Banco Santander SA (SAN) 2006 Q4 法說會逐字稿

Good day. Welcome to the presentation of our results. I'm going to be dividing the presentation into four sections. First of all I'll be presenting the first group of ideas and I'll be talking about the fundamental issues that characterize the Group. Then Jose Antonio Alvarez, the CFO for the Group will then go into more detail about the figures of the Group and what's been happening in the main units and the business areas.

And then finally I will give you a summary of what's happened during the year and give you an idea of the outlook for 2007.

Right. The first point I wanted to make is that 2006 as a year was excellent for Santander for many reasons; growth in business, magnificent results and on the progress that we made in the strategic development of our businesses. And I think that we can sum up the year by touching on five key points.

First of all, the strong growth in earnings.

Secondly, the very high quality of the earnings; 2006 was a good year for banks in general and there is no point in looking at it from the cold perspective of just percentage growth. It's more important to look at the quality of results, where they come from. The quality of the growth seems to us to be fundamental because that is the very firm foundation upon which we can continue to grow over forthcoming years.

Thirdly, we were able to combine stronger earnings with a much stronger balance sheet.

Fourthly, we're not just concentrating on profits for today. In 2006 we've brought together short term returns with long term investment in the future value of our Group. We've invested in the commercial network, in enhancing the quality of our service, cross selling to customers and developing technology.

The fifth point I wanted to make was the high return that our shareholders have enjoyed during 2006; 31%, which followed on from 26% that we already got in 2005.

So I'll give you some more detail on each of these points.

We closed 2006 with a total attributable income of EUR7,596 million. Excluding capital gains and extraordinary provisions, attributable income was EUR6,582 million; that's 26% up on 2005. So this figure I think is the figure that best reflects the Group's capacity to generate earnings and should be the starting point for the future years. This sharp rise in ordinary income had several effects.

First of all, all of it fed through to earnings per share, which increased 26% to EUR1.05 per share. Secondly, and this was a significant issue, was the 2 percentage points rise in our return on equity, outperforming market expectations. It also meant an improvement over and above what the market had expected placing us among the top five world banking groups for earnings per share. In February 2006, after presenting the 2005 results, the market consensus was a rise in our earnings per share of 19% for 2006 but we comfortably overshot that figure. We also managed to outperform most of our global competitors which is particularly noteworthy as it happened in a year which in general was pretty good for European banking as a whole and world banking in general.

The second idea I wanted to discuss amongst the original five was the high quality of our results. Here you can see the results in vertical terms, so you can see that the bottom line was driven by strong growth in gross operating income and operating costs rising at less than half its pace. We've managed to open our JAWS by 10 points and significantly improve our cost income ratio in the Group as a whole, and indeed, in all the business areas.

I think you've probably heard me say this before but really our financial statement is a textbook case and net operating income surged 28% whilst attributable income also rose by a similar amount. But it's not just a matter of looking at the vertical quality of the results down the cascade of the income statement, it's also quality across the board; it's horizontal quality. That means that income wasn't concentrated in any one area but came from all sources by geographic areas. For example, Europe grew 16%, Abbey 24% and Latin America by almost 30%. Abbey has achieved its three year planning target and has hit an attributable income of EUR1 billion. As you know, the target for 2007 is EUR1.2 billion.

And it's also high quality growth in terms of our secondary or business segments. Retail Banking's income before taxes was up 24%, whilst global --Wholesale Banking's went up by 17% and Asset Management & Insurance 18%. Jose Antonio Alavarez will later give you more detail about exactly how we achieved these growth rates.

The third idea in the list of five was that our earnings didn't come from lower provisions and nor did we in any way jeopardize the quality of our balance sheet by lessening provisions. Quite the opposite happened. If you start on the bottom part of the slide on the right you can see that credit quality continued to improve in 2006. The ratio of non-performing loans is at an all time low of 0.78% and coverage reached almost 190%. At the end of 2006 we had EUR8,627 million of provisions to cover EUR4.6 billion in non-performing loans. So of that, EUR5.6 billion were in statistical or generic provisions. And I want to point out that these generic funds, which I actually prefer to call them reserves for the future, rose by almost EUR1.1 billion over the year.

Lastly, as you can see on the left, loan loss provisions were up 53%. This increase was largely due to higher volumes in lending above all and also our entry into more profitable segments and products, albeit with a higher risk premium. Both effects produced a rise in generic provisions in Europe and specific provisions mainly in Latin America. This increase in specific provisions at a time of expansion shouldn't be seen in isolation. It should rather be set against the context of the kind of return we're getting on our lending. It's very instructive here to compare the risk premiums with the spreads on lending.

In mature markets like Spain, the risk premiums of commercial banks are at around about 0.10% with spreads a little over 1 percentage point. In Latin America the risk premiums are higher, as can be seen in the slide, but spreads are also substantially larger. Let me give you an example. Our bank in Brazil, it has spreads of 13 points, whilst in Mexico there are spreads of over 6 points. So that means that a joint management of risk return is very important and as you can see in the region our banks have performed very well in this area since 2006. And we will keep up this strong growth in 2007 throughout the region, adjusting our risk premiums and our returns to this growth profile.

We've seen that we've got a very sound balance sheet in terms of risks, but we can also see how sound it is in terms of how we manage our capital. We've been pursuing very active capital management in 2006, so that our core capital has remained at around 6% despite a lot of strong expansion. So I want to point out the three main factors behind this.

First the strong generation of ordinary results, roughly 50% of which we retained after paying dividends.

Secondly, we continued to manage our business portfolio. We sold off some investments which had a positive impact via capital gains in lower consumption of capital. But we also made some investments which consumed equity such that the overall impact of divestments and investments was basically zero.

Lastly, we actively managed our risk weighted assets which grew at rates of around 16% compared with a growth in lending of more than 20%. In 2007, we will continue to effectively manage capital as one of our top priorities.

The fourth point I wanted to highlight was the fact that we are investing very firmly in the future. Our objective, as managers of the bank, is not just to generate profits for one year or two years, we want to build up a machinery that will boost growth in earnings per share over the medium term and constantly outperform our international peers. So that's what we're working on. This slide shows some of the steps we've already taken.

