Banco Santander SA (SAN) 2007 Q1 法說會逐字稿

Good morning everyone. Right we're going to be presenting the results for the first quarter that the Group had. And as we usually do, I'm going to be dividing the presentation into three sections. First of all, I'll give you a snapshot of the fundamental ideas underlying this first quarter of 2007 for the Group. And then our CFO, Jose Antonio Alvarez, will be discussing the different business areas going into greater detail. And then, finally, I will end with a summary about the quarter, putting forward a few ideas about the performance and about the outlook for the financial statements, and for the business as a whole over the next few quarters of 2007.

So the key highlights for this first quarter would be that, once again, we've had very good results, excellent results in the Santander Bank. This confirms the tendency that we'd already been observing in 2006. It's been a very good quarter for several reasons, but fundamentally because the results are excellent in quality; excellent quality in vertical terms, in the cascade on the income statement, which we'll be looking at later, and also horizontally, looking at what's happening in the different businesses and in different regions of the world. And during the presentation, we'll also be seeing that we are continuing to invest in the strategic development of our businesses.

I've highlighted five aspects I consider to be vital to understanding this quarter, and they're going to be the crux of my presentation. First of all, the strong growth in profits, especially in earnings per share. And we must notice their sustainability, their quality and their recurrent nature. The second idea is the strong revenues we're generating. You'll be seeing that revenues are very sound in all the different units in our Group. That's the outcome of deepening our business with customers and improving our share of wallet, our market share, the number of products we have with our biggest customers.

Another fundamental issue is the improvement in the efficiency ratio. Our cost income ratio has improved significantly in the Group as a whole and in all the business units too. We're now on the way to becoming one of the most efficient banks amongst the global class in the world.

The fourth idea is that our loan-loss provisions are in line with projections for 2007, so we're in line with budget. They're growing, and they have been growing over the last few quarters, but we've been telling you all along in all the different quarterly presentations, that this is mainly due to the growth in the business, but above all the change in our business mix. That's especially pronounced in our businesses in Latin America.

The fifth point is that all of this has been made compatible with a very sound balance sheet, that is to say, we have improved our short term results whilst maintaining a very sound balance sheet at the same time. NPL ratios and coverage ratios and our solvency ratios are all excellent, and improving in all aspects.

Right then, let's look at each of these points. The first, as I've said, was that we're seeing growth in earnings and growth in earnings per share. Attributable profit this quarter was EUR1.8 billion, nearly 21% up on the same period in 2006, and 10% higher than in the fourth quarter of 2006. Obviously, when we're talking about this, we're looking at recurrent earnings without taking into account the one-off capital gains for the last quarter of 2006 above all, given that the capital volume is the same, earnings per share has improved with the same percentage growth up to EUR0.289, and 20.7% growth.

Return on equity has risen 1.4 percentage points, and I think very clearly this quarter, we've started off the year with earnings above the market expectations for our performance this quarter. And if everything continues to go at this pace, then we will definitely, or probably, be amongst the top five in the big world groups in terms of our EPS growth.

I was saying at the beginning that, apart from the importance of growth in recurrent results, in recurrent earnings, which is an important issue, there are two other adjectives that we need. One is quality, and the other is sustainable. Sustainable means that they're recurrent earnings, and I repeat, we're talking about ordinary profit and then quality. Quality can be seen both in the vertical axis and the horizontal axis. The vertical quality can be seen in this slide.

As you can see, operating income has been rising 30%, because gross operating income has gone up 18.3%, and operating expenses only 7.5%, and these jaws, the cost income ratio, the gap between these two which is a concept that we think is vital, is 11 points. So revenues have gone up 11 points more than costs, which as I said, means that net operating income has risen nearly 30%, and without provisioning that would be more than 28% as well. And that is a very important proxy which really does throw light upon how our businesses are performing.

So with that 29 point something per cent in the net operating income, we have larger loan-loss provisions, and then there's also an impact from the tax regime in Mexico, which we can talk about more when we talk about Mexico. And the higher tax rate there has had an impact, bringing that 29 of net operating income down to 22.3 for net profit. And we've also seen the sale of minority interests in Chile, so that brings the gross in attributable profit to 20.7%.

And again, there's another impact from exchange rates, which for the Group as a whole this quarter brings down the nominal value, that is in euros, by 4 percentage points.

So that's the vertical quality. But we can also look at the horizontal quality, and by that I mean what's happening in the different geographic regions and what's happening in the main business blocks. This information is given in this slide. As you can see, all the operating areas have seen an increase of 33% in their net operating income, so they're all seeing standardized growth in their contribution to the consolidated accounts, obviously in their management currencies.

Continental Europe has grown by more than 46%, Abbey 20% and Latin America has been rising at around about 20% too. Continental Europe, obviously, is booked in euros, Abbey in pounds sterling and Latin America in US dollars.

