Banco Santander SA (SAN) 2006 Q3 法說會逐字稿

[interpreted] Okay, shall we begin? Good morning. Welcome to the presentation of the third quarter results of Santander. The presentation will be divided up into four parts. First of all, I'm going to sum up the basic ideas of the third quarter, and the year-to-date for the first nine months, then I'm going to look at the Group, the different business units from a geographic point of view, continental Europe, EU, sorry, UK and Latin America, and then I will wrap up and summarize the key aspects for the first nine months, and our estimates for the coming quarters.

So first of all, I would say that there are three things to remember here; the results are very high quality, very recurrent, and the growth comes from net interest income and fees so it's very high quality. They're very diversified, all business units have strong underlying growth, and thirdly, the balance sheet is really solid. The capital ratios, NPL, coverage, are all increasingly stronger.

I'd like to talk about the quality. We have very profitable growth here; we can see the earnings per share, in the standalone quarter is 30%, almost EUR0.27 per share in the quarter, and the year-to-date 27%, the same as the global profitability increase. Cost to income has improved, on efficiency 5 percentage points, so that's a quantum leap, and the return on equity has gone up by 2.2 percentage points, and return on risk-weighted assets has gone up 11 basis points in the first nine months. So I think that shows the quality of our results.

Then secondly, we have diversification. All business areas are growing, both in geographic terms and business segment. In continental Europe, 16% growth; in the UK, in line with the market guidance we gave, 31% more in profits, and in Latin America 33%. In different business segments, retail banking, 24%; wholesale banking, 18%; and asset management and insurance, 18%.

Our equity stakes; there's a lower loss than the previous year basically, due to exchange rate differences. It's our hedging; in 2005, it was negative and in 2006, positive, more in the second quarter than the third quarter. And last year, we set up a fund for risks stemming from the implementation of Partenon, and so that was there too.

The third idea that I mentioned was just how solid our balance sheet is, and for two reasons, I think; quality, NPLs at 0.83%, coverage 186%, and our capital ratios, our core capital, has gone up 13 basis points. It's up to 5.88. That is because of selling Abbey's insurance business, 7 basis points on core capital, and then with securitization there's been an increase in core capital there too. And then, if we look at loan-loss provisions, EUR5.5 billion with growth in the quarter of -- very strong growth in the third quarter, very much concentrated in fact in this third quarter.

In the second section, I'd like to talk about the first nine months' results. This third quarter has been another very good one. Attributable income in the third quarter was EUR1.7 billion, that's 30% more than the same period last year, and for the year-to-date, EUR4.9 billion. That means we're in line with what the chairman gave as guidance of being in excess of EUR6 billion in ordinary attributable profit by the end of the year.

So if we have a look at the income statement we can see that costs have grown 7%, income has grown 17%, so there's this 11 point difference, so operating income's therefore grown about 30%. Loan-loss provisions, well, there are two components there. The generic and specific provisions. The generic ones are more linked to continental Europe, the specifics more Latin America. So pre-tax profit has grown 32.6%, and attributable profit 27.6%. I'm going to analyze the income statement in terms of income, costs, and loan-loss provisions, which have grown in the first three quarters of the year.

So in the first part, income. I've spoken about the good quality of our results, and net interest income and dividends, excluding dividends, has grown. The two main drivers there are net interest income before dividends and fees. It's grown about 20%, and fees about 17%, in net terms, and of course, we've been attracting more new customers in Spain with our “We want to be your bank” campaign, and so that has a negative impact on that line of the income statement. Dividends have grown quite significantly. The equity method has fallen because of our selling of Union Fenosa last year, and in insurance, there's been a slight shrinkage there because of selling Abbey's insurance business. They -- we booked them to July 31, so we have one month of income from Abbey insurance and none after July 31. I'll go into more detail about that when I talk about Abbey. So that net interest income and fee increases mean our ordinary margin is up by 17%.

And now, if we have a look at income quarter-by-quarter, we can see that there's strong consistency in growth, and also in geographic areas and business areas. The third quarter compared to the second quarter shows sustained growth, as you can see from all the figures, so we've got good growth in all our business units, retail banking, etc., and in our geographic areas, and that's what I referred to when I said that we were doing well everywhere. We have quality and consistency. So the income trend is very good, and in terms of costs, the global increase has been 7%, 6.7% in fact. In Europe it's 6%, although there're two different profiles.

One is the Santander Banesto and Portugal; that is very significant, because we're opening a large number of branches both in Spain and Portugal, so even with growth in our branch network, we're not necessarily increasing costs. In consumer finance, we have big growth projects, direct credit in Spain, deposits in branches in Italy, the business launch in the UK, and a change in perimeter which explains that 16% increase in costs. In previous quarters, the figures have gradually slowed down. We started at the beginning of the year with 20%. Abbey is really in line with expectations, costs were 12% lower than the first nine months of 2005, partly because of the insurance business sale, and on a like-for-like basis the reduction was 8%.

In Latin America we have double-digit figures; there is 7 to 8 points which are because of exchange rates in local currency. Brazil's costs are flat, and in Euros it's 4%. Mexico and Chile are increasing, Chile's about 7%, but of course there are branch network expansion plans and ATMs.