In order, first of all, to increase our distribution capacity, we already have the largest distribution network in the west and it will continue to grow. We also want to invest in business with future potential. So here of note would be what we've been doing in Consumer and Private Banking, which we consider to be two of the businesses with highest returns.

We're also investing in our customers; we're enhancing the quality of service throughout the Group and we have clear and well defined programs to do this and to encourage customers to hold more of our products. The figures we're giving today, and the additional information on various countries available on our website show that we're definitely making progress in this field.

Finally, we're aiming to develop a more global banking model, both from the business standpoint and also in technological terms, so that we all have a single technology platform for the entire Group within the medium term.

So of all the things from here, I just want to talk about two key items; the opening of more branches and We Want To Be Your Bank. These are examples of our investment in future revenue generation without ever easing up on our strict criteria regarding costs and short term returns.

2006 was a year of strong expansion in our commercial networks, especially in Europe, where we increased the number of branches opened by 350. This is organic growth. And we combined this expansion, which as you can see in the last column produced a rise between 6 and 8% in our branch networks, with virtually zero growth in costs in real terms. This was possible due to our unique technological strength. I'm convinced that in mature markets where competition is constantly on the rise, it's vital to ensure control of costs and better efficiency. That's exactly what we're doing.

That doesn't mean however that we're missing out on business or growth opportunities. Rather that our greater efficiency and productivity in our operating areas enable us to free up resources for business areas and customer service. The figures are proving us right, which means we'll continue along down this path.

Something else I want to highlight from 2006 is We Want To Be Your Bank. When we launched this plan we said it wasn't a campaign but a medium term strategy; a new way of doing business with individual customers in order to boost Santander's network activity over the coming years. We estimated the initial investment at its launch in 2006 at EUR83 million and we set demanding targets in order to break even in the first year. We also said that we weren't going to announce results month by month, as this kind of strategy needs to be analyzed over a longer timescale. But now, one year later, we can say we are very happy with its performance.

What's most important is that we've established the foundations to go on getting more growth in the long term. So we're optimistic about the strategy and have increased the number of groups that we are targeting within it, so that we will now include other groups such as students and immigrants.

The fifth idea that I wanted to highlight is that the stronger earnings and progress made in rolling out our strategies are reflected in our return for our shareholders, which is much higher than the average return in the market. The return, that is share price rise and dividend, was 31% in 2006 which I can remind you, comes after 2005 when it was already a very healthy 26%. Santander's share rose 27% in 2006, well above the rise in the European and United States banking indices and indeed in most non-financial companies.

Moreover the dividend per share that we're going to be proposing to the next AGM is 25% more than that paid in 2005. And you'll remember that last year we also increased the dividend 25%. Few banks in the world are able to offer such increases whilst maintaining a stable pay out policy.

And now, Jose Antonio Alvarez will give you the Group figures and those for the different business areas.

Good day to everyone. I'll begin with the Group's global figures and the income statement.

It really is a question of continuity. Income is still the main engine of our results, growing in excess of 17% whilst costs are growing at about 7.5%. So net operating income is very, very strong; 28% up on the previous year.

And if we look at the income statement, you can see that this high net operating income gives us an increase in attributable income without capital gains of 26%. And we've increased our loan loss provisions because of activities in Latin America. And then we have net capital gains of EUR1 billion. I'll talk about that later on. It's actually a very similar figure to that of 2005. So our attributable income with capital gains is EUR7.5 billion.

The exchange rate impact has been reduced over the year. We started with 7 or 8% and ended the year with 1 or 2%. So it's a very marginal impact.

If we have a look at revenues, costs, etc., we can see that most -- the biggest growth in revenues comes from net interest income without dividends and fees. That shows good volume evolution and good spread. We're improving our spread in Spain, UK, Mexico and Brazil. They're virtually unchanged in Portugal and Chile. And only Santander Consumer Finance has had lower spreads because of the increase in interest rates which can't be immediately passed on to the loans.

Fee income rose 15% after absorbing the impact of, We Want To Be Your Bank. We said that was about EUR83 million. And all fee components increased except for a dip in pension fund management in Latin America, because of a drop in fee income in Mexico which has been going on for several years now.

Insurance has done very well, 31% up. We are really giving impetus to this sector within the bank. So Latin America, Argentina, Brazil, Chile and Mexico are growing at more than 30% in terms of income from insurance.

And financial transactions. Those gained also, rising as a result of Wholesale Banking activity with customers, and also the very good performance of income from markets. The second quarter was not that brilliant, but in the second half of the year it picked up.

The only decline was in income by the equity accounting method because of the sale of industrial stakes in previous years. And so it's been high growth in income and then the important fact that they are current.

Here we have the financial margins and you can see that quarter-after-quarter our results are growing repeatedly, and I think it's quite easy to predict. So high growth and very recurrent in our income statement from basic revenues.

Now if we look at costs we, I think, have talked about our cost policies, depending on whether a market is mature or not, and cost to income is a very important factor. And we've launched projects in Latin America which we've been telling you about, and we've been restructuring in Europe.

And in Abbey, Abbey's costs have fallen by 7%; we've improved GBP300,000 worth. And in Europe costs have increased in Consumer Lending and Wholesale Banking because everywhere else costs are in line with inflation or below inflation, except for Portugal because of the change in brand in 2007.

In Latin America, in local currencies, we said Mexico and Chile would grow at about 10% -- between 10 and 12%. And Brazil, if we don't include the exchange rate impact, costs are growing below inflation. And then cost of financial management and equity stakes increased by 150 million, but that's a result of the development of corporate projects and the amortization of intangibles. So we have selective cost increases without, of course, neglecting investing in projects to guarantee our future. So our cost to income ratio has improved considerably, 4.3 points.

I know we seem to say this one quarter after another, but this is very, very important. We can see that Europe is at about 40% cost to income, that's Continental Europe. Abbey started at 72%, we're now down to 55, and our commitment to the market is to get below 45% by 2008. In Latin America cost to income has improved by 6 points and it's basically -- Chile is basically in line with European standards by now so there's been good business development which has contributed to that improvement in cost to income.

