about your general business -- all your general business [items] and their performances. Is this more systematic, i.e., is it because the outlook of the markets in which you operate you are more positive on? Or is this more company specific? If you could highlight on that, that would be appreciated. Thank you.

[Translated] The first question then was a specific question about the closed with-profit funds, the insurance business in Abbey. We have already mentioned that the performance results this quarter were weak, or really the growth wasn’t there because this is a business that has been closed; there is no growth that can come out of that. That was the first question.

And then there was a question about whether we want to [technical difficulty] in the three year plan. And we've been very clear with the three year plan that we are focusing on restructuring and integrating our platforms with integrating business in [inaudible]. And we did talk about the value component there. This is part of the price that we paid for Abbey and we intend to continue to manage those operations and to manage the value that we have got. But the business is closed and the question is now to manage the portfolio to bring in the best results we can. That was the first question.

The second one was about any synergies that might come out from the merger of our insurance business here in Spain. There won’t be a very big change on the cost side because of the integration there because these companies already are very small, very efficient and very cost controlled. EUR3 million would be the maximum amount that we would have as a cost reduction capacity with the merger. I think the difference will be more on the qualitative side, the manpower we will have there in the network really. And the more global approach we will be able to take to our bank insurance activities. So the merger has more of a qualitative impact than a quantative impact on the operating cost side in Spain.

The third and last question was whether our outlook for the rest of the year was more positive because of the company or because of the improvement in the general economic environment. My answer would be for both reasons we have a more positive outlook. We have a unit; Brazil in particular I have already said, is a unit that is performing much better than we expected and that's the specific side, the company side and we have completed integration so we are better placed to get better operating results there.

And then secondly, yes the economic environment is more favorable. So I would say it's a combination of both of those factors as an answer to your question.

Thank you.

Next question is George Karamanos from Keefe Bruyette & Woods. Mr. Karamanos please go ahead.

Yes thank you. Just one question regarding your capital management. Looking at your resource you’ve had risk-weighted assets growing by 19%. We have not yet seen Abbey National start increasing its risk weighted asset growth, I guess that should come next year in Latin America as you said it is growing extremely fast. What would you consider a normal level of core Tier 1 going forward in order to ensure that you can fund this growth?

And can you give us some indication of what kind of internal capital generation you foresee and how you plan to use the industrial portfolio, the unrealized capital gains that you have under this context? Thank you.

[Translated] Your first question then is about the growth in our risk weighted assets which is currently recording a 19% growth rate and our core capital ratios. Well what we are seeking as target core capital ratios is, as we've always said, 6% more or less is the figure we're heading towards. The growth of return on risk weighted assets is strong because of the lending activities in both Latin America and Europe. And in Abbey you're right the figure are lower, the growth is lower but there are some drivers behind that growth in risk weighted assets which is perhaps higher than the average figure which is 12 to 13%.

Capital generation after dividend at this point of the cycle I'm talking ex-sale, not including sale, of [stakes] in the industrial holdings, we're talking about between 500 and EUR700 million that's a free generation figure for you. I mean that's perhaps a low figure but the return on risk weighted assets is still growing so we are still generating enough capital to finance the growth although it's not a substantial increase, it's not a problem at all because we have this excellent rate of return on risk weighted assets so it's not a worry for us.

There are no more questions.

[Translated] Thank you very much for your attention and if you do have any further questions please get in touch with our investor relations department who will be glad to help you. Thank you.