Banco Santander SA (SAN) 2006 Q2 法說會逐字稿

[translated] Whenever you wish I can start. Well as always we want to give you a presentation of our results and in the first part I'll be emphasizing the main keys to the Group's performance this half year. And then José Antonio Alvarez, our CFO, will be discussing what's been happening in the different business areas.

And then, as I've done before, I will give you a brief summary of the presentation, trying to focus on the priorities, the main focal points for the rest of the year -- the second half of 2006.

Right then. The first slide, which you can see here, is really a very brief summary -- although it does go into quite a bit of detail, what's been happening in the first semester of 2006 here in the Santander Group.

First of all profit went up 26%, as we'll see later.

I'm sorry the sound has gone, I'm very sorry about this. We had sound and the translation can't continue without sound.

But as you can read earnings per share have gone up and the returns on risk weighted assets have also gone up by 10 basis points. Apart from this cost income ratios improved as well. It's improved 4.5 points and we've managed to break through that 50% threshold that we had in the Group for the first time. Later on we'll see a breakdown of this ratio and see how we've managed to improve the cost income ratio, looking at the main blocks that make up that performance. But both in Spain and in Latin America and in Abbey our efficiency has been significantly improved and very good. So those are the main figures then.

And then business earnings and business activity. There too the half year has been very good. Activity and volumes have risen in Europe and in Abbey and in Latin America. In wholesale banking, insurance and everything, and the results of all the different areas -- business areas -- have really improved with very high growth in earnings.

Moreover we're talking here about recurring earnings and also there have been figures which can be compared against the other ones from previous year because we haven't had too many one-offs or capital gains this half year. We can now go into more details about all the different business areas. But just to sum up the different elements that I think are worth talking about specifically today in this half year, things that I think markets would be most interested to know. I think there are a few things we should focus on in Europe.

The whole Group has been doing very well. All the different legs of the stool have done well, Banesto, Santander Portugal, Santander Finance and all the other units that we have in Europe.

I'd like to specifically highlight one thing though which is the growth of net interest income in Santander Group in the first half and very specifically in the second quarter of 2006. You will remember that when we presented the results in the first half of -- first quarter, we said that this was growing at 9%. And now at the moment it's growing quarter-on-quarter at 13%, second quarter over first. So I think this is very important, there's a lot of things behind this, it shows that although activity is still very important, the way that we're handling the spreads is very efficient.

Another very important thing to highlight this quarter and this half year, but especially in the second quarter, is what's been happening in Abbey. Abbey in the second quarter had very good results. It finished the half year with EUR4.9 billion earnings which puts us on a path which -- although we haven't formally published our targets for Abbey, nonetheless I think the market knows what we're after right from the start when we bought it three years back. We were talking about EUR1 billion for this item. And now with these earnings it looks as though we're definitely on track to meet the 1 billion a year. And the growth in revenues shows certain consistency as well now. It's grown to about 9 -- they're growing at about 9%. So that's the second point that I thought was relevant to highlight for this half year.

A third very important issue is Latin America. Latin America continues to see its business grow in terms of customers. And because of the strong growth in its customer business its margins and its profits are very high. The operating profit for Latin America is 46%, that is it's growing 46%. And if we look just at customer business, commercial banking, that's grown 71%. That's through our network distribution. And that's compared against the first half of last year.

Obviously here there is a positive impact from the exchange rates, but that actually is less than what we had in the first quarter when we reported the first quarter results. At the moment it would be, for revenues and for earnings and costs of course as well, about 5%. And it's different in different countries there. In Mexico it's quite different from Brazil. Brazil has a much higher impact than elsewhere but the consolidated accounts have estimated an impact of about 5% on total consolidated earnings.

So this 46% growth in operating profit, with 71% growth in commercial banking's profit, means that we're expanding very well but we've also got the exchange rate impact. So that was what I wanted to emphasize, the good commercial results we're getting from Latin America.

Another important item to emphasize is the magnificent results we're getting from global businesses and very especially from wholesale global banking which is being consolidated. This is a very sound business line, it's heterogeneous. If you look at the P&L it has stable elements and other volatile elements. Stable elements are customer businesses, and then we have directional portfolios which are much more volatile. But if we look at our customer portfolios, there the revenues have grown at 42%. And that means that our model that we're rolling out, which is beginning to be consolidated, is obviously on the right track and working well.

And then the global activity for insurance as well had rather a weak first quarter but the second quarter has been excellent. In operating profit and pre-tax profit this is going up at more than 30%. So that's the things that are clearly very positive. The net interest income of Spain and then Abbey, all in all, and revenues and then global banking, customer business and -- Portugal's doing very well too. I have to recognize it is a small unit but Portugal nonetheless has had a fantastic first half and is managing its spreads very well and its volumes in all the different areas.

There's something I'll be explaining later in more detail which is the increase in allocations to provisions. There are two components to that, as generic provisions go up, that's happening in all countries, but very especially in Europe because of greater activity here in Spain and in global wholesale banking. And then more specific provisioning, mainly in Latin America. This is driven by growth in volumes and by changes in the mix of our products. So we'll have a special point on this during the presentation so you understand what it is.

So as a consequence of all of that the balance sheet is being shored up with NPL ratios despite higher provisioning improving -- we've improved NPL ratio and coverage ratio. And you'll remember that with the generic provisioning we've got over 5 billion in generic provisioning. The capital ratios are very sound, they've gone down slightly since the last report because of our investment in Sovereign.

And then we can discuss something which we've already informed the market of, the agreement to sell the assurance business in Abbey to free up some capital. But above all our main aim is to significantly reduce our exposure there.

So those are the key elements that I wanted to sum up to give you my vision of the positive things that have happened and the not so positive things that have happened during the first half of 2006.

So now we can look at the figures and the earnings. And you can see that the profit for the half year has gone up 26% and then you can see that in the second quarter of 2006, once again we've got record figures; it's true that the second quarters every year look very positive because of dividends, but it's also true that there's a qualitative leap here, a big leap here. So very good first half year.

The second quarter was better than the first and that means that all in all the six months have been very good in quarterly terms, in quarter-on-quarter terms and half year on half year terms. So that can lead us to think that we are very well grounded and we are moving on track to get the results that the chairman announced at the last AGM saying that our recurring earnings, our ordinary earnings would be more than EUR6.5 billion.

So clearly we are on track if we look at these figures; the Group should hit that target. As a consequence of that then, of these results, there has been no change in our capital, earnings per share have grown 26%. And of course there's an important improvement in return on equity and our return on risk weighted assets. In the first case the ROE has gone up 2 percentage points, up to 18.2, and the return on risk weighted assets has gone up 10 basis points.

So let's have a look at the income statement. You've got an excerpt on the screen and you can see that basically the profile is very similar to what happened in the first half of 2005. But there are some things that we'll have to go into a bit more deeply because I think it's worthwhile you really understanding what's happening. Obviously we're increasing our earnings which are growing twice as fast as costs, that's good news obviously, but it consolidates our model for growth and our model for generating earnings. I wanted to say that first of all. And then secondly as you can see, our ordinary profit has gone up 17.2%; it's true that the exchange rate does have an impact on this as I've said before, that could account for about 5 points of that growth. Our costs are growing at 8% and thereto there's a component which is the exchange rate impact of 5 points, and later on we'll talk more about earnings and about costs in greater detail. And that gives us an operating profit of 28% which is pretty well the same growth that we have in attributable income.