And there on the right, you can see we do the same exercise. It's the same idea, but this time looking at the main business units. Retail Banking across all the different countries where we're operating, and then Wholesale Banking, and then what we've grouped together under the item, Asset Management and Insurance. Retail Banking has gone up before tax 27%, Wholesale Banking 68%, and later on I'll explain the reasons behind these growth figures. And only Asset Management and Insurance has not been quite so strong in its growth, mainly because of the low contribution from Latin American pension funds because of regulatory changes in Mexico and Argentina. But when we talk about the business units, we'll be able to talk about that a little bit more.

Okay then. These ideas so far have been looking at earnings as a whole with a vertical snapshot and a horizontal snapshot should we say. The second idea I wanted to highlight is the performance of our revenues. I think that this is one of the issues that's probably most relevant of all in the first quarter results. On the right of this chart, you can see that our net interest income, without dividends, has been growing 20%. Our fee income also have grown 20%. We've got lower growth in dividends and minorities being booked through the equity accounting method because of the disposals from last year, and we're also growing in insurance, which is a business that we can consider a core business within the organization of the Retail Banking organization which gives us a rise in core revenues of 9.4%.

And if we look at [NTIs] and break them down, we can see that they have contributed 20% in growth, but have contributed about the same as the other revenue lines on the account, that is to say about 20%. I think that getting revenues to grow between 18 aggregate with all the different components, or 20 in net interest income dividend and the growth that we have in insurance as well at the same time, I think that we should really make sure everybody knows this, if you'll allow me to say so.

As a consequence of this, of having such high revenues growing with more activity, with customers, a better management of spreads efficiency ratio has significantly improved in the first quarter of 2007, because that's the other thing that's leveraging the earnings and the profits. I always say that an improvement in efficiency is a necessary condition for any group that wants to be a leader in the future, and we give high priority to improving this ratio, because at the end of the day, that means that you just have to understand these jaws.

Growth, the rate of growth, of revenues, has to be higher than the rate of growth of our costs, as I said before; that these jaws open 11 points. And naturally these wide open jaws have an enormous impact on the final profit. So we've gone up from -- or we've improved rather, from 50.9 to 46.3. That's nearly 5 percentage points, and that's true in Continental Europe in Abbey and in Latin America; in all the geographical areas and in all the business units as well.

Another important issue this quarter, and this year in all of 2007, and in all of 2006 quite honestly too, I'm sure the analysts will remember provisioning. That's rather a sensitive issue at the moment, because the market is focusing a lot of attention on it. As I said at the beginning, provisioning is very much in line with the forecast for 2007, and growing in line with what we'd forecast as of the performance in 2006 when the provisions grew in Latin America above all due to growing business, but also because of the change in the mix, moving towards higher yield products which give us higher spreads and higher returns, but also mean that lending is more expensive. So there's been a 34% increase in provisions compared to the first quarter last year, although that is a slight drop against the previous two quarters from the end of 2006.

If you look at the final quarter, there's a drop of 1% despite the fact that we've brought Drive onto our books, and that is a business with a risk, with high NPL. And it is true they have very high spreads, so it's also potentially very profitable. This means that our provisions fall very much within what we'd forecast for 2007. There is no element that is worth mentioning apart, but on the right there is a graph that I think is quite a good proxy, perhaps a better proxy, for understanding the returns on the businesses, because we're subtracting loan-loss provisions from the net operating income, well, from the net interest income really.

I'll remind the august of you that we used to do this a long time back when Rafael Termes was at the Bank, the chairman of the Bank, and it would seem to be a good proxy to really understand the underlying, or the most relevant performance in the different business. So if we subtract loan-loss provisions from net operating income, you can see that instead of 29%, there's a 28% growth. So obviously the operating income, before and after, loan-loss provisions is very sound.

And then finally, to end this brief summary I wanted to give you by way of introduction, I'm going to talk about solvency, the strength of our balance sheet. NPLs are going down to 0.82. We've still got coverage at very high levels. Our generic provisions are approximately EUR6 billion. 66% of our funds are generic, and our capital ratios have been strengthened since December 31, 2006, in core capital and in Tier 1, and in Abbey's ratio too. That's all due to the strong earnings we've got, and the provisions that we have. We're paying a lot of attention to efficient use of capital, so I thought it was worthwhile to explain things in this slide as well.

So that's pretty well the summary of the first quarter, and then now Jose Antonio Alvarez will be explaining in greater detail just what's happening in the different segments, the geographic regions and the business units. And when he finishes, I'll give you a brief summary of the quarter, more looking at quality than quantity, just to give you my impression of how things are going, and how we expect the Group to do over the next three quarters of this year.