Now, financial management and equity stakes increased by EUR171 million, basically the writing-off of Abbey's intangibles, for EUR114 million, so that was the biggest item there.

So, revenue's up by 17% -- income up by 17%, costs up by 7%, so there's a 10% difference there, and that means a big, much better cost to income ratio, by 5 percentage points in fact, so that's a very big difference, and our cost to income ratio is now below 46%.

Of course, in Europe, it's actually below 40%. That's quite a big benchmark for us. We're at 39.4%. In Abbey, we're continuing to improve, by 10 points in Abbey, 10 points better, 54% still higher than what we expect to attain in our three-year plan, where we hope to be at least 45%, and in Latin America a 6 point increase, sorry, improvement being at 46%. So cost to income ratio has improved throughout the Group.

So I've analyzed income and costs, now I'd like to study the third variable, that's loan-loss provisions. Here, we have the corresponding graph. You can see there's been a big increase there, very sharp growth, basically because of an increase in activities that require greater generic provisions, they've doubled since 2005, and the change in the business mix in Latin America. We've gone from corporate institutional business to more retail banking business, credit cards and consumer lending, so that explains the difference there. And, as you can see on the left-hand slide, total provisions have increased by 90 million this quarter, basically because of country risk, because specific provisions have come down, but generic ones have gone up 50 million. The specifics have come down because of Brazil, we'll see that later, and generic provisions are continuing to increase because of wholesale funding, and we'll see that when we look at global wholesale banking.

Now I'd like to talk about provisions in geographic terms. To explain the increase in specific provisions; Latin America has increased 519 -- total provision of increase 519 million. Latin America represents 448 million of those. That's basically because of -- in the UK also we have UPL, the unsecured personal loans coming from Cahoot, so I think you will understand why that is in generic provisions. Europe is growing; Spain 425 million in increased generic provisions.

If we now focus on why specific provisions have gone up so much, the 448 million in Latin America, last quarter we gave a similar breakdown and we can break it down to three components; exchange rate volume and change of mix, and increase in risk premium. We can see that depending on the country, certain components are more important than others. In Chile for example, it's the change in business mix, and in Brazil it's higher risk premium and change in mix. Mexico it's basically change in mix too.

If we look at generic provisions, the Santander network has increased to 109 million and global wholesale banking 257 million more. In fact it's gone from almost zero generic provisions to 260 million. That's due to growth in wholesale lending, and we'll see that later on.

I would now like to go to analyze results in terms of business areas starting with geographic criteria, so I'd like to start with continental Europe. In Europe, well this is a very recurrent statement. Our gross operating income grew 15%, a good business performance, good spread management. Spreads are positive except in consumer finance as we'll see later on. Costs grew 6.5%. I mentioned that there are two different trends there. The branch networks costs are growing below inflation, but Santander consumer finance has higher costs because it's growing a lot. With this leverage, net operating income has grown by 22% and then, of course, we have generic provisions which means that operating income is 17%. So operating margin is very, very consistent. Wholesale banking is doing better quarter-by-quarter.

Now I'd like to focus on the different business units starting with the Santander network. The Santander network's income has grown by 8%, that's thanks to the "We want to be your Bank" campaign. And so the financial margin has grown by 14%; operating income has grown at 17%. So it's progressively faster I think and we have 14% operating margin, and I've dealt with the generic provisions which brings that margin down to 10%. I think everybody is familiar with Banesto. Income 10%, attributing an additional profit 16%, etc.; Santander consumer finance, 16% increase, operating income 14%, costs slowing down and profits 20% up. Portugal similar to previous quarters, so very good, very sustained, very recurrent as we'll see later on. And then the rest; there's been very big increase in operating margin, but, of course, we do have the generic provisions of global wholesale banking, as we'll see later on as I said before, is becoming faster at generating earnings.

So now I'd like to look at the main units at Santander network. We are investing in customers thanks to the "We want to be your Bank" campaign and we're consolidating trends there. We continue to increase in lending. In March it was 15%, June it was 17%; in deposits we're now growing at 13%. That's in terms of volume. If we look at it according to product, individual lending 18%; micro companies 30%, and current accounts 19%, time accounts 16%. We have an increase in quality quarter-by-quarter. We can see that in income where we have net interest; income is growing very well, 14% year-on-year, 17% operating profit as you can see from the graph on the right. Generic provisions have increased quite significantly; of course, 13 billion more in lending compared to only 7 billion last year. So obviously generic provisions have to increase whereas specific provisions have dropped by 40%. That strength means that we can keep up that strong growth whilst we invest in capacity both for the branch network and more customers thanks to "We want to be your Bank" campaign.

Now Banesto. I think you're familiar with the figures; its growth in individual customers 19%; SMEs where it's focusing now, 22%, and larger companies also, so Banesto is doing very, very well. It's in line with its target and in the third quarter it actually grew faster and more than in the first two quarters. You know that Urbis will be sold and that will fund Banesto's very strong organic growth. And it's doing very well as far as income is concerned and its operating profit is also very, very consistent with previous quarters. It's continuing to gain market share and is really attaining all the targets established by its management.