And there's one point which I've already mentioned which we will talk about more later which has to do with the growth in our loan loss provisions which have grown 62%. Therefore there are three elements to be highlighted here, three issues we could say, which I think are worth discussing in greater depth. First of all what's been happening in income, in revenues. Then what's been happening in costs. And then what's been happening in provisions. So I'm going to devote some time to these issues during my presentation.

So first of all let's look at revenues. The net interest income without dividends has grown, as you can see, at 20.9%. I'd say that this was very good growth. In my notes I've put very good, VG next to it. 20.9% increase in the times that we're living through at the moment with the level of income that we have as well is pretty good. And there are two reasons for this. Basically we're seeing good growth in the volumes of business that we have and then there's an excellent management of spreads and margins.

So on to the next line, just to go through the entire cascade, dividends have grown 13%. These dividends mainly come from our holdings in Sao Paulo and the Bolsas y Mercados Espanoles, and with the sale of Union Fenosa, equity results have gone down, especially for things that we are accounting for through the equity accounting business. And then we've seen a growth of nearly 20% in commercial revenues. That's due to the growth that we're getting in fees and commissions which have gone up 19.6% and then you see insurances there too which have gone up nearly 15%. So in this package, taking into account as well that there are some fees that don't help our growth, which come from the [Afordis] in Latin America, this component all in all shows extraordinarily good growth and that gives us a total, as I said 18.2% growth in commercial revenues.

NTIs go up 7.5%, and that's trading gains, and here I wanted to highlight revenues from customer trading, the trading we do for our customers giving us gross operating income which has grown 17.2%. Again I'd say that was very good. I repeat, I remind you that there's an exchange rate impact of 5 points here, but I don't think that that detracts at all from the excellent performance that we're reporting here.

I now move onto the second area I wanted to talk about, costs. Costs obviously, you might find it surprising when you first look at this, because the years the Group has claimed as [light motives] the fantastic cost control that we do. And our battle horse is to grow earnings and to keep costs absolutely stable, especially in the more material markets. It would seem then that perhaps this principle hasn't been met in the first half with this 8% growth. I should remind you that in the first quarter there was 10% growth in costs, so that growth has slowed down and I should remind you also that here, 5 points are due to exchange rate.

But nonetheless let's have a look at how these costs are constructed so we understand what it means. And you can see all of this on the right-hand side of the slide. Santander network has gone up 1% of its costs so I'd say that there the policy is to contain costs, strict cost discipline in an environment with 4% inflation more or less which is what we've had so far this year in Spain. So excellent marks for cost control in Santander.

Banesto has seen its costs go up 4%. That's in line with inflation here in Spain and that's good cost control. Banesto, as you know, is much more on top of its costs, it's been ahead of everyone else in controlling costs and so there's not so much upside left in order to reduce costs. And when I say reduce costs I mean reduce costs against inflation so it's done well. A 4% cost increase is very good here in Spain at these moments. It's got a lot of projects, it's got a lot of expansion and its business plan is being rolled out.

Consumer finance has seen a growth in its costs of 20% so let's stop and look at this. I think it's worthwhile looking into. Santander's consumer finance has two groups of impacts; first of all we have to look at the perimeter. That's not a big impact because all it's acquired has been the Portugal unit but nonetheless it's important when we look at the accounts because it's investing to boost the car finance business in the UK. This business, as you know, came up onto the market. It was sold by Abbey before we bought it, so Abbey didn't have that business very well developed at all although there were some systems, there were some people left inside Abbey who knew about that particular portfolio. And so on the basis of that, we are now beginning to move back into that business for finance, especially car finance, the consumer financing and car finance. But that does put up costs. So in 2006 and probably 2007, possibly even in 2008, this business in the UK won't be giving us a lot of earnings but will be giving us costs because we're going to be relaunching a lot of projects there. And that's what's reflected here and that explains part of the increase. That's what I call the perimeter impact.

And then we have projects. Santander Consumer Finance over recent years, over the last two years has been expanding very strongly in Italy, as you know, opening branches very rapidly, and that entails boosting the systems in the back office as well.

And in Spain and in markets we are seeing that we are moving into near prime and sub-prime markets which are new markets which require new projects, new resources, and we have to roll out new commercial programs for distribution, and that means that because of Santander Consumer Finance are picking. But that's really one-off.

In Latin America as well, costs were 17% higher, but please notice at the bottom, if we get rid of the exchange rate impact, in local currencies, the cost growth is pretty well zero or neutral. Brazil actually saw its costs go up minus 3, Mexico plus 5 and Chile 8%, but at the moment Chile has got a lot of commercial projects as we'll be seeing later.

So despite the fact, and I'm going to finish on costs now, although it looks as though we've got this cost growth which doesn't really fit in with the gospel that we preach. Nonetheless, when you look at what's really happening you can see that the Group continues to roll out its policy of very disciplined, very efficient cost reduction.

And then as a consequence of all of this, cost income has improved, 4.5% in the Group. But if you look at the different blocs, Europe has improved 2 points at 40%, Abbey has improved 12 points at 55% and Latin America 6% improvement. So as we say, we have our jaws wide open, our jaws are wide open.

There's a difference then between the earnings that are increasing and the costs which are increasing less.

So we'll now go on to the next line. We've seen revenues, we've seen costs, so now we can have a look at net operating income. I think we've seen the two main components; I'd just like to say that there's a quarter-on-quarter improvement. The second quarter's better than the first on that, in year-on-year terms the figure is 28%. There is a seasonal impact, not much of a one, but I did already say that because of the dividend impact the second quarter is usually better than the first.

And here we come to loan-loss provisions which is worth talking about. There's been a big increase, 60%, and there are two components that I should, I think, specify here, so that you can understand what lies behind the figures.

There's been a growth in generic provisions in Europe because of bigger lending activities in Santander and in Global Corporate, just because of an increase in lending volume; it's nothing to do with risk quality. There's no increase in the specific provisions, in fact we have lower specific provisions, lower allocations to specific provisions in Europe.

And then the second component that I think I should mention is the increase in specific provisions in Latin America, notably in Brazil. There is a reason for that, partly the exchange rate, partly volumes in absolute terms, and thirdly a change in the mix that we'll be seeing later on. The business mix is less corporate, more individual, more consumer lending, which means more allocations to provisions although margins are much higher, and there's been a general deterioration in the system in Brazil as far as risk premium is concerned. But we will be seeing the details of this in the next few slides.

What we can say here is that our lending costs are very low, I would say historically low. I don't remember ever seeing it that low for such a long time. We have, of course, the unsecured personal loans in Abbey, but it's not that relevant. And we have EUR290 million growth in Latin America from the first quarter 2005 to the second quarter 2006. I know if I explained this very quickly; I do have a more specific slide on that later on.