Then loan loss provisions. They are growing in line with the change in our business mix in Latin America, and in line with growth in Europe. That is generating a 77% increase in specific provisions because of higher spreads, higher risk premiums basically in Latin America. And in Europe there's been a big increase in generic provisions focused in European Wholesale Banking; we'll see that when I go on to talk about the Wholesale Banking unit.

So the total amount of provisions during the fourth quarter was lower than in the third quarter because of the dip in generic provisions. And specific provisions increased in Latin America and Brazil and Mexico because credit cards have spiraled. And if we look at the split between specific and generic, you can see that the increase in loan loss provisions in Latin America has been because of a higher volume of lending and a change in the business mix, and there was also a slight deterioration in the credit quality of one country.

And the rise in specific provision, Abbey was linked to the UPLs at Cahoot and we've eliminated that now because it did have higher NPLs. The rest of Abbey's lending portfolio is excellent and certainly better than the market, especially in mortgages. Most of the generic provisions were in Europe because of growing business.

Now I'd like to have a look at this in a bit more detail. The exchange rate impact is significant in Brazil; there's been a higher volume of lending and change in business mix so we've also seen a greater standardization of risk premiums and evolution of lending quality in local markets. In Europe, as I said, the rise in generic provisions was basically due to -- 70% of it was due to global Wholesale Banking because of financing big operations throughout the year and really the faster growth in Retail Banking.

Now capital gains. I said the impact on net attributable profit was 1 billion. Gross capital gains are at 2.5 billion, that's from Urbis and San Paulo. Obviously Urbis was Banesto, but we have our corresponding percentage. The total applied was 1.4 billion before taxes, of which 760 million went to fund early retirements in Spain in Santander and in Banesto. Net of taxes that cost was 488 million. And the impact with the tax reform in Spain, that's a reduction in general corporate tax as of 2007 was 491 million. And then 179 million will go on shares to be distributed to employees to mark our 150th anniversary.

So now I'd like to go on to the different business units, and I'll start with Continental Europe. You know we have our geographic divisions, Continental Europe, UK, Latin America.

So in Continental Europe our attributable income was EUR3.47 billion, that excludes the capital gains from the sale of Banesto's stake in Urbis. It's almost the same as that [by Group] in 2004 according to IAF, and the rise in gross operating income was almost twice that of costs. So we're seeing net operating income in the fourth quarter of 1.4 billion and last year that was 1 billion, so you can see what the improvement has been there.

Other businesses have also had a good fourth quarter, although less than in the third quarter. If you remember I told you our Wholesale Banking revenues in the third quarter were particularly high and very difficult to match. That really was an exceptional third quarter.

So now if we focus on the different units this time, well it's very homogenous. Double digit attributable or gross operating income, net operating income has grown well. Costs are increasing more in Santander Consumer Finance; we started the year with 20%, although it's down to 12%, and so our cost cutting strategies are working. And that means that our net operating income grew by 15% -- some 14%, some 16%. And what I've called others, which is Global Wholesale Banking beneath and other units, their operating income has grown very well. And then we've seen the figures for the other indicators for provisions etc., and by 2007 we believe that a lot of these operations of course will be eventually syndicated by the market.

Now if we look at the Santander branch network, growth is stronger there and faster both in lending to individuals and to companies. The same is -- well that's true for customer lending and then customer funds. And the -- of course linked to the strategy of We Want To Be Your Bank, current accounts are growing at 16%. There's been a big increase in the number of transactions customers carry out with us. And then income -- net interest income has gone very well; double digit growth in the last few quarters and we've a new record in profits.

So we're investing in the future to generate more profits and I would say that the network in Spain has had an excellent year; it's gone from less to more. Every quarter has increased in terms of revenue and results.

Banesto presented its own results; very, very good growth in lending. It's improved its customer spread over the year in its targets. SMEs, consumer lending and credit cards are its targets and it's gaining market share in all of them. They've also opened more branches, just like we have done in Santander and they are generating what very good business net interest income is on increase as is commercial margins. The costs grew in line with inflation, about 4%, and their provisions are basically generic ones.

And of course here, we haven't included the capital gains obtained from the sale of its stake in Urbis which really have reinforced its capital base and means that it will not have to seek additional capital for the next few years.

Santander Consumer Finance had good growth, 20% and in the most profitable sectors in second hand or used cards -- credit cards, so production is growing. We aim to grow organically. We haven't reached break even in the UK yet. In Spain we're in the sub prime sector and in Italy we're opening offices and I'll talk about drive later on because of the impact on the income statement in 2007. But focusing on 2006, we're still going well.

In terms of commercial income, the consumer spreads always suffer when interest rates go up because we haven't been able to transfer them to our margins. That's just a structural element of this business. Operating profit is still very strong as it was in previous quarters.

Now drive will mean a big increase in profits -- a sharp increase in profits but it will also have an impact on the structure of our income statement in consumer lending. It's really sub prime with yields of 20% or more and that means that net interest income will also make a quantum leap. It has a high lending cost so provisions will also increase in 2007. So the profile will be quite different from what it was in 2006.

So to summarize I'd say that 2006 was a good year for Santander consumer lending and we've invested a lot in new platforms and new projects to continue growing in the future.

Portugal. We always say that the macroeconomic context there is more difficult and the bank is growing at 10% in individuals and 25% in SMEs. In funds we're basically growing in capitalization insurance and there has been good branch expansion income. In Portugal it's still mainly from fees. Insurance has gone up 50%, service 15%, cost to income continues to improve and operating profits have increased so we're still getting better in Portugal. And finally provisions in Portugal were lower than in 2005 and the bank made notable improvements in the ratio of non-performing loans and in coverage partly because we sold many write offs.

In the UK in Abbey, that's another one of our geographic units. As the CEO has already said, Abbey has made all the targets we established for it. There was zero growth in 2005, negative in 2004, it's -- we're now at 5% growth and in costs we're about to make the GBP290 million mark so there's definite improvement there. I would say that even, with the fact of no insurance business for five months because it was sold in July, Abbey still achieved its target for a trivial income in 2006.