Santander consumer finance is growing. We are investing in organic growth; in the UK we started from scratch; in Spain it was sub-prime lending; in Italy we're opening branches and growing a lot and we bought Drive in the US. Drive is sub-prime car loans and we did give the figures to the market and it's growing from year one.

Santander consumer finance growth is good in production; cars 24%, credit cards 40%, and income is doing very well. Costs, well I've already dealt with that. In the first quarter we grew 22%, the second 18, and the third 10% in terms of costs. We've concentrated our investments in the first quarter and there's a moderate increase in provisions, 11%. It is true that you'll see in the annexes that this business, when short-term interest rates go up, then because of the elasticity of some products, and negotiations with the dealers who sell the products that take place once or twice a year, so you sometimes have a delay in re-appreciation of assets. And that has an impact on margin as you'll see in the annexes where we've explained the fall in spread, the difference in spread.

In Portugal good growth rate. Not as good as in Spain, but the Portuguese economy is not doing as well as the Spanish economy. But it's doing well in SMEs, especially the Bank's presence in the Portuguese business world is increasing; it's gaining market share and it has a growth plan, it's opened up several new branches in the last year. So it's good. Fee income net interest, income has also improved quite significantly; in the first semester it was 3% and the first nine months it's much higher than that. There's been an increase in operating income, quite a big jump, and there's been an increase in gross provisions because of recoveries and selling off of failed loans.

Now what about the UK? The Abbey account where we can see that the margin is increasing 4%, costs have come down to 12; I'll also explain that in more detail, and to have this operating income growing at 30%. Well the figures I think speak for themselves and we're totally in line with this year's target, which is 1 billion.

I said that I had some things to say about income. Except for not including the selling of the insurance business we're seeing good like-for-like growth and costs are coming down. When we sold the insurance business we thought that the sale would materialize in November, but it actually materialized in July and we thought it would have a 100 million impact in terms of pre-tax that we would absorb by higher growth in other business units. So that explains that 10 million less income there because we sold the insurance business.

If we look at the key facts to Abbey now. We've improved market share although in the third quarter activity has been slower in mortgages and in deposits, basically due to Abbey's policy, because we want profitability rather than growth. However, if we look at a year-on-year comparison we're still gaining market share compared to last year. And so that is one aspect of management.

And then in terms of resources we're still reducing costs, we're still cutting costs especially headcount. The target was 2,000 this year, we've already cut 1,800 and then we also have, of course, the insurance business that we've sold and that what corresponds to that.

The implementation of Partenon is going according to schedule and lending is growing at 9%, the lending stock 9% and the deposit stock 2%.

If we look at income and, of course, you can see the difference there after selling insurance, we were at 23, 27, now at 28, and operating income is growing well. There's been an increase in provisions; I referred to greater provisions before for personal lending, the unsecured personal loans basically because of Cahoot, the Internet subsidiary.

I'd now like to have a look at the business figures for Abbey. Gross production has grown 23% in mortgages, prepayments only 1% so net production has been multiplied by 3. Stock has grown GBP6.1 million, stock is growing therefore at 8%. However, in the last quarter net market share was lower than the previous year because of the reasons I gave. Because we are aiming for profitability rather than growth, with personal loans we've grown 18%; savings accounts we've changed our pricing policy in Cahoot and in Abbey at the top end when we weren't getting much, or when we were getting a negative margin, we've reduced those deposits. You can see that in the spreads and it means that growth really speaks for itself.

In investments we're focusing a lot there, we're doing well, growing at 16%. And current accounts, we tend to give the number of current accounts, there's a 16% increase, but also the balances in those accounts are growing at 12% to 13%, which is very good for the United Kingdom.

So we're very satisfied with how Abbey is going and we're in line with the different targets that we'd established and in the three year. So we're going well according to the three year plan. With the implementation of Partenon there's been a landmark, customers have been allocated to the different branches; it's the single customer database and we hope to develop and launch new commercial tools next year. So Partenon is going according to schedule.

So if we now go to Latin America, the figures are very, very good. We're growing very well, 26% -- that's in dollars because that's what we use there. Costs 12%, so we have operating margins of 42% and attributable profit 31%. Retail banking has doubled its earnings in a year; we've gone from 500 to $1 billion in retail banking in Latin America, which is not just a quantum leap, I think it's such a huge leap forward in quality when we see where those results come from. The change in mix, I think, shows that these results are more consistent, they're a lot more retail based rather than corporate or institutional banking based.

The exchange rate impact is significant; it's between 6 and 8 points versus the dollar, positive in our favor.

And now if we focus on different countries we can see that revenues are very, very consistent. We see in local currency terms, Brazil 27%, Mexico 53%, Chile 36%. Earnings growth was really, really strong; Brazil 26%. Last year we had the Tieté sale impact which, of course, was a one-off. Without that it would have been 47%. Mexico has attributable profit at 37%, that's because of the increase in the tax rate which has gone from 9% to 20%, although we'd included that in our calculations. And Chile, which is worthy of note because we never really talk about Chile; it's really, really impressive, gaining market shares, market leader and the performance is fabulous really. Santander private banking, that's offshore, that's very consistent too; it's very recurrent and in fact growth in excess of 20%, so we're now really achieving critical mass. And in other countries; Argentina and Venezuela are doing very, very well.