So now I'd like to talk about the generic provisions, and as you can see here, we have the component of the branch network, 196 million for generic provisions in the first half of the year, that's 79 million more than in the first semester 2005, and of course you can see that in provisions. But the Santander branch network has almost doubled its lending volume in the first semester 2006 compared to 2005, so obviously provisions would have to increase.

For global wholesale banking in Europe, we haven't doubled our lending, we've actually quadrupled it compared to the first semester 2005, because in the first semester last year we only had 6 million allocated to provisions, and this year it's 84 million. So I think that speaks for itself, so our generic provisions are EUR5.2 billion. We'll see this later on too.

I'd now like to talk about the specific provisions for Latin America. Brazil, Mexico and Chile are here in the table, and Latin America's 280 million more than the same period last year. Of course, this is due to exchange rate difference, notably in Brazil. There's also been an increase in volumes and a change in mix, and of course a high risk premium.

Volume and mix, I've already mentioned this, because the business mix in Latin America, and notably Brazil and Mexico is changing significantly. Less corporate business and more individual lending specifically, and that has a two-fold impact. It obviously has very high margins. We have 40 basis points and some of them in Brazil, and obviously they have a risk premium of about 9%. So you can see some of this above the line but you can also see some of it below the line, and it also requires of course higher provisions. But we need to remember that these products are much more profitable. There's a higher risk premium, as I said, and this is something that the whole of the sector is noting. We've seen that from our peers in Brazil too. There's a higher risk premium. I actually think we're slightly below the system average. We'll continue to have that higher risk premium, because you could basically I suppose think anything, but I don't think that we will be continuously better than the system in terms of risk premium. I believe that these risk premiums will be maintained throughout the next few quarters.

Mexico has about the same risk premium as last year; it's below 1% which is great, and in Chile the risk premium and cost of lending is about 1%. So there are no issues with regard to Mexico and Chile. The problem is focused in Brazil, but it's no source for concern. It just corresponds to changes in business mix and higher yield products, because our lending quality in terms of NPLs is continuing to improve. NPLs are falling and our coverage is increasing. And we have 5.2 billion in generic provisions, in the generic fund.

And now, what about our capital ratios? Our solvency ratios are good. The only significant changes since March this year is our acquisition of Sovereign, that's reduced our core capital by 14 basis points and 48 basis points in our base ratio. And the sale of Abbey's life insurance business which is still in the agreement phase, but it doesn't have much of an impact on core capital because in the UK it's been traditional to fund that with debt so core capital is 5.75%, the Tier 1 7.41% and the BIS ratio 12.4% as of June 2006.

So just a little bit about the sale of Abbey's life insurance business. We've sold it for EUR5.2 billion, 97% of embedded value. In strategic terms, I think it's very positive. We've reduced balance sheet risk and we've always said that we are going to focus on distribution, that's what we do well, that's our core business, and that's what we do in Spain, in Portugal, in Santander Consumer, in Brazil, Mexico, Chile, everywhere we're going to replicate the model in the United Kingdom. So we have agreements with third parties for resolution. We're also making the most of our own skills at distributing insurance in the United Kingdom. Abbey does have a big sales program through telephone sales through its Cahoot Company which offset the loss of revenues and earnings from the loss of its insurance business that we're selling. I think that we will be able to offset the sale with better profits from Abbey's own production. I think we've got a good price for the company and we've managed to reduce risk at the same time. We've freed up economic capital not regulatory capital. And in one way or another I believe we will be able to reallocate that economic capital to our core business to what we're best at, then that will lead to an improvement in our profitability. And I'd now like to give the floor to Jose Antonio Alvarez, the CFO, to talk about the other business units.

[translated] Good morning. We've been going for half an hour already so I'd like to go very quickly over the other business units and more information is available on the website of all different kinds of information. I'd like to talk about the main segments of our business, that's in geographic terms, that's continental Europe, UK and Latin America, and then I'll talk about the secondary breakdown which is insurance, commercial banking etc.

So in business areas, as the COO said previously, all geographic areas are doing very well double-digit growth in profits. That's been a constant of the last few quarters and it's continued to be the case now. And where is the profit from? Well, the same as in the past. Europe 50%, Latin America one third and UK 15% of attributable profit.

I should mention the corporate center where there has been an improvement compared to the first half of 2005. That's because of better results in our exchange rate. That's part of our hedging policy for Latin America and because the dollar went down against the euro, we made about EUR130 million and that's why, that's partly the reason for the change in financial management and equity stakes whose loss was lower than in the first half of 2005. That's why corporate center losses are down to minus EUR123 million because of the hedging impact and the exchange rate which was 8% the first quarter and only 5% in the second quarter, and that hedging policy has helped our earnings there.

Now let's go on to continental Europe. I think that revenues are growing double digit growth, about 10%, and as the CEO has said, we've had 7% increase in costs. That's not par for the course for us but I think the CEO did mention about Santander Consumer Finance where we're investing in Italy, sub-prime in Spain and in the UK and that's why costs are going up there. But the costs in our other units are registering close to zero on negative cost increases. So net operating income grew -- attributable income profits went up by 11%. There is an impact there of higher generic provisions that have already been explained by the COO. It was 150 million more.

Now I'd like to focus on each different unit, the Santander branch network has 7% growth in income. We have the "Queremos Ser Tu Banco" -- "We Want To Be Your Bank" campaign which has produced good results. We've already heard that the network is doing very well in terms of spreads and activity; net operating income has grown 16% and Banesto has already presented its results and it's very consistent. Santander Consumer Finance, well higher costs can been seen in the operating profits and the underlying there is about 20% so there is the seasonal impact of spending a lot of money because of expansion in the first two quarters, but these will slow down throughout the year. Portugal has been very consistent and EUR230 million leading to EUR70 million in provisions which is for the rest. That's global wholesale banking and Banif.

I'd like to talk about the different units in continental Europe. First of all, for Santander network quarter-on-quarter is doing really, really well and the growth rate is higher than what we've had in the past. The quarter-on-quarter growth is at 4%, that's double what we've been seeing so far this year. And we're growing in a most profitable product in SMEs, individuals, current accounts, 16% increase. So that's very, very strong growth because we have very attractive products and we can see on the right hand side that net interest income has improved very much, especially on the quarter-on-quarter rate. It was below two digits, it's now well above double digit growth, it's 13%. Good spreads, good net interest income and because of good cost control, the operating profits are in excess of EUR600 million.

I think we've heard enough about provisions and allocations because of growth in lending.

Banesto, as I said, has already presented its results. It's in line with its three year plan and it's focusing on individuals and SMEs. It is expanding its branch network, its SME project is doing very well and if we look to the right-hand side of the slide, revenues are growing consistently quarter after quarter as are its operating profits. And the same is true with lending, quality and the generic provisions are also well in line.