We have already talked about costs to income there, and operating profit went down slightly but that's because of an impairment charge to its leasing business, that's 10 million there. That's why operating profit looked lower.

And the business itself, we're improving production capacity; mortgages has improved by 4 percentage points and unsecured loans 2. We have actively managed our spreads and volumes. We'll -- when we see deposits, mostly they've improved because of good price management and we're still reducing costs. The balance sheet has grown; stock on balance sheet has grown. Loans have increased 9%, deposits only 1% but of course there's the impact of our change in strategy, in our pricing strategy, not just Cahoot but also in Abbey and that has meant that deposits have only grown by 1%.

If we look at cost to income, we're still opening up our JAWS and that means that operating profits are growing very well. Provisions have increased by 46 million. I talked about UPL, that's the Cahoot UPL and then of course there's the new technological platform which is on schedule for installation in 2007. That was one of the targets for Partenon. We've multiplied mortgage production by 2.6, net production 7%. Personal loans, despite the end of Cahoot, have gone up by 7% and net deposit flow fell quite significantly but that's because of our pricing policy; we don't want deposits with negative margins.

But there is something I would like to mention, something that we've been talking about because we're interested in current accounts. And the current account balance has gone up, we have the highest spread there of all our liabilities. And investments are growing well as is Personal Banking that we launched throughout 2006.

And finally, Latin America. In Latin America we have seen very strong growth in income based on retail banking which has been growing at 45% in income before taxes. Total attributable income has developed $2.8 billion which is 30% up on 2005, very good. 27% increase in gross operating income, double that of costs which did grow as well 13% and net operating income increased to 43%. The impact of all of this means that there is a change in our mix which means higher provisioning and that means that along with higher tax rates, in Mexico especially, the operating income from 43 leads to an attributable profit of 30%. The positive impact of the exchange rate impact can be seen as positive. Growth in retail banking, as we've said, has been based on increasing volume and above all changing the mix.

If we look at things county by country we can see that there has been growth throughout the region, 26%. This is in dollars, if we looked at it in local currencies it would be basically the same. In Brazil instead of 42% it would 28; Mexico 69 and Chile 29% on operating income which means that income shows the dynamic as attributable income went up in Chile by 46% and 28% in Brazil because of the impact of the sale of Tietê in 2005 but on like-for-like excluding that we would be growing at 45%.

Mexico grew 41%. We can see that there's a difference between net operating income and attributable income and that's due to the fact that the tax rate has now been normalized and that meant that at about 26, 27% our income before taxes was 63% higher.

Santander Private Banking continued to perform very well. We have been growing consistently at over 20% and then finally, I think we've already said this, we are growing and want to grow more in private banking throughout the region.

If we now look at things country by country, activity in Santander Banespa has maintained high growth rates. We've improved our commercial capacity after finalizing the integration of our IT platforms with new strategies for growth in some new markets, especially cards, where we've placed a lot of cards in barely five months and above all in Rio de Janeiro.

Commercial revenues are growing at about 38% in dollars, that would be 24% in reais. Net trading income however were 21% lower than in 2005, as I said, because of the Tietê divestment. Costs were virtually unchanged in [reais] because of the lower depreciation from the early writing off of obsolete IT systems in the fourth quarter. And if we bear in mind that we've opened 129 points of sale and more than 300 ATMs, we've got a high rise in our net operating income and we can see that this growth has been increasing quarter-by-quarter.

And finally, the risk premium went up to around 3.7%. We had to take into account that this is compatible with loan spreads of around 13% with a risk premium that's gone up to around 3.7% for the year as a whole.

In Mexico, there I'd say that the fundamentals are good. The financial sector has been growing strongly and we have been out growing the financial service industry in the highest return products; the payroll checks and credit cards are still the two main products driving growth. Lending has grown at more than 50% for individual and SMEs whilst there's a drop in the relative importance of loans to the public sector for obvious reasons.

We've had a record quarter in net interest income. Fees are doing well despite the fact that mutual funds have seen the fees dropping but that's been offset by cards and insurance. Costs rose 12% in local currency, very much in line with budget. We have increased the number of branches by 3%, increasing ATMs by 12% and the number of employees, 9%.

What's happened has been a real leap forward in net operating income; we've gone up from quarterly levels of $200 million in 2005 to more than 300 million in 2006 so that's quite a healthy change. There has been an increase in loan loss provisioning because of this fast growth in credit card products and that is due to the change in the mix that I mentioned. There has been a 60% rise income before tax, we've gone up from 7 to 22% in our tax rate and that should stabilize out at around 27% for 2007.

Chile. In Chile the quarter had some one-offs, the main issue was negative inflation throughout the country. In Chile, as you know, we have the [inaudible] which is a second currency and that has had an impact on this quarter which was very negative for our financial margin; not so much on net trading income but all in all the impact was 40 million over the quarter. And that explains what has been happening to the financial margin in the fourth quarter. Although the underlying trend is very sound, we're generating profits still and we are satisfied with our performance.

Costs. Well, there was a significant in the cost income ratio but in the fourth quarter we also had to take a one-off charge for the anticipated costs of the collective bargaining agreement. I think it was about $16 million for that quarter, so that was an upfront payment.

So I'd say that this one-off and the impact of deflation means that the fourth quarter's net operating income doesn't really represent the underlying business patterns, so it would be more like $300 million per quarter if we looked at it on the basis of our basic performance. So the quarter showed some atypical items which altered the numbers but when we look at the earnings, we can say that the underlying tendencies are the same as in earlier quarters in terms of generation of business volumes and activity.

Let's look at our secondary segments now. First of all, Retail Banking. You can see here the three main units; Continental Europe, UK and Latin America. And basically we can say that what we've got here is very sound performance across the board.