Now I'd like to focus on individual countries, I'd like to start with Brazil. There's still strong growth, lending is growing at 21%, savings 22%, we have technological integration, legal integration over the summer and we're generating new business initiatives; we have projects. The Rio City Council now has its payrolls with us, we've launched the card project which is, well we really hope that we can gain a lot of market share there and we're increasing the number of customers with more than one product. Lending has grown 33%, SMEs 20% and other activities 28%, so very, very high figures.

Costs, and then we've got net interest income, good. I said costs in local currency terms were flat zero and operating profit also very consistent. And provisions in Brazil, because of the change in mix in the last quarter, specific provisions are quite stable after several quarters of big increases.

Mexico; I would say that the scene is very similar, increase in lending, increase in savings. Here we can see the figures -- they are really spectacular, 82% individual, 66% SMEs. We're investing in capacity here, in branches, in ATMs, in point of sales terminals, and in the fourth quarter, I think we'll be seeing figures of 11 to 12% for costs because we've been spending a lot now. Net interest income is growing strongly. Then we have insurance where we have the famous [inaudible] fees are coming down there quite a lot. Other fees are in excess of 20% and operating income is also growing very, very well, both in terms of quality and quantity.

Chile; this is, well, this is -- it's a very stable country, low interest rates, very stable macro-economically. We're still gaining market share even with low interest rates up to even 25% market share. That says a lot about our quality in lending; we're outperforming the market. We're opening up branches and ATMs. Net interest income is doing very well, I think it peaked earlier on. That was because of the evolution of the UF and so very, very good consistent growth. Net interest income's great and provisions are stable. So I would say that Chile's performance is fabulous.

If we now look at the secondary segments, we can look at the list from different businesses. We can look at retail banking, which has been growing 60% in operating income, net operating income 29% and income before tax 24. Global wholesale banking gross operating going up 35, net operating income 46.

I talked a lot about the generic provisions before and so income before tax is only (indiscernible text not included) has got 18%. Asset management and insurance has been impacted by the sales -- the selling off of the Abbey insurance business; gross operating income gone up 6, but -- and costs has gone down 11, net operating income up 20 and income before tax 18.

The retail banking business gives us a count, all in all, that looks excellent. And here you can see the Abbey results going up 6%, because they're in retail banking, here we're talking about that not insurance. Latin America, going up 31% and Europe 11%. This goes on to an operating income that's growing at 29% and in before tax profit we're going up 24%, of which 45% is the figure for Latin America, 16% for continental Europe and 23% for Abbey.

Global wholesale banking shows strong growth in customer volumes, 48% growth in the first nine months of 2006 against 2005. Trading activities have higher results by 11%.

If we then look at customers, which is where we're getting these increased volumes, we can see that the way we've organized the business, we've got a lot of transactional services plus investment banking, which is going up 39%. Trading for customers Santander global connect and Santander global market are going up at 64% and then brokerage going up 39%.

We can see that there's a big growth in the operating income, but that doesn't get -- slow down to the pre-tax income. The explanation is the increase in activity because credit and underwriting in 2006 went up 16 billion compared to 3 billion compared to the first nine months of 2005. And therefore, very good performance in wholesale banking, strong growth in customer business, above all customer treasury trading which has given us these excellent results.

And then asset management and insurance; here you can see there are two main components first of all. On the left you can see the total volume for the area, and here we see what it contributes to the Bank, which is basically 1 billion a quarter, which is 2.9 billion in the three quarters. The sold businesses which are basically Abbey and [inaudible] insurance businesses have seen a drop of 26% but in the other areas, you can see the insurance business, not including Abbey, goes up 29%. Insurance business without Abbey goes up 24% -- sorry with Abbey goes up 24%, pension funds 1%.

I was talking about the lower fees in Mexico with our [affore] there which has an impact on this figure and then mutual funds which have been growing at 11%.

Here we're developing new products, hedge funds and such like to sell them in Spain after the approval of the new standards and we've also launched the first risk capital, venture capital fund, and a couple of days ago we got authorization from the Spanish authorities for the merger of Santander Seguros and Banesto Seguros. We've got the internalization of Latin American insurance and we're redesigning the asset management business in Abbey with systems, products and investments teams all being brought together to get more synergies out of them all.

So there are four main conclusions I wanted to wrap up with. We've got record earnings, good quality earnings, sustainable figures based on a lot of commercial activity and we've got a good control of costs and risks, good diversification, growing in all the different businesses across the world in the different areas where we're working, continuous improvement in the cost income ratio and we've got a very sound balance sheet. You can look at asset quality and you can look at capital [inaudible] and we're definitely doing very well in both of those and we're selling off our non-core businesses in order to be able to invest in future growth. We think that the results are very much on line to be able to comply with the promises we gave in the guidance to our analysts earlier on in the year. And we think they give us a good springboard to obtain significant growth in 2007.