Santander Consumer Finance, well there we're investing in growth in the UK where we launched a new operation right from scratch. In Spain we're in sub-prime, we're investing in Italy and we're also investing in Germany. So there's a policy of growth here. If we look at the different products this is not market growth, we're actually gaining market share constantly. We're gaining market share in most of the countries where we are present. If we look at the commercial margin, commercial revenues, you can see that our production volume is good so that has an impact on the bottom line, although of course interest rates sometimes erode your margins. But we're growing very consistently. The operating profits were -- of course suffered because of the investments we're making but the underlying operating profits are about 20% higher and lending quality is still very good, slightly higher provisions, and we've sold off the failed portfolios.

Now Portugal. We still have growth which is good for stagnating economies such as Portugal. Their economy is very, very sluggish. We're gaining market share, we're growing, we've increased the number of branches we have in Portugal. In revenues we're doing very well as far as fees are concerned and insurance fees, that is something that the Portuguese use instead of term deposits which is something you should bear in mind when you look at the figures there. So there can be some transfer between margins and fees because of the way the products are marketed. As a result of that growth, in business and in fees we have EUR150 million in revenues; last year it was 120. And we have good lending quality so our allocations to provisions are very sensible.

Now I would like to have a look at Abbey. Very, very good news here from Abbey. I think we're proving that the re-launching plan for Abbey is now bearing fruits. We have the first three year plan and we wanted to increase revenues between 5 and 10%, we're at the high end of that. The cost-cutting plan is still in operation, we've cut costs by 10% and so operating margin has gone up by about 50%. The provisions are basically for UPLs, unsecured personal loans, from the Cahoot portfolio which is lower quality. And attributable profits have gone up there 41%. This is the sixth quarter under our management and we're very, very optimistic about full compliance with the three year plan.

I'd like to focus on what lies behind the numbers in mortgages. This is the first quarter that we haven't lost market share, in fact we've even gained some market share. And in savings and investments we're trying to manage things there the way we've done in other countries when you get very, very tight margins on current accounts. We try and get people into funds. Personal loans production is doing better, margins are better, and we're starting to explore the opportunities of premium banking and personal banking within Abbey's customer base. And costs were, well complying with our plan, we had a redundancy plan for 2,000 people; 1,300 people have already left this quarter. The technology plan is going according to schedule and that will of course entail productivity improvements. The balance sheet is already doing much, much better as the figures show and so Abbey too is opening its jaws wide and is really going to start and do very well. We have all the figures here both for mortgages and unsecured personal loans.

I'd like to talk about mortgages. We have 10% market share and net production; the stock for the first half of the year and basically the second quarter has definitely improved. Stock is growing at 8% and we're basically now in line with the market. The other indicators that we usually show you are still very good. Personal loans are growing very well with much better margins. The net savings flow is growing 4%. We've done very good pricing policies here. In the last quarter the volume of Cahoot deposits fell because we had some deposits -- some accounts that didn't have any spread and we've certainly improved that; we've got 4 basis points more than at the end of last year. So we've given priority to spreads over volume.

And then in investments we're doing very well; 20% growth and the number of current accounts is growing by 10%.

What about Parthenon? Well we're on schedule and it will be fully implemented by the end of 2007.

In Latin America, and I'm going to be talking dollars now because we were talking in euros before, but now we'll switch over to dollars where we've seen 25% growth in revenues. Costs have been kept under control, we're talking about dollars again, because we're already talked about the exchange rate impact otherwise, with an operating profit which has been growing to about 40%. The exchange rate impact is 10 points to the dollar. But I did want to focus on the right-hand side where we can see that the operating profit in commercial banking has really doubled in one year. So a year ago in the second half you can see the figures there for our operating revenues and commercial banking. Now we've got up to $1.11 billion. And that's a qualitative leap forward in terms of what we're doing with the franchises in that region.

If we now focus more closely on the different countries we can see that all the countries are seeing their revenues grow. The main one, Mexico, is growing them very fast here. And in attributable profit, in Brazil, the provisions which we've already mentioned mean that they have 7% growth. Mexico is growing at 40% and Chile at 45%. Santander Private Banking is still seeing constant sustained growth and this half here we've got 28% growth all in all.

So let's look at things country by country. Brazil, Mexico and Chile are our main countries so let's look at the main milestones that we've met. In Brazil then the economy is still going well. The macro-economy is doing well. The system is growing at about 20% in savings and in deposits and lending. And we're seeing 19% increase in interest rates; at the moment we're about 15. That's probably a process that will continue. And we're seeing that there's an increase as well in NPLs which we've already mentioned.

So that's for the entire country, and the system, but we're growing at 30% in lending. The system is growing at 20, as I said. We're growing more with individuals and SMEs. This is a change in mix, and it's significant. We're increasing our number of customers, as well. If we look at revenues, on the right there, the net interest income and fees are being driven by the increased activity on both those lines. Expenses are growing below inflation, as we said, not just that, they're actually dropping off in local currency, and that gives us an operating profit that's growing at 63% compared against last year, if we exclude the effect that we had last year of the disposal of an electricity utility, which impacted the results. So, if we exclude that, the operating profit is going up at about 63% then. So that was a one-off in the second quarter of 2005, and that was positive.

There's been a change of mix which put up our risk premium, and therefore I'd say that to sum up, in Brazil, commercial activity in the branches is doing very well, and you can see that in revenues, as interest rates drop, which puts some pressure on the liabilities side of our books, but not so much on the assets, and all in all, there's a deterioration in the asset quality throughout the system which means that provisionals need to be increased.

Mexico, then. The macro-economic environment is good. The system is growing a lot in lending and customer funds, and we're getting a bigger customer share. The bank is growing at about 75% in individuals, and we're still gaining market share in the most highly revenue-generating products, above all credit cards, and consumer finance, and you can see that in the net interest income, which has grown consistently. Fees and insurance is affected by [Afordis]. There's a seasonality in that impact as well, in the pension funds as I said in the [Afordis], and without that there's consistent growth in fee income in Mexico. And the operating profit is at new record levels, of 200 -- well it used to be 200, 200 and something, and now we're in 300, 300 and something, with some growth of up to 50%, which takes us into a different bracket. There's an increase in provisioning, which is to be expected, net growth of 65% in -- as we've grown 65% in lending, so provisions have to go up. And standardization of the tax rate has changed the profile of our tax bill as well. So, in Mexico we're seeing good growth, good margins, good growth in activity, and this can be seen in the operating profit, which is growing at some 50% in this first half.

Chile. We don't tend to talk very much about Chile, but things are going especially well there now. The country is growing at 16 to 18% and we're outgrowing the financial system, and that has great merit. We have market shares of between 25 to 30% in many products, and we're still gaining share. Growth is good. We're growing more in retail banking; in SMEs we're only growing 7, in the wholesale banking as well, whilst we're getting 25% in retail banking growth. The net interest income and fees show very clearly what's happening. We've already talked about provisions, because the risk premium here actually has not gone down, it's actually improved in part. The exchange impact has an effect on that, and also provisioning.

And if we look at the secondary segments, there, we've seen the different geographical areas, and now we can look at businesses. We've got commercial banking, global wholesale and asset management and insurance, and here we can see retail banking is 77% of the Group's business, which is growing at 25%. Wholesale banking is 14% of the Group's -- and that's actually declined by 2% but we have to understand the core performance better. We'll talk about that later, and asset management and insurance has improved over the first quarter.