Income has gone up 16%. Operating income 27%. And if we then look at what's happening in each unit, Abbey has seen its income go up 5% -- sorry its net operating income up by 26%, growing in general at 5%. Gross operating income of Latin America's retail banks went up 27% and net operating income up 52%. In Europe, more moderate growth in gross operating income, it's still in double digits, and here we're seeing that we are gaining momentum in our capacity to generate earnings over the year.

And in Global Wholesale Banking the first issue is the 32% growth in gross operating income, very positive, largely due to the 40% rise in revenues from customer activities and very good trading results as well. Here we've consolidated our position, getting a really global wholesale banking outfit that can generate more recurrent revenues because of our strong activity. So we can say that we performed very well in revenues.

And the second aspect that I've already mentioned in passing, is the surge in provisions which meant that the 40% growth in net operating income didn't fully feed through to income before taxes. But most of this is generic, and most of the provisions have to do with specific operations which are now being syndicated. So probably over the next few quarters, we'll be able to free up some of the provisions as the Group reaches the final take that we want to keep on these operations after syndication.

Asset Management & Insurance. We've seen net operating and income before taxes rising by close to 20%. These are our factories really that are working in Asset Management & Insurance and we're seeing that we're getting about 1 billion in average quarterly revenues. And one thing I've already mentioned which is growing at close to 30% is bancassurance.

And meanwhile pension funds. I think I mentioned that because of Mexico's lower contribution we're down 4% although in Spain they've been growing at far more, 6.6%.

So after having looked at the business areas I think the CEO can now talk about how we see the outlook for the Group in 2007.

Right, well as you've already seen, 2006 has been an excellent year for the Group and for all of its business areas. In Continental Europe we boosted productivity, efficiency and our commercial capacity. We've had wonderful strategies which have been very successful such as We Want To Be Your Bank and Menara in Banesto. At Abbey, banking activity has promoted and progress was made in our technological and operational platform and all revenue, cost and income targets were met.

In Latin America we've been leading the process of bringing more customers into the banking system achieving strong growth in business and results. It was also a year in which we've launched new projects, above all in global businesses. This was important across the board. We've also continued to rebalance our business portfolio, above all to boost returns and be able to boost its capacity to generate future earnings.

The main two operations I wanted to mention were the sale of Abbey's insurance business and our purchase of Drive in the United States. Basically, for that reason at the same time, the balance sheet has strengthened and the Group's efficiency and profitability improved.

Now, how do we see 2007? First of all, the macro environment looks very favorable for the financial services industry. The world economy will continue to grow at a sustained pace. We think that two important markets for us in Continental Europe and the UK will outgrow the Eurozone average which is very good news for us. We expect interest rates to rise moderately and that could have a temporary effect above all on our net interest income. But it would also recover with the re-pricing of financial assets. And in Spain's mortgage market, we think we'll probably see a gradual decline in its growth but still there will be double digit growth nonetheless, whilst the UK mortgage market will continue to grow at a similarly pace to that in 2006.

The other block where we are operating is in Latin America. Definitely there we foresee strong economic growth in the region, about 4% with solid fundamentals, which is a pretty good framework for continuing to bring more customers into the banking system in Latin America. So in short, we can say there's a pretty positive outlook for financial businesses in all our markets.

So against this backdrop, in 2007 we want to achieve high quality returns with high recurrence. And once again, as we've been doing for several years now, we want to outperform our main competitors and try and surprise, yes, surprise is the right word, the market buy outperforming market expectations. In order to do that, there are three main sources of structural growth which we think are important within this vision.

First of all, our current positioning of our portfolio of businesses. Then our superior capacity to carry through projects which we think is greater than that of our peers and then our global dimension combined with a global vision in some of our business lines.

Talking about the first point, that is our current business portfolio, we think that as it stands we have a capacity to outgrow the market. We have a fantastic starting point because of our strong presence in very dynamic economies with high potential such as Spain, the UK and Latin America. Our Consumer Finance franchise is one of the best in the world as well as one of the biggest in the world, and our global businesses can continue to extract global synergies led by Wholesale Banking. And if apart from that we're constantly rebalancing our portfolio with small acquisitions as we've doing for example in consumer banking, that will enable us to improve our allocation of capital, making sure it reaches the places where it's needed; the highest potential investment areas. Then we can refocus our Group on areas with strong growth potential.

Secondly, what I was saying that we think that our capacity to carry through projects is better than that of our competitors in all of the different markets and business that we're operating in. That's an element that is driven by our obsession to continuously improve our efficiency and our business processes and models.

Then finally, our global dimension combined with a global vision of the banking business. We think that we are already getting almost a single technological and operational platform which generates global cost savings. And we're also developing models that contribute the global business vision to our local operations.

So with that background we've established our priorities for 2007 at Group level and then at all the different unit levels, and that includes both the support areas and the business areas as such.

What are the main drivers of these priorities? First of all, to continue to focus on our customer activity, getting strong growth rates in our business with customers which will lead to rises in net interest income and fees. The second idea is selective growth in costs. We continue to want to keep costs flat but of course we are open to selective rises in costs if there are areas that have specific investment needs and need to make a special effort to invest in the future. So we'll keep our doors wide open as we have done in 2006 and obtain further improvements in our cost income ratios.

The other main driver will be our excellent management of the risk return trade-offs so that we continue to grow profitably in activities with a higher return, recognizing that these also have a higher risk. With all of this we are confident that we will maintain strong growth in earnings.

So if you remember these ideas and then apply them to the areas and divisions, the main ideas are expressed here on the screen. You can see after the success of our We Want To Be Your Bank strategy in 2006, we want to extend it to a further 600,000 customers. We also want to take new measures in SMEs, with merchants and companies in order to step up business.

In Banesto, Banesto will continue to focus on gaining market share maintaining its strategy very much on SMEs and improving its efficiency via the Menara plan.

Santander Consumer Finance will maintain strong activity with a smaller rise in costs, on a like-for-like basis, whilst we will be managing the return on Drive and continuing to look at new investment opportunities.

We are optimistic about Abbey. We think that Abbey should meet its goals as it did in 2006. We expect revenues to go up in 2007, between 6 and 7%, and we also think that we'll be able to roll out the Partenon platform, which will make it easier to get new business opportunities, generating further cost savings.