So I finish the presentation as such now. So if you would like to ask questions, we'd be happy to receive them.

[interpreted] Good morning, let's start as always with the questions that have reached us over the webcast. The first one from Arturo de Frias from Dresdner Bank. He asks us about what's happening in Sovereign, whether the shareholders and the Board are trying to sell the Bank, or wish to over the next few months, and what would our stance be on that matter?

[interpreted] Well, the situation in Sovereign is something you all know about. They're looking for a new chief operating officer, they've got an interim one, and there's now a committee which is specifically going to look out for a new COO, which could be the same one that is acting as the interim COO at the moment, so that's the situation.

Potential intentions of other members of the Board or other shareholders represented on the Board? Well I can't talk about other people's ideas. We'd just be moving into the realm of speculation about any possible things that might happen in the future. We would have to decide what our position is then. You know what we think about Sovereign, what our position is. We've always said, and will continue to say that our position is that it's a financial investment for us and our scenario is the scenario we have before us at the moment. We're there for two years, with the possibility of getting to know more about the American market and then we'll come to the decision that we consider to be most suitable for our shareholders within two years. So I really haven't got anything else to say.

[interpreted] The next question is from Tomas Nicolau from Fidentiis and he wants us to talk about the slowdown in SME lending from June to September, if you look at year-on-year figures. He asks us if that's to do with deterioration of the asset quality in the market as a whole and I think he's talking about Brazil.

[interpreted] In Brazil, SME lending isn't very significant as a whole in Brazil. In Brazil, there's corporate banking, some SME banking, business banking. I don't know if you know of that business banking, how much of it's SMEs and what the lending figures are. 10% of the total lending in Brazil.

So these figures, we haven't got a deliberate policy, if that's what you're asking us about restricting lending to SMEs in Brazil, so I think it must be a one-off situation, which has an impact on the figures. There's definitely no policy, no deliberate policy to cut off lending to SMEs because of asset quality or anything like that. So, to tell the truth, I don't know what's going on there and I hadn't noticed that this was a significant factor. It hadn't stood out in any way.

[interpreted] There's a second question from Arturo de Frias. He says that given that our competitors brought down their expected profit levels for 2007, about 20% they said, do we have any guidance for 2007?

[interpreted] No. It's not our policy to provide guidance to the market at this stage of the year for next year. In the presentation, I said at the end that we're expecting to have a good year, with strong dynamic growth in the different business areas. You can see that in our figures and we're in retail banking. We're in retail banking and that means, evidently, that in 2007 we're going to start a little bit higher up than where we started in 2006. We've got good figures now and they give us grounds for optimism for next year and we'll have to see what happens. We can't give guidance now.

[interpreted] Pablo Beldarrain from Morgan Stanley has some questions. I'm going to see if I can organize them. In general terms, there are three questions about general issues. The tax rate, first of all 26% compared to 20% in the first quarter to the third quarter. So what are we expecting for the future?

The second question would be about capital and risk assets, which have been going up 20%. Can we expect that kind of growth in 2007/2008 if the perimeter doesn't change?

And then Sovereign. After the change of the three years heading the Bank, whether that's going to have an impact on our strategic decision that we might buy out 100% of the Bank within the next three years?

[interpreted] Well, firstly about the tax rate. It is 26% for this quarter, which is basically due to the agreement reached with Total about Cepsa and because of that Total has left some shares in Cepsa to pay off some of the taxes, which means that without generating the capital gains, nonetheless, we have to pay the taxes and that means that we get this slight peak.

I don't know if you've got anything else to say Pepe?

[interpreted] Simply, with the withdrawal of the other shareholders in tax terms, there's capital gains to be paid in today's market, based on historic costs and current costs, and so every company has left its shares there, whose mark to market will be used to pay the taxes. And the shares that they have left are still of value to have a historic cost and that's why they have to generate this capital gains tax. Right, and in the future, we'd imagine that probably will come back to previous levels in tax payments and the percentage could go up a little bit in the future.

The second question, I think -- I don't know if I understood your question. 20% growth?

[interpreted] Do you think that your risk rated assets, how will they be performing?

Well, the growth in our risk rated assets, there are some components that are more recurrent but there are some which are more volatile. The most volatile ones have to do with market risk, which is obviously very volatile and then there's another component, which is the Abbey [inaudible] short-term markets vis-a-vis repos, which according to the Spanish regulator consume capital and the volume of this business is high, with low risk, but high volumes, 30, GBP40 million, so there is some quarterly volatility there.

Excluding these two items though we, and I've mentioned this indirectly, are still expecting growth rates to continue to be high in these activities. So in the absence of any securitization activities, these will continue to be significant then. We've been much more active in activities of selling off credit, not just retail business through securitization, but also with syndicatizations (sic) on the wholesale market and I think that means that our risk rated assets should cease to grow quite as fast as they have been to date.

And then Sovereign. The change of the CEO; we'll have to see who the new CEO is, but your question as to whether it affects our vision of the future over the next two to three years, no it doesn't. It might -- we might be affected by our understanding of the American market which we are acquiring as we stay in Sovereign for the next two, three years, in order to better understand the America market. That's what's going to tip the balances with respect to our decision. It's not a matter of who is the CEO at any one minute, that's not going to change our expectations.