So let's talk about retail banking. You can see the operating profit on the right, it looks pretty good. It's recurrent income, and quarter by quarter, you see a mathematical improvement before the impact of generic provisioning, which can change things slightly. But the core business, the recurring business in retail banking, is showing very sound, very predictable performance. If we open up retail banking, we look at Europe. You can see pre-tax profits are growing very fast, and in emerging markets the results are growing at about 40%. That's basically Latin America. Abbey, everything, there is being relaunched, so the results are very similar to the UK geographical area. So we can see excellent performance in retail banking, and above all, a lot of recurrent earnings.

And then in global wholesale banking, there, the account doesn't really reflect what's going on. Look at the right, in the ordinary profit from customers you see this growth of 42%, trading income dropping at 41%. There's the impact of the disposal of the Brazilian electrical utility, and that produces this distortion there. But the first message is that business with customers in global wholesale banking is doing very well. The second negative impact is, because of the high growth in the second quarter, the generic provisioning has gone up a lot. These two impacts are distorting what would otherwise be a business that, if we were just to look at the core business, would be growing at about 40%.

If we break it down a bit further to see what's happening, we've got a plan for developing this business, all the projects that we've been talking about with the distribution of retail trading and other projects, and more transactional banking development. If on the right we look to see what's happening to these projects, we can see that transactional global services, and that includes lending, and transactional banking, corporate banking, etc., there we see growth of about 22%. Treasury for customers is growing at about 68%, and then the brokering operations are growing at around 52%. We've got higher costs, we're rolling out new projects, which means that our costs inevitably have to go up here. So all in all, I'd say that the headlines aren't reflecting the core business of global wholesale banking, which actually is growing very strongly.

Asset management and insurance, this quarter, has had some cost impacts. It's quite a small area, and so the percentage impact of such one-offs is notable, but its normal performance is pretty sound. If we look on the right, we can see that revenues are growing at 15% from this area, and some areas, like mutual funds, insurance fees, and the rest of Abbey insurance, are growing very strong, and then there are two areas that aren't going so fast. There's a drop in pension fees in Mexico and Peru, which mean that pensions have risen only 3%, and then Abbey, the traditional business that we've just sold in Abbey, so we've got growth there of about 6%. And so, there are some good things. But basically, mutual funds, insurance, and Abbey insurance distribution are business that are all growing very soundly.

We're going through a process of integration here, we're launching single platforms, and trying to improve our factories, and at the same time, we're trying to incorporate new products which are coming out onto the market, especially in Spain, such as hedge funds, and putting out some very new products in prime equity and real estate as well, and so we are making our insurance business much more international. Everything that's being sold in Spain is sold in Europe, and we're also moving into reinsurance.

So, now I give the floor to the Chief Operating Officer, so that he can reach some conclusions, and then we can go ahead with the questions after that.

[translated] Right.

To sum up everything that we've heard with all these figures, all these data on the first half of the year, we conclude that the results have been very good, and they've been very high quality results as well. The results have been achieved with strong growth in all the business areas, in all the key areas, in all the markets where we're operating. And I've already highlighted at the beginning that we've seen a big increase in customer business in Latin America and in global wholesale banking, and these are two big divisions in which we are really trying to get high growth, and we're managing to do that. I wanted to say that we're seeing consistent growth, very positive growth, in the business areas that we're managing with a global vision. We're still investing and fortifying these businesses. We have a strategic vision, and we look at things in the medium-term, and so we're investing for the future, as I said last year, in non-core businesses, so that we can boost and support the growth that we're getting in our financial businesses, which are our core businesses.

So, to sum up, 2006 continues to be a year in which we're making progress, not just in results, but also in the strategic configuration of our Group for the medium to long term, which means that we can compare ourselves very favorably against big, world players. And here, you can see the 15 biggest banks in the world, that we compare ourselves against, ten from the euro zone, and five from the US. And we like to compare ourselves against them, because that's our peer group, and that's how we benchmark ourselves. And you can see that this half year, or this quarter really, in the first quarter of 2006, we're ranked number three in growth of earnings per share, and second, in improvement of the cost income ratio in the first quarter of the year.

And there's another element that I wanted to highlight for this half year, and that was how we've improved our ratings, especially from Standard & Poor's, and Fitch, and also Moody's has confirmed its rating. That's important because these agencies have noticed the key characteristics that we have been trying to boost, and which you can see here they see as strong points, which are based on five issues. The Group's strategy is very clear-cut, well-defined. It knows what its business is. The Group is consistently reporting very sound growth as it gets higher and higher returns on all its businesses. And moreover, the Group is meeting expectations about what it would do in Abbey. It's boosting revenues, and it's controlling costs. And that's something that Jose Antonio Alvarez has said is very important, and I must second that, and then the risks in the Group are more diversified, and we're seeing a much sounder risk profile. And then finally, the rating agencies see that we have very sound capital ratios. So, the ratings are the best that the Group has had over the last seven years, and Standard & Poor's has also maintained its positive outlook.

So, then, to sum up very briefly, where should we focus our attention looking at this year as a whole? In Continental Europe, there are two very important things. Priorities for this year are first of all, the entire strategy that we have for individuals. And I always talk about this, when people ask me, and say, look, this isn't a campaign, this is a strategy. It's the medium to long term. That's what we're thinking about. And the idea is "We Want To Be Your Bank". And that's not an advertising slogan, it's not a way of getting one-off customers off the street. No, it's a way of orienting the Bank in order to boost our competitive position in terms of the number of customers we have, the number of products that they have, and what we're doing in the kind of service that we're providing to individuals. We've done very well in the first half rolling out this idea, and we'll continue to do so in 2007, 2008, 2009, 2010, because this is a strategic plan. We're orienting the entire Group.

Something else important in Europe is the consolidation of the Santander Consumer Finance projects, which are growing through acquisitions, but at the same time, along with that, we have to get a consolidation of the businesses and markets and products, and we have to improve management in Santander Consumer Finance with organic growth projects as well, in Italy, in the UK, and working in sub-prime and near-prime.

So with all of that, we think that if there is an opportunity to buy something like the small bank we recently bought in Russia, we'll take it up, but basically Santander Consumer Finance is in a growing business, and so we have to work very hard. There are a lot of things we can do to improve our organic growth moving along the tracks that we've chosen to follow.

And what about Abbey? Well, we've already said, really, that there haven't been any changes in our plans. It's a retail bank. It has long-term plans, so we just have to put them into practice and do that well. And so, we're concentrating on management and synergies. We have had a plan for restructuring an entire retail bank, so that's not something you do in six months or two years, it's a long-term program. And we've said right from 2004, when we acquired Abbey, that we had a program. It's now 2006, we're rolling out the program as expected, and the results are excellent and consistent. So there's really nothing new to say about Abbey, and that in itself says a lot, doesn't it?

The strategic plan is being rolled out in Latin America. What's most important is really to look at how the macro-economic fundamentals in the region as a whole are leading to an explosion, in the best sense of the word, of the local financial service activities. And that's why we're seeing big expansions in all our businesses in Mexico, Brazil, and Chile, and in other countries, too, in Latin America.