In Latin America, we'll continue to keep up current performance, strong activity with customers, management of risk return trade offs with risk being adjusted to growth, and selected growth in costs on the basis of business expansion investments in each country.

And then in the global units, 2007, I think, will be a key year for consolidating and deepening these businesses, getting all the synergies that we can from applying common processes and models.

In Global Wholesale Banking we're going to enlarge our global customer relationship model, and add another 100 global customers to our global customer base. We think that we're being successful because we can offer more and better products and services to this type of customer, which means that these customers, in turn, provide the bank with a better return.

In Cards, we're transferring our positive experience in Mexico to other countries, including Brazil, as well as the UK and Spain. Definitely in Brazil, our first launch has been a great success.

And in the rest of global businesses, where we have significant projects, above all highlighting Private Banking, this is an activity with very low risk and high return, so we're strengthening all of our units in many markets with new acquisitions, quite small in themselves, but very important to boost our overall presence in Private Banking, especially with Latin American customers.

So with all these developments, the Group's beginning to get the best out of all the opportunities that arise due to our global nature as a bank.

So in 2007, we will also have to boost our single technological and operational platform. We've been aware of this for many years. We'll complete the installation of Partenon in Abbey and our platform in Europe as a whole, whilst continuing with our plans for Portugal in Consumer Finance. And in Latin America, we'll continue to reap the rewards of Altair once it's fully installed in all the region's banks. But we think that we should be able to meet our 2010 vision when after the convergence of Partenon and Altair we have a single technological platform, and a common operating basis for the entire Group.

So in short we're pretty optimistic about 2007, and we're working to boost our earnings per share during the year. We're confident that we'll be able to do this, and once again outperform our competitors and also outperform market expectations as we've managed to do in previous years, too.

That's it, thank you.

[OPERATOR INSTRUCTIONS]. Thank you.

We will start the Q&A session with the questions received via Internet, then we'll go onto the conference call. The first question, well, actually, there are two questions from [Peter Alexander] from Oddo. The first one is, what about our ambitions in Italy, in terms of organic growth?

And the second one is about a comment made by our main competitor BBVA yesterday, who said that customer spread in Spain had reached its peak in 2006. What are our expectations for 2007?

I'll answer those two questions. Our ambitions for growth in Italy are very clear. Based on the two units we have, one which is very well consolidated, excellent growth, that's Santander Consumer Finance, that's our consumer lending unit, and we have great growth expectations there in Italy. And then we started something recently because we want to be an active agent in Private Banking, so we've started to sow seeds there with a recent purchase by Banif. That's really what our plans are for Italy.

Now, customer spreads in Spain. It's very difficult to say how spreads will evolve, but in my opinion, over the next year I think it will be quite stable. I don't see why there should be any dip except say perhaps for interest rate impact. That's for asset spreads. Liability spreads will increase; I think that's logical because interest rates will be going up so customer spreads, which is a combination of the two, I think that they could go up slightly in Spain, because asset spreads will be stable and liability ones will open up.

Luis Pena has three questions. One is why did generic provisions -- why were they cut by half in the fourth quarter compared to the third quarter? And did you apply the 123% rule?

And what about a stock options plan? Will we be buying the shares on the market, will we be issuing them?

And then the third one is about our cost guidance for 2007 per unit?

Well, I can answer that question too. To make provisions in the fourth quarter, maybe Jose Antonio will have to help me, but in the fourth quarter we'd already been announcing some of this. There was this huge increase in the third quarter because of the corporate activities that we undertook, that was higher risk, obviously higher provisions. But as those activities gradually syndicated, then provisions come down. And that has already started in the fourth quarter, and it will continue through to 2007 because of the impact of syndication and the risk reduction for the final take. So I don't think there are any other reasons behind that, so that's the reason. Nothing special has happened, we haven't applied the 123% rule yet.

Your question about stock options. We have several possibilities, but we haven't yet made any decision. It's still an open issue, we have to see whether people have earned them yet, and I think by March or April, when all banks publish their results, well that's when we'll make the decision.

Now, cost guidance. We don't provide guidance, either for income or for costs, but the underlying philosophy for 2007 is very similar to 2006. Below inflation, costs below inflation. Flat costs, that means below inflation, in our mature markets, Spain, Portugal and Abbey. Abbey will have a big drop in costs, maybe not as big as in 2005 and 2006, but at least 3% -- 3.5% more reduction in costs. And Santander Consumer Finance whose costs went up, well a lot depends on what we do. Obviously the perimeter has changed with the addition of Drive and perhaps its costs will grow ahead of inflation because it's still growing in Italy and in Germany basically, and obviously that will mean higher costs. Plus Poland, Scandinavia and neighboring countries, so the momentum there is different from that of our other business. In Latin America that will be quite heterogeneous, but in local currencies, costs will increase very, very little. We'll have to see what the impact is in euros because of the exchange rates, but costs should be similar to this year, despite our expansion plans.

Then Pablo Beldarrain from Morgan Stanley has several questions about the Spanish retail business, why are our provisions so low in the fourth quarter?

In Consumer Finance have margins been compacted because of interest rate increases? What about guidance for 2007?

And in Abbey the outlook of the 1.5 billion for 2008, is that a target, is it guidance, because that's 25% growth in 2008? What about cost reductions after the roll-out of Partenon?

Okay, I'll start with Abbey because I can remember that one more readily. Since we bought Abbey, I don't know whether you call it guidance or a target, but it's one and the same thing. We said that in 2007 we'd make 1 billion. 2008 -- sorry, we said 2006 would be 1 billion, 2007 1.2 billion and 2008 1.5. So we've been saying that right from the beginning. I suppose it's more of a target than actual guidance. We have our budget for 2007 and we can confirm that our best provision is that we'll be on target if things go reasonably well. Then in 2008 we will have our 1.5 billion. But these are not new figures, these are the figures we've been mentioning ever since we bought Abbey; that this was our view of how Abbey would evolve.