[interpreted] Then there are three questions about the retail business in Spain.

The site deposits have slowed down 12%, sorry, have increased 12%. Is that sustainable?

And then the effect of the strategy we have in, “I want to be your Bank” in getting new customers and keeping customers as well.

And then your plan for opening new branches for 2007.

[interpreted] I think that the first two questions are linked closely together. Yes, site deposits are doing very well. When retail banking launched its project of “I want to be your Bank”, we said that the idea was to bring in new customers and do a lot of cross-selling. We're very satisfied with the fact that the growth figures we're reporting and not just for site deposits, but also in lending, in customer activity. We're getting more retail business and thus there is sustainability. With the payback growing 7, 8% and the economy doing well, I don't know if we should talk about 12%, but definitely 10% would be a sustainable growth figure.

Given that we have this strategy, which is what we're rolling out and will continue to, we think it's doing well. “I want to be your Bank” is saying that we're a mass bank, that we can attend people well. We haven't given any figures for “I want to be your Bank”. We've said that by the end of the year, maybe the retail banking unit will give more figures, but we can just say that we're happy with how things have done and one of the biggest impacts has been seen in churn. Churn has been limited substantially.

And then in 2007, our plans for opening new branches is similar to 2006. This is an ongoing process. I think that the COO in other presentations has already explained, that this is an ongoing process and it's a stop and go process, so that every quarter, every half year, we'd look at how the opening plan is rolling out, what's happened so far. If things are going as expected, we go on, but if we see that there's any slowdown in business or if there are any negative impacts against what we had been expecting, then we slow down or stop the process. But so far the new branches have worked, I'd say, even -- well, slightly better than the expectations we had. So it's probable, very probable, that we will roll out a very similar plan in 2007 as what we had in 2006.

[interpreted] There are a couple of questions about Abbey. The first is if we can give a breakdown of the effect of the sale of the insurance risk business and then about slowdown in gross loans, in gross mortgage finance. Are we expecting a slow down in the third quarter, in the fourth quarter? And what about the strategy of buy-to-let? How's that impacting your decisions? Have we got any figures about that?

[interpreted] We haven't got them to hand actually, so what we'll have to do, since I can't give you the breakdown for the first question, I can answer about the gross loans though.

The mortgage market in the UK, if you look at production through intermediaries, with the aggressive pricing policies, you see an immediate payback, so if we think that gross loans are going to grow very strongly or are going to have a lower market share, this will depend on the pricing strategy that we have. Normally, what we've done in September and what we've done in October is used as the basis for what we do. We probably will have more production, but we're not going to be very aggressive in pricing in order to get another point or two in our market share, if that is the question. We're focusing on returns and are not generating assets with negative margins and we're going to sustain that policy.

[interpreted] There are a series of questions about Abbey insurance, more about the impact of the sale; those 10 million that we talked about on the slides, the GBP10 million. Could you clarify whether that is extrapolable to the end of the year and comparisons to 2007?

[interpreted] Well, when we sold the insurance, we said that for Abbey's results as a whole this EUR1 billion for 2006 and 2007, included the loss of business from insurance, which we consider to be EUR100 million before tax. Those GBP10 million, well we've given the figure to help people understand just how income is growing in Abbey. By the end of the year, including the impact of the loss of insurance, we believe that we will make the EUR1 billion in results, and in 2007, the EUR1.2 billion that we'd targeted. So that means that there'll be greater growth in other business areas to make up for the loss of insurance business.

I think I've give you some ideas about that. We've increased in what we call investment, in wealth management, and next year in the first quarter, we'll be launching credit cards. We're launching many different initiatives in Abbey that will help us compensate that.

I think there were some questions about buy-to-let and gross loans. Our lending activity in the buy=to-let segment is going well. All of these new initiatives, we believe, will help us replace the earnings that we've lost by selling Abbey's insurance business. I have to say that I think this has been an important landmark for us. We've really carried out a de-risking exercise on the balance sheet and I think that for Abbey and for the Group, it's actually a great piece of news that the sale is going ahead, although of course, it does have an impact on income, especially at the beginning.

[interpreted] Two questions from Luis Peña. The first one is about Sovereign's contribution according to the equity method this quarter, EUR26 million.

And the second question is about Italy. Will we be buying branches or any other kinds of assets?

[interpreted] In Italy, our stance is very well known I think. We've said that the Sao Paulo operation is a good one; it makes sense. We also think it's the best franchise in Italy and that the operation doesn't include the whole value of Sao Paulo, but I don't want to speculate about different kinds of assets. I really have nothing comment on there, because it would be nothing more than mere speculation.

[interpreted] We have a question about Latin American from Pablo Beldarrain about expansion in Mexico and where lending spreads are just an impact of the mix and what about the evolution of ALCO in Mexico?

[interpreted] Our improvement in margin in Mexico, it's just due to the mix. I think we actually showed that in the slides, individual customers and big increase in credit cards. So there are higher spreads there. The ALCO does have capital gains because of fall in rates, I think it was 8 billion, and that the results were 10 million in the margin and there are quite significant implicit capital gains there.