So, we want to do things well, and to accompany the growth in the economy, working through our branches, whilst keeping an eye on our risk profile, and managing risk well, because when there's high growth, one has to be careful about risk.

And then in global businesses, we want to go on rolling out our plans and having a global management of the businesses where we think global management can add value, and that adds earnings because it adds to our business. We've got global businesses in wholesale banking as well, which is giving us excellent results, excellent earnings. And at the moment, we are currently consolidating and implementing the global business for asset management and insurance, and recently we created a global means of payment business, which did exist, but it was more for disseminating best practices and suchlike, but now it's actually going to be a whole business which will bring in its own earnings and suchlike. Obviously, with global management, you have to make a global effort, worldwide, but we're doing that, and we're getting better earnings, and better results if we had just worked at things looking at everything from a local viewpoint.

So, we're bringing this global vision to all of our businesses, and so that makes us pretty optimistic about 2006. We think by the end of the year, we should comply with the expectations which were triggered for an ordinary attributable income of about EUR6.5 billion, as our chairman said at the last AGM at the beginning of this year.

And that's about it. Thank you very much.

OK, at this stage we will begin the question and answer portion of this call. [OPERATOR INSTRUCTIONS].

[translated] Question and answer session. I will start with the questions that have come in through the Internet and then the conference call.

The first one is from Antonio Ramirez, Merrill Lynch. What is your viewpoint of the Group's position in Sao Paulo, taking into account possible bank consolidation in Italy?

Well, I'll answer that question, because we're going to share out the questions between the three of us, but this one's mine. Well, I think it's a well known fact that Sao Paulo is exploring the options available to it, it's actually said so and it's hired consultants to do so, and I think it's Sao Paulo's decision. And when the Sao Paulo Board and the chairman, when the time comes will give their explanations. As shareholders, we have just below 9%, a 9% equity stake. We will always support any action that means value creation for shareholders, ourselves and others. So, that's our institutional statement. I actually think it's a good opportunity. Sao Paulo's a good bank, and I think it could do very well in the Italian banking consolidation process. So there's a clear opportunity, as there usually is in this kind of circumstances.

Eva Rubio from BBVA has three questions. The first one is that you're starting to see more activity in the Santander branch network. Is this a result of "We Want To Be Your Bank"? And then the generic provisions in Europe, and there's been a big increase in European wholesale banking, so will this have an impact on provisions? Then there's been lower customer spread in Latin America, and so, what about the impact there?

Okay.

Okay, growth outlook for Santander in Spain. We've very pleased with the increase in business, in mortgages, individuals, well, I gave you all the details. And the "We Want To Be Your Bank" project, I don't really want to talk about it yet, because I don't want to think that the strategy is a one-off thing. I don't want to take a very short-term view, because for me, this is something that is part of a continuum, and I think we have to take things in the long-term. One semester's improvement can mean a lot in both positive and negative terms, and if the market takes this to be a long-term strategy, then we'll probably talk about it by the end of the year, because that will be one year on since its launch, and I think we'll see that it's a lot more consolidated. Obviously we're happy, but I'm not going to say anything else on the issue yet because I don't think it's time.

Provisions. It's a question of arithmetic, as I think we all know. That's the generic provisions. It's pure arithmetic. When activity grows, generic provisions grow, and if global wholesale banking continues to increase lending, although not that much, because we're not so much lending-based any more, but demand for lending is increasing and so we will see an increase in provisions and in proportion, obviously, and in banking in Spain too.

Now, what about the outlook in Spain about lending, in general? I think it's quite difficult, but we think there seems to be a slight sluggishness, but very slight, but it is sluggish, I think because of the change in mix. Mortgages are still a very big share, but slowing down. But we're seeing company loans, SME loans, consumer loans, are growing. And I think that that will be the outlook, well, maybe not for the next six months because I think that the next six months will be very similar to now. I'd say six plus twelve, by the end of 2007, we think that lending will grow reasonably, maybe not as much as in the past, but that also means that generics will continue to grow at the same speed. That's my opinion. I don't know if either of my colleagues would differ from that.

Now, for wholesale banking, there's some one-off operations the same as how in retail depends more in generalities, there have been one-offs in wholesale banking and that means additional provision, so there can be more volatility there.

And the third question, that was spreads in Brazil. The question is about the evolution of customer spreads in Brazil vis-à-vis interest rates. Interest rates have been falling in Brazil, they've come down from 19% to 15%. We think they'll continue to drop, maybe to about 10% by the end of the year, and in this context, our asset spreads haven't suffered. We do have some information on that on page 60 in the annex, although deposit spreads have fallen because of the fall in interest rates. So I think that is about par for the course. I think we do need to talk about different segments, some are suffering from more pressure than others, and altogether, even with the drop in interest rates, I wouldn't expect a big difference in spreads.

We have a question from a shareholder, will you be having bigger shareholder payouts or any share buybacks, dividend policy?

Well, we can't talk about the dividend policy because that's a Board decision and it hasn't been made yet. We will increase the dividend by 15%, and I think that's good, for the first interim dividend, but I don't have any more information on that.

And then [Ubenza Souvari] with two strategic questions. Do you have any plans for non-organic growth in Europe, specifically the UK and Italy? I think we've already talked about Italy. And the second one would be, what about our plans for Asia?

We don't have any non-organic plans for Europe, growth plans that is, although obviously if an opportunity arose, a small-scale one - I say small-scale because it's hundreds of millions, the bank that we bought in Russia cost EUR40 million, and that's, I don't know whether you'd call that organic, non-organic, or nothing, or minor, I can't find the right word for it. So we really do not have any acquisition plans for Europe.

Asia is a geographic area that we are studying in depth. We have a team there, they've been there since the beginning of the year, and we're studying our strategy there. We want to be realistic, because we believe we have to take good stock of our possibilities and opportunities there. We are what we are. I think our strong point is Latin America, as far as Asia is concerned, and so we really need a good assessment of our strengths. And so by the end of the year, we will make a series of decisions about where to go and how, and we'll give you information on that when any decisions are made, because we're just preparing the ground. It won't be anything spectacular, I don't want to mislead anyone, but we will have more active presence. We do have some officers of representation, we have a trade finance officer in Hong Kong and we think that that is a good starting point do more but we will be very pragmatic and very realistic and will always consider our realities and our potential and if we do invest, it will be an eminently practical investment.

George Karamanos has two questions. Our estimate for EUR6.5 billion for -- it should be profit by the end of the year and why are we increasing generic provisions in Spain and the specific ones in the UK?

Well, yes, we believe in that estimate. I have just said it in the presentation. We expect even to exceed this EUR6.5 billion and I think I have been very clear. Specific provisions have increased because of UPLs. Mortgages there don't require very high provisions. I think that is a well known fact and in Spain generic provisions will increase because of our activity in retail banking. Lending demand in Spain is fairly stable. I think it will gradually slow down throughout 2007 but as I said before, generic provisions are basically arithmetic.