Santander Consumer Finance, as everyone knows, when interest rates go up, because we sell the assets at a fixed price -- when interest rates go up, margins are compressed. You can relieve that by financing at a fixed rate for an equally long period, but that's not always that easy. But there are -- interest rate curves sometimes mean that you can't do that. So an interest rate hike does mean compressed unit margins, but we can offset that by high volume growth, which is what we're doing. And of course, there is increased competition in some markets, say in Germany and Italy, so those margins tend to drop there too.

Then the first question was about retail banking in Spain and why we have lower provisions in the fourth quarter. I don't know, so maybe you can answer that?

Mortgages, companies and consumer lending has been different. We've had more mortgages, so they consume lower generic provisions than say in previous quarters.

We have two more questions from Pablo Beldarrain. One about Mexico. Provisions are growing, so coverage is increasing but NPLs are coming down. What would be our outlook for those indicators for 2007?

Then Chile, net interest income is below what was expected. Is that because of inflation? And then about Chile. Costs are higher than expected. Is there any non-recurrent element there?

Chile. I think I mentioned it in the presentation. Net interest income, yes, there's the US impact which has -- inflation was negative, and that of course actually has a positive impact on returns on financial trading. It's about 500 -- 700 million financed at nominal rates. That explains the impact because of negative inflation.

I think I also mentioned the reason for increased costs. We've signed a new four year agreement in Chile and you always have to make a sort of down payment when you do that, and that's been included in the fourth quarter. So I said the underlying operating profits in Chile are still excellent, and still stands at 200 million.

Mexico. Provisions have gone up, but that's purely because of credit card business, but growth in credit card balances has been 70 or 80%. You say, well the ratios -- the NPL ratio is coming down. We're very strict there, so that's why you see very quick impact on provisions, but not so quick on the NPL ratio etc., but this is all linked to credit card business too. For the future, well it's really the change in business mix that's affecting provisions in Mexico. Not just Mexico, but we've growth of 60, 70% in credit cards and we're falling in government loans, so obviously that will have a correlation with provisions. And the spreads are still 15, 16 basis points and cost of credit 4 to 5 points. So it's still very, very attractive.

We have several questions from Arturo de Frias from Dresdner. Some of them have already been answered; margins in Spain, costs in Abbey for 2008. There's one about provisions in Latin America. Now that specific provisions have tripled, we did issue guidance that we would be growing, or that we would be doubling them, but we've gone beyond that. Why have they gone up so much? And the risk premiums in the fourth quarter, will they be recurrent?

And the chairman talked about Italy this morning, about the stake in Capitalia. Doesn't that seem to be a contradiction, because you're always saying that Santander is not interested in deals right now, so why -- what is the idea behind buying Capitalia, or a stake in Capitalia? How much are we prepared to buy?

Thank you. Well, the chairman said we have less than a 2% stake; we won't be changing that. It's purely a financial stake as we have in many other banks. And as the chairman said, as we had in BPI in Portugal which we've just sold for very good capital gains, so I think that is quite clear.

Can you just remind me about the other questions?

Yes, this goes back to investor day in Latin America. We said provisions would be about double because we said lending was going up. However, if we look at the running rate of the fourth quarter, risk premiums are in line with what we said on investor day, but the final figures, as we always say, depends on the mix if the underlying growth hypotheses are fulfilled or not. Obviously if lending activity goes up more in consumer finance and credit cards, then provisions are higher. But I think the guidance we gave on the running rate for Q4 and the guidance for next year are all very much in line.

Now we have several questions about Latin America. Some have been answered, then there's another one. What are your -- how many branches will you be opening? What about cost outlook for Brazil for 2007? That's one question.

And then we have the impact -- the estimated impact of cost increases following the early retirements in Banesto -- excluding Banesto, sorry.

Okay, Brazil. It's true that on investor day we said that we'd opened 63 branches, 60 in Rio, because we managed to get the payroll account of Rio civil servants. The cost outlook in Brazil was very, very close to inflation, and we're always talking local currency here, of course. And we said that costs would be more or less in line with inflation, so that's 4% to 5%. And we have investments like in call centers and ATMs and generally increasing commercial capacity and recoveries. But credit cards are growing a lot, consumer lending is growing a lot in Brazil.

The second question, was early retirement in Spain; how much will we be saving with early retirements in Spain, not including Banesto. Well, I think the CEO answered that when he talked about the cost profile in mature markets, so we'll have flat costs definitely below inflation.

And then Pablo Beldarrain has another question. Risk weighted assets increased 5% quarter-on-quarter. Could you give some more information about that, please?

And what growth do we expect for 2007 before securitizations, and how much capital could we free up through securitizations?

Okay, risk weighted assets. I think I did mention it in Abbey, it was quite volatile because of the short term markets business. It has this asymmetric regulatory capital level. It's very high volume. It's linked to UK regulations which are different from Spanish ones so I wouldn't actually take this as a pattern or a trend. In Brazil, there's a lot of growth, and also because of our negotiation portfolio business.

Expectations for 2007. Well, the CEO said that we expect to see a big growth in customer activity and that would mean that figures with -- regarding assets and risk weighted assets would all be the same then. Securitizations, that depends on the policy chosen. We do have some very big lending portfolios, and we'll be active in 2007. So in 2006 we securitized EUR25 billion worth. In 2007, we'll probably go beyond that, maybe even up to EUR50 billion worth of securitizations. We think that freeing up capital through securitizations -- well we think our core capital position is comfortable. We have enough for growth.

And then we have a question from [Rosalie Pinkney] from Barclays. Has Drive been affected by the deterioration in auto loans in the US?

No, not for the time being. The NPLs are in line with our estimates and what is normal, so we can't say there's been any increase in NPLs or any drop in asset quality there.

Then we have a question from Gert van Rooyen from UBS. When we look at Brazil's figures, the quarterly figures in local currency, the bank seems to be reporting different trends from your competitors, given Bradesco and Itau and Unibanco's figures, which seem to have given flat estimates. Is it because of a change in business mix, although there doesn't seem to be a higher net interest margin or financial margin in Brazil? If it's risk adjusted, it would seem as though returns are falling. Do you have any comments to make on that?