[interpreted] Then in [inaudible] from Ahorro Corporacion about the stock options planned for management. How would that be built? How much would it cost? What about the price of the shares?

[interpreted] The stock options planned, well the cost has been calculated and calendared and it -- will there be a payment to reserves or not, depending on whether the two parameters are complied with, whether people earn their stock option or not. It all depends on earnings per share.

The other one is performance, but peer performance based the indicators are well known and I think our share price is actually below what it should be. It's undervalued and eventually the market will recognize what we're doing.

[interpreted] Then there's a question about deferred taxation, for this 30 to 35% difference. Are we expecting any impact in the fourth quarter? An impact on the bottom line or in the income statement?

[interpreted] We don't know. We're waiting to hear what the regulator says about this corporate tax and this drop from 35 to 30%. Well that's 400 or EUR500 million in our case, so where will it go on the income statement, we really can't say yet.

[interpreted] There's another question from Arturo de Frias, about the big increase in generic provisions, especially for wholesale banking, linked to Santander's funding of Spanish corporate operations recently. These will presumably be short-term bridge loans, so should we expect generic provisions to come down again?

[interpreted] Well, there are two variables here. These corporate operations, well, yes, these are bridge loans, and once the operation goes ahead then, of course, the loan will be syndicated, and that can take between three to five months. Then, of course, that will be taken off our balance sheet, and that's what's happened in the past, and the Bank's final take is in line with our risk policy, and so that's why we have these temporarily higher provisions. If there's no increase in lending in other activities, not necessarily these ones, then those generic provisions would, of course, come down again.

[interpreted] We have a question from Alejandro [Aguira] from Kepler. How can the Santander network be growing in spreads 22% in lending, 22% and net interest income 12.3%, so what's the outlook of these three variables for 2007?

[interpreted] Spreads. We're talking about the liability spread, which has grown. It's on one of the pages in the annexes, the liability spread. I think it's gone from December at 154 to 195 in the third quarter, and then the asset spread has fallen slightly from 146, sorry, 139 to 131, so it's fairly flat, depending when the interest rates go up. Overall, it's 310 up to 326, but the asset volume is much higher than the liability volume, and there's increased wholesale business, so customer business spread is increasing, but participation in wholesale lending too, and so Alejandro is right, activity is growing 20% margin, net interest income growing at 14%, so that 6 point difference is due to the increased weight of wholesale.

[interpreted] Christoffer Malmer from Goldman Sachs has sent in three questions. The first one is about Abbey.

[interpreted] I think in the previous question there was another question about our outlook for 2007, our outlook for customer spread. Well, we're taking another look at the income statement; we're waiting for the European Central Bank to say something about interest rates. So if interest rates go up spread will improve again, just as we've seen. Because there's asset repricing, the catch-up takes a while, and liabilities catch up quicker, so the outlook in increased interest rate scenario, well, that would be positive for spreads. Sorry for interrupting you.

[interpreted] So Christopher sent in three questions. The first one is that, given that we still have the target of EUR1 billion for 2006 for Abbey, taking into account the negative impact on margins of selling the insurance business, but the positive impact on restructuring, on costs, what are realistic expectations for future growth in Abbey, I suppose beyond 2006 and 2007?

[interpreted] In the -- well, that's in the three-year plan, we had this range, say 5 to 10% in income. We still think that in 2006 we'll be closer to 5, and we think that will continue to increase. I've mentioned, some of our initiatives which will boost income, and I think we should grow between 6 to 10%, 2007, 2008. So getting closer to 10% in Abbey as we gain momentum and consolidate traditional products with the capacity to generate earnings on new products, for example credit cards, or not-so-new products that were already in Abbey's portfolio, but which we will be addressing, like wealth management and current accounts. Because we think we can grow there, either actually double-digit growth in most of them, and in those where we start from scratch like credit cards, we'll get very significant growth.

So, Abbey is really a process of business consolidation, with mortgages and deposits, and then we'll see development and growth of new business where we have a lower market share than would naturally correspond to us, and then, of course, in those products that we don't yet have. And so once you amalgamate all of that, we expect to see higher income growth in order to comply with the targets included in the three-year plan. We are reasonably confident that we can attain them.

[interpreted] The third question is linked to the second question, about selling the insurance business. Net interest income has increased, because of the sale, so what will happen in the future?

[interpreted] It's true, we sold the insurance to Resolution, so we did get some cash, and that's now within Abbey. I talked about 100 million less pre-tax profits, but, of course, we now have a risk-free rate, and that money, we hope, will actually be more profitable than that and will help offset the loss of income incurred by selling the insurance business. So the net interest income is better, but for two months this quarter.

[interpreted] And the last question from Christopher is about Latin America. Are we considering non-organic growth in any of our Latin American markets, or are we concentrating on fast organic growth?