And then we have Pablo Beldarrain from Morgan Stanley has some questions. They are quite conceptual. Can we explain the high second quarter growth of fee income in the Santander Branch Network? The second question, would the increase in lending which is 21% year-on-year, 4% quarter-on-quarter, is that individuals or SMEs? And then current accounts have grown by 16%. What are your expectations for the next 18 months? Is it all payroll based? Is there some SME element? Are we using payroll products to attract new customers?

Okay. Second quarter fee income growth. That was the question, right? It's a bit of a mixed bunch because of our increase in credit card standing. We did launch a strategic plan last year. That is doing very well. Then an increase in our insurance business which is also going very well, that comes under fee income, and partly, although "We Want To Be Your Bank" cuts down fees we're also increasing the number of customers and we are not losing customers any more, and that explains the increase in fees for the second quarter compared to the first quarter when we first launched "We Want To Be Your Bank".

Increased lending. Well it is a very wide-ranging mix too. There has been a slight increase in mortgages and that is a bit of a one-off thing. It is not that we are encouraging mortgage activity, we are doing very well with SME lending and consumer lending so the mix is improving. I think I did talk about this in some detail. Do we expect to continue that growth? Well for 2006 definitely. 2007 I think we will see slightly less. I don't think it will be a sudden change but I will be including that in my budget.

Increase in current accounts? That is also a very complex issue, like most banking questions. Yes, we are more active with payrolls and SMEs but we have the Y '08 star product which was to include the number of transactions in retail banking both individuals and SMEs. We want to achieve greater penetration in accounts receivable and payable for companies to increase the number of transactions which increases current account balances. It is quite erratic actually, this whole current account issue because sometimes other products are involved, say a term deposit that ends is then transferred to a current account, but we are very pleased with the progress because it was one of the main targets for retail banking for 2004 to 2006 and we have now extended that to 2008.

Now we have the second lot of questions about consumer finance. NPLs have gone up to 2.46% whereas in 2005 the average was 2.3%. What is your outlook for the next few quarters?

Well I will answer that one, otherwise I will forget it. It is a change in the mix. I think I explained this. I explained that costs had increased in Santander Consumer because of the change in the mix because of the near-prime and sub-prime activities and that does mean an increase in NPLs. In traditional business there has not been any drop in lending quality, and okay, the NPLs may have gone up slightly but the margins in those products are much higher.

Then Santander Consumer Finance, any acquisitions in the air? In the pipeline? Well we believe that there is a possibility, but of course we would have to identify those opportunities and they would have to contribute to efficiency. They would have to be different kinds of synergies there. In recent months, as you know, we haven't done anything because we haven't found anything. There will be, there will always be some small scale operations because those opportunities tend to abound, but there is nothing new in our policy there.

Now about Abbey. Why is customer spread expanding, especially in deposits? What about the outlook for the second half given in mind the pound's performance?

Okay. Customer spread. I think because we are eliminating some Cahoot very expensive deposits and focusing on more retail traditional deposits we have really expelled a big amount of expensive deposits and accounts. That is what we are focusing on and I think we will be seeing more of that over the next few months, and we are launching what we call investment products on the UK market which do bring in a higher margin. And the return on customer funds and -- well insurance, with an insurance wrapping, is also improving because of the same reason.

Which mortgages are growing more? What about the buy-to-let ones? We are not in the buy-to-let business or only to a very small degree. We don't have the tools or the expertise to be in the buy-to-let market. It is the traditional mortgage business as part of the very complex mix in the UK because there are -- it's re-mortgaging, there is almost no spread there or zero spread. There is a whole mix. You have to actively manage it to improve the mix of other components and I think we are getting much better at that and that is why we have seen an improvement in a few basis points.

Then there is another question about investment product strategy, although I think you have already answered that. And the fourth one is, can we make a distinction between provisions for UPLs and provisions for mortgages? It is. It actually is, it is just that we group it together for the presentation but you can see it in Abbey's accounts. We have the provisions for mortgages and non-mortgages.

And one last question from Pablo about Latin America. The big increase in net interest income in the second quarter in Chile, and it has been much better than expected given the stagnation of the first quarter.

Yes, it is true that in Chile net interest income has grown. It's actually inflation linked. In Chile there are two currencies, the nominal peso and the [CS1]UF. That is -- well inflation has gone up in Chile. We are long in UF funded through nominal pesos and in Chile actually this tends to be par for the course. Almost every year we see this impact because of inflation. We tend to increase net interest income there.

Ignacio Cerezo from JP Morgan has the following questions. What risk premium can we expect in Abbey for 2006 and 2007? And will the increased provisions for UPLs be recurrent?

UPLs? Well, we have been talking about them since we started to manage Abbey when we changed the Cahoot scoring for personal loans. We are expecting to attain good results from that. We think that risk premium will be maintained throughout the next few quarters where that portfolio matures and then we think it will improve.

Your second question, or Ignacio's second question, the impact of the depreciation of Latin American currencies on the Group's reserves? I think it is about 200 million and the most open position there is Brazil. I think the book value there is 3 billion and so we expect 200 million is the impact on reserves there.

And the third question was, your estimate for net interest income for the Spanish Domestic Network. Well, we have said that interest rate hikes are beneficial in the long term. In the short term it depends on when the European Central Bank actually puts those rates up, but we think usually once the ECB puts interest rates up there is a slightly negative impact in the first quarter which then improves.

Then we have Carlos Berastain from Deutsche Bank. Sorry Carlos Berastain. What about Banif? Do we have any plans in the Group?

Well I would like to deny that we have any plans. We have never even contemplated that. I don't know where those rumors came from because there is no foundation to them whatsoever. We actually have an expansion plan for Banif. It is not this huge, large-scale project compared to commercial banks, but it is quite big given its size so we are growing Banif. It is going very, very well. It's extremely efficient in its market segment and it is the only big, private bank in Spain. It is the only one with decent market share. So it would be ridiculous to sell it. It's part of our core business and very good core business so it would be unthinkable for the Group to sell it.

There is another question from Citibank that has already been answered and one that has to do with spreads in Spain and the evolution in basis points. They want the figures. That is more technical. We can answer that later perhaps. So there are two other questions.

One from Mario Lodos from Ibersecurities. Coming back to the risk premium for the Santander Network, if we think it is at a reasonable level and also the spreads in Santander Consumer Finance. Why have we seen a growth in the risk weighted assets in Santander Consumer faster than the lending?

Well there are two components to that. One has to do with lending and credit and the other has to do with funding. When you are funding with derivatives to hedge the balance sheet, there is additional growth in the assets which have the risk weighting attached to them, so that is why you see that impact.

And then the risk premiums. There I think we have discussed that. The moderation of the spreads in Consumer. Well there was the presentation when we launched the campaign in Italy at the beginning of the year and we brought in a billion euros at 6% rate and in this half year that costed up EUR13 million and that has a direct impact on the net interest income for Santander Consumer and then as these mature then that impact will lessen, but I think it is about 12 or 13 million impact on the account, but it is rather a one-off issue.

So we have ended then the questions we wanted to take over the web and we can now take questions over the conference call. Hello, the first question is from Arturo de Frias from Dresdner. Please Arturo. You can go ahead.