After -- well, you mentioned risk premium trends for our competitors in Brazil, but the first thing I would say is that Itau and Bradesco especially have very different mixes from ours. Their NPLs and their risk premiums have been much higher than Santander Banespa, because their mix is a lot more retail than ours. I don't know what guidance they issued, I don't know what their estimates are, but our mix is changing towards more retail.

I think you mean that our margin in Brazil in the third quarter was what, 0.3%, and I think in the actual presentation, the CEO gave figures for lending spreads in Brazil, I think it was 12 to 13%, and the risk premium went from 3.5 to 3.7, so the change in business mix means higher spreads. We are changing our mix, I don't know what our competitors will be doing. It's true that we have less consumer finance than Itau and Bradesco, our risk premiums are lower, but as we change the mix we'll have higher revenues and more risk premium.

A question from Goldman Sachs. He says we seem to have been reverting the provisions in Latin America despite the change in mix, which has altered our risk profile. He says he's trying to understand our capacity to alter our provisioning policy, the provisions that we've already generated previously. Are there a lot of recoveries, he asks, or is there something that's worsening in the underlying fundamentals?

Well, let's see. Provisions as a whole in Latin America, indeed, we are using generic provisions, especially in Brazil, and that's pretty normal. Standards have been set up with risk parameters that were established in Spain, and this is what the Bank of Spain requires, which is a rate which is applicable to Spain. The risk premium, when it becomes higher, means that you start to consume generic provisions. That's happened in Brazil, mainly, and also I think it's begun to happen in Mexico and elsewhere. But it's just due to doing the mechanical application of Bank of Spain standards. When we're talking about risk premiums, we're talking about risk premium in business terms, not so much in terms of provisioning to the account. Risk premiums are going up, and that's why we see how we come to use up the generic provisions.

Two more questions from [inaudible]. One regarding Abbey, whether you expect double digit growth in the JAWS between the growing revenues and the growing costs in 2007 and 2008.

The second would be the loan to income in Brazil. That ratio's gone from 0 in the first quarter this year to minus 69, minus 54 and then minus 90 million in the fourth quarter. I think here, although he doesn't say it, he's talking about euros. He says, what's included under this item? And is there anything special going on there?

Well, I'll answer the question about Abbey, but I've already said it I think. I said that revenues in Abbey in 2007 should go up around 7% -- between 6 and 7.5%, so we can take the average, 7%, and that costs will go down by about 3 to 3.5%, which gives us a double digit JAWS doesn't it? As we've already seen in 2006.

2008, well, I'd prefer not to be too specific about that yet, because really if we want to get into such detail about the accounts in 2008, not having got close to it yet, would be a bit risky.

I think that the second part of the question had to do with other earnings in Brazil in the fourth quarter, so I think he was referring to the fourth quarter. There's allocation in Brazil to provisions for commercial issues. Basically, we said that we've got a big campaign to place credit cards in the market, that has its cost. And also what we're doing in bringing in the San Paulo civil service payroll, which is $50 million and that surcharge which went against earnings in the fourth quarter, in Brazil. And I think that really explains the change.

The final question -- we've had the final question, then. Javier Bernat from Caja Madrid has a question. He asks about our industrial portfolio. What's the current value? Is there anything new to report about the divestment of Cepsa?

Capital gains in the portfolio are about 4 billion, depending on how you look at them, but basically EUR4 billion. And there's nothing new to say about Cepsa.

Okay then, now we can take calls over the telephone line.

We've got an initial question from Mariano Colmenar from Credit Suisse.

Yes, good morning. I have a couple of questions. The first has to do mainly with the divestment of the Abbey Insurance. Can you explain what cash has been generated, how the sale was made and what you're going to do to reinvest the cash generated? I don't remember quite when the sale took place, but I'd like to know whether it's reflected in the net interest income reported by Abbey or not? I don't think it is. Could you perhaps give us some idea about that?

And then the equity accounting. That's gone down, the income from equity accounted holdings. There are various impacts at stake here, probably. I'd like to know about the charge, the Sovereign. How much that might entail, if you could quantify that?

And then the adjustment in Cepsa. Could you quantify what that adjustment was, exactly?

In the sale of the Abbey insurance arm, we talked about that when it happened. Cash did come in, reducing the funding needs for Abbey, so it's on the interbank market with the short term rate, so the impact on the net interest income is negative. Also, the ones from the sale. So it will be about 5%. And then we see the disappearance of the insurance revenues, however, it's in Abbey. And so that's the first question.

And then equity accounting. Well Sovereign, until the third quarter the impact was plus 36 million, and in the fourth, minus 9, so minus 40 million came in the money coming from Sovereign and booked under the equity accounting method. So there's inevitable rotation on our portfolio everywhere, and obviously Sovereign had an impact, and that was its impact.

Any more questions?

We've got another question from Arturo de Frias, from Dresdner.

Hello. I wanted to ask you to clear up your answer to an earlier question. Talking about earnings in Spain, you said you expect spreads to increase slightly. But what I wanted to know was what kind of margins you get on that, taking into account the liability and the increased borrowing costs? So if you look at the spread, which gives us less and less explanation of what's really going on in the income statement, and if we look at the net interest income over average total assets, or risk weighted assets, in 2007 in Spain, what do you think will happen?

Then the second question. It seemed to me that at the end of your presentation, the CEO said that he thought that the estimates for the consensus in 2007 were probably rather low. I don't know if that's what he really meant. Could he perhaps clarify?

That's it. Thank you very much.

Well, let's see. Estimates. I didn't say they're too low, at all. I just said that our aim and our desire is to outperform them.

And then with respect to the spreads. Well, I'm not too clear about this, but I get the feeling that net interest income in Spain, due to the effect of greater volumes and also spreads, understanding spread to mean what you mean in your question, I would say well, this year 2007, the net interest income should improve. I think that was what the question was getting at. Yes, definitely, it will improve.

Any more questions?

No more questions over the conference call line.

Thank you very much, then, everyone.

This concludes our conference. Thank you very much for attending.

Speaker statements on this transcript were interpreted on the conference call by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.