[interpreted] I think that with our current growth -- I think I made it clear in the presentation. The big initiatives for organic growth in all countries, in Chile we're opening up branches, in Mexico we're speeding things up, in Brazil for the first time since we bought the Bank we've really made a scoop by getting Rio City Council's payroll at the Bank, so I think that that is more than enough. We can make the most of organic growth, especially when our target is to gain market share, a lot of market share, like we are in Mexico, and Brazil. We're starting to gain market share on Brazil, and, of course, in Chile. I think that's more than enough, in these markets that are growing in excess of 20%. I think that's more than enough for the local management teams that we have there.

(Spoken in Spanish)

[interpreted] Another question from UBS, what is the 133 million that you have in financial earnings, which are booked under rest of Europe? What are they? And is it possible to keep the 440 million of financial transactions from Brazil under actual, because they're compared against an historical average of about 100 million -- sorry, reais, reais is in the currency in trading activities.

I don't understand what you meant about Brazil.

[interpreted] How sustainable are these R$440 million that you have in financial results, in net trading income in Brazil? We're talking about reais, so $200 million, would that be?

[interpreted] I don't think I've got the comparative figures here. I think that the historic average was 150 million, and this year indeed it's been 100 million for the first two, and then 200 million for the third quarter, so the second quarter was weaker because of upsets in the market. The third? Well, the markets have got back to some degree of normality. In Brazil, you will remember, the scenario is one of lowering interest rates, high volatility in April and May, which meant that the results for the second quarter were particularly weak, and the third quarter, really, you could say that it just offset the poor performance of the earlier quarters.

[interpreted] The final question, coming in before we take the conference call questions, is from Lehman, whether we can give more details about the low level of growth in costs in Spain and Portugal, given the expansion in the number of branches?

[interpreted] Well, this is something we've discussed quite extensively before, the CEO always highlights the flat costs. We have to keep costs flat. This process can be seen quite graphically; we're reducing positions in back office, and we're putting people in the front office. And, along with that, at the same time, technology makes new things possible, with the development of Partenon, and Alhambra, and in Banesto we've got other projects as well, which will help us go on doing this in the future. We've got more people actually selling, and in contact with customers, and we've got fewer people, or fewer costs at least, in the back office operations, which means that we continue in a process we've had for several years. You might notice it more now, because we're opening branch offices now. So if you look at the usual way of looking at things, and you say, you open branches, that costs money, that's not really true any more. It used to be, but it's not any more, and in Banesto, and in Portugal, for many years now, we've been keeping costs down below inflation whilst at the same time we've been increasing activity, because we're reducing back office costs, and we're increasing the number of people we have in contact with customers.

[interpreted] Okay, now we have to take on our telephone questions. We've got one question from Mariano Colmenar, from Credit Suisse. Please ask your question.

[interpreted] I want to ask a question about Brazil. I'd like to have some more details regarding net interest income. I think there are three components to this, and they will have different impacts on the net interest income. The first one would be the commercial component. It seems that things have gone well there, but I'd also like to know what's happened with the ALCO and what's happened with your pension and bonds portfolio.

And then provisions, you said, have come down. I'd imagine that you must be provisioning on the base of expected losses. So my question is whether this level of provisions could be expected to continue to grow on the basis of the increase in the lending portfolio.

Then, profits in Brazil, I think in dollars there's $745 million for the first nine months. There's growth there of 35, 36% year-on-year, which is a bit more than what you had suggested it would be at the last meeting you had with analysts, and talked about stuff in America. Guidance was more like between 15 and 20%. So, are you expecting that for the rest of the year this pace of growth will continue, because that would mean that you should hit $1 billion dollars by the end of the year?

[interpreted] Well, let's start there, with your first question about net interest income. Commercial activity is going very well. You can see the annexes, and the ALCO, if you look at the net interest income, what ALCO has done hasn't been especially favorable, because if you look at the spread and the Semic index which hasn't been too favorable with inflation at 3, 4%, the spreads on the TPM, ITPM portfolio would put us up to 14, 15%. The Semic has just come down below 14% now, so for the year as a whole, the impact on this net interest income was quite low, because the funding is done at the Semic rate, so what's really behind the net interest income is our commercial activity. This will probably become more favorable as Semic comes down a bit further. The impact then of the portfolios will become more favorable.

And then provisioning. I think that the level that we have is probably quite normal, with a certain mix. If growth continues to be strong in consumer finance, and I do hope that they will be, then with everything we're doing with cards in Brazil, we're putting out a card at 6% monthly rate, and the market's at 12%, so this is a very aggressive rate, but the spread on this is 46%. So if we're successful with these kinds of initiatives, then provisions might go up. But we'd be getting a big return on the risk, so if we think that with this mix we have, provisions probably are at a sustainable level, and we think that this mix will continue to focus more on consumer finance.

And then you asked about the volume of profits and the guidance we gave on the Latin America investor's day. Well, they have to look at the exchange rate when we gave guidance. The real, since then, has appreciated, strengthened against the dollar, but we thought that it was going to remain about the same. That's the main thing that's changed. Everything else is more or less the same. We said 15, 20%, and we're reporting more, and I think the main factor in that is probably just the exchange rate.

[interpreted] Next question?

[interpreted] No more questions on the conference call.

[interpreted] Well, that's it, then. Many thanks.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.