[translated] Yes, good morning. First of all I want to say that the numbers look very good and then I have got various questions. Some have already been answered but I want to come back to certain details. So first of all the margins in Spain. Total margins including wholesale funding. Yes, I think this is the first quarter that it has gone up since we began to see interest rates going down and so the overall margin has gone up in the second quarter so that must be good news. Are you expecting this to be a turnaround in the tendency as the interest rates go up in Europe or do you think that your competitors in the market could mean that you can't keep boosting the margins in that way?

And then generic provisions, I have a question there. It is clear that you are doing a lot of generic provisioning because lending is growing. My question is, when do you expect to see the advantages of these enormous mattresses that you have got? You have talked about more than 5 billion at the beginning of your presentation. More specifically could you give a feeling on the cost of risk for Santander as a Group, taking into account all the provisioning over the last few years, generic provisioning that is, we can't expect the risk cost to ever be more than so much or to go up so much more than x basis points in the next few years?

And then I have a question about the cost of risk in Latin America. Obviously this is going up quite a lot in most of the countries, so above all I would like you to talk about the risk adjusted margin. In some countries that is going up. That might be offset by the rise in provisions but the risk adjusted profits is going up, isn't it? What is going to happen there in the future?

Consumer finance? Impressive growth figures for that division. I think this is the first time this quarter that consumer finance has reported more profits than Banesto -- higher earnings than Banesto, so I would like to know what medium-term growth you are expecting in this division. Will we continue to see 15 to 20% growth in the medium-term?

And then Sao Paulo. You have already answered earlier on about this matter, but I want to have some very specific information. A month ago you made certain statements and said that you wanted to have more influence there. I interpreted these statements as meaning that you were giving out a word of warning about negotiations regarding the possible change in the shareholders' pact in Sao Paulo. So, if you can't get this greater influence over the Board, would you think of putting an end to the shareholders' agreement that you currently have?

[translated] Yes, let me then go to the first questions. Total profit in Spain. If there is a definitive change in the tendency of interest rates, well, I think there are two things to say in answer to the question. In the absence of any significant movement amongst the competitions I think we can expect these margins to follow the same patterns and that could be if a relevant competitor had an extremely aggressive policy to raise more customer funds. But that would seem unlikely. The ECB might put up interest rates more or less one month but at the end of the day the underlying core deposits will continue in the current patterns we think.

And then generic provisioning. When will we not need such a big safety net? Well you know the regulations. If you increase your lending there is no way you can do anything but increase your safety net, so we will increase our generic provisions. The first 5 billion of impaired debt would be covered if there ever were a problem. That is the advantage of the safety net especially when there is an impairment in general in the market conditions.

And then deterioration of the terms. Well what would the maximum level be on the cost of credit? If we look two years back we can see that there has been a lot of change in the mix that we have had two years back, and lending in Latin America was basically for corporations, big businesses, but now we have got a lot of individuals and such like who are also taking loans from the bank, so we have to look at the mix that we have in our products before we talk about the risk remit and the cost of borrowing.

And in Latin America you asked about the risk adjusted returns and as Arturo said, that is a key issue. We are talking about real yields and risk adjusted returns -- give very high returns on capital in nearly all of the countries. But we have to look at the underlying tendencies. The growth, even with higher risk premiums, continues to provide high returns at the moment if we look at it quarter by quarter, but if we look at the underlying tendency, things are different in different segments in different countries. There are some segments in which there is more competition, for example in Brazil. There is a lot of competition in car finance and there spreads have gone down quite a bit, but in general the returns you get on capital, in lending, in the region, even with higher risk premiums, we are talking about 5% in Brazil and about 1% in Mexico, but nonetheless the returns are very attractive.

Santander Consumer Finance with more term products? We said that 13% operating profit doesn't show the core trends where we are talking about 20% growth underlying tendencies and we think that that is pretty good if we look ahead at what might happen with future scenarios in the market with growing interest rates which could initially have a negative impact, but we still think that this underlying growth is pretty sound. And there is not much more we can say about that.

Okay then. Let's take a couple of questions. Only two more. Next question. The next question is from Luis Pena, M&B.

[translated] Yes, good morning. Two questions. The first has to do with net interest income in financial management in the second quarter of the year. That is obviously excluding dividends. In the first year it was 100 million more negative than it was in the first quarter so can you explain what is behind this performance?

And in net interest income again I would like you to talk about Abbey. You talked about higher volumes, their net interest income has behaved very well this quarter compared to the previous quarter this year. Perhaps you could discuss the total spread there and what might happen in the rest of the year.

And the third question has to do with Cepsa. The latest news that you have given us is that it was going to take some time, a few months. Recently we have been hearing news that suggests that you might be divesting your stake in Cepsa earlier than you had predicted. So can you give us some idea about the timing of this disposal? Thank you.

[translated] Well the net interest income and the most important here is the higher rates for the funding of the holding activity which is based on securities and that will have an impact then on the net interest income. And then the spread between the dollar and the euro and that has an impact on the cost of our hedging, it's at 0.25 or 0.75 -- sorry, if it is 2.75 or 2.5 that will make a difference. And then in Abbey, the spread in deposits has improved in four basis points against the end of the year with less volume but better spreads. There has been a drop of one basis point in spreads, which along with the volume of activity in Abbey means that we are growing our stock of mortgages at 9% and deposits are growing at 4 and the margins are about stable, and so that is why we see that change in the net interest income.

And then Cepsa. There is no change in what we have already told the market.

And then a final question? Are there are any more questions?

Yes, there is one final question from Carlo di Grandi of HSBC. Carlo, please go ahead with your question.

Good morning. Carlo di Grandi from HSBC. I have only one question on the cost increase on the Consumer Finance business. You have said that partially the cost increase was due to the new investment, the UK car financing etc., etc. Now, quarter on quarter we have seen an increase of 38 million. You have said also that there will be more costs in the future but also more revenue. I was wondering how much of this 38 million is related to the expansion program and how much is eventually like-for-like cost growth? Is this the new running rate going forward, i.e. 172 million, or we should imagine that there is a component of one-off here? Thank you.

[translated] Well we did talk about the cost in consumer finance, we did say what amount was due to the expansion plan. There has been a change in parameters, about 3.5%, 3 to 4% because there is 20% growth in Portugal and 3 to 4% is change in perimeter and the rest is, we are really pushing sub-prime in Spain. The figure for the semester is EUR10 or 11 million. I am not sure just for the second quarter, but we have had to invest in advertising in Spain and then we have opened up our branches in Italy. That is the third element, and the fourth element is business development in the UK. I did say earlier on when I was talking about the operating margins, saying we expect 20% for this business with revenue increases that we have been having we should see costs being down to about 10% for the whole of the year rather than the current levels. I did say mention before. And then the running rate depends with a constant perimeter would be below 10% but we said that we wish to have both organic and non-organic growth. This business is very uneven from one country to the next. We have cards, credit cards, direct credit in some countries and in others we don't. And so there will always be quite a relevant component of organic growth in this business.

Well I think that is the end of the session, thank you very much.

This now concludes our conference call. Thank you all very much for attending.

[CS1]Unidad de Fomento