Good morning. As the CEO has said, I'm going to talk about the different business units, and I'll begin with the different geographic segments, and then the specific business units.

So Continental Europe. That was -- the profit there was EUR1.3 billion. That's a record, and it was a 47% increase. It's true that the figures include Drive. We left that inside Santander Consumer Finance so it's in Continental Europe, but without Drive, that 47% would actually be 44%, but I still think that's pretty spectacular.

Revenues have increased about 30%, costs 12%, which gives us operating margin in excess of 40%. We can see, if we look at the left of the diagram, that European commercial banking has done well, and global business has also made quite a significant contribution and is continuing to improve because we've been dealing with added value products and global relationships.

If we look at the different units in Continental Europe, the Santander branch network, although I should say (inaudible) that all units have grown, and apparently there's some problem with the slide, all the units have grown in excess of 10% as far as gross operating income is concerned, except Santander Consumer Finance. Growth is 19%, Banesto 15%, and net operating income, they will increase by more than 15%. Attributable profit grew strongly and we are seeing that the branch network did very well. We'll see why, because this is exceptional for such a mature market. Banesto's attributable profit rose 11%, although recurring business profits 25%, and Santander Consumer Finance, that was up 32%. That included Drive. Without that, the attributable profit would have been 15%.

Portugal grew 16% with continued net interest income improvement, and then the rest, which we've divided up between Global Wholesale Banking Europe and the rest, Global Wholesale Banking grew 125%, basically because of treasury operations and investment banking, although we'll be seeing that in more detail later on.

So now I'd like to focus on the Santander branch network.

All the slides that we'll be seeing will show the same thing. Our activity is going very well. There's an increase in the number of customers, and lending growth, such as for example in mortgages, is only growing at 15% when we were used to 18%, and we've seen sustained improvement in spreads, which means that revenues and net interest income are growing at 21%. So good rate of activity, a certain slowdown in some products, good spread, net interest income 21%. Gross operating income also very well.

Our commercial expansion has already been mentioned. We've opened up more new branches, and net interest income is, of course, behind these revenues. Gross operating income grew at three times the rate of cost, so our cost-to-income is now below 40%. This improvement in efficiency led to a 30% rise in net operating income. There was a drop in provisions, less generic provisions. And in specific provisions, there is a slight release.

Now, I'd like to quickly mention Banesto. It's already presented its own results. It's done very well. It's growing very, very much in its strategic focal areas; that's SMEs and businesses. There's also been a slowdown in mortgages there. They've gone from more than 20% down to 18%.

Gross operating income rose a lot in the first quarter. You can see that on the right. And there's also been a good improvement in cost-to-income, an almost 4 point improvement. So net operating income is growing in excess of 20% a year. Credit quality was excellent and the generic provisions are the ones that are really there on the income statement. So Banesto's growth is very stable over time. It's making its targets for cost-to-income market share and basically everything else, and it's also been opening up new branches, so that's given it a great deal of continuity to that growth.

The third area is Santander Consumer Finance. You can see that on the left, the bottom left, we have included Drive there. I'll be talking about -- well, with and without Drive. New production without Drive is still great. We're growing very well. In the first quarter, there was a VAT change at the beginning of the year, which displaced demand for some products, say cars, to the end of 2006. So 2007 Q1 has been weaker in Germany because of that. Spain and Eastern Europe are growing at 18 and 23%. Things are good except in cars because of the VAT impact in Germany.

We have really included everything here in this slide, so I think that's why we've included Drive. We've shown figures with and without Drive, with the LLPs. There are several impacts here with interest rate increases, because asset elasticity is minus 1, so margins are being compressed. However, if we analyze this on a quarterly basis, this compression is actually slowing down, because we can pass on higher interest rates to the asset price, but margins have still suffered. As I said, less growth in Germany, because people bought more at the end of 2006 rather than 2007 to avoid the VAT increase, and then [cost] perimeter changes because of Drive.

We have a lot of projects underway with lots of start-ups, which of course aren't yet profitable in the UK, Russia, and increase in offices in Italy and Germany.

So overall, I suppose I should just mention that Consumer Finance is growing well, and that in the annex, we've included a slide about Drive to help you understand that business, because it is sub-prime, so it's quite different from Santander Consumer Finance's average business.

And now I'd like to mention Portugal. Portugal is continuing to gain momentum. Net interest income rose 7%. We have to remember in 2006 it was only 5%. Fees are continuing to grow, and we're doing well cost-wise. even through we're opening new branches. The cost-to-income has increased, or sorry, has improved by 2 points. And provisions are very, very moderate. We've changed criteria. I think there are some notes on this in the annex that explain how we've changed that to bring -- this is basically provisions for NPLs and coverage to bring them into line with the Group's stricter criteria. They are actually improving in Portugal, and we've given all the explanations for that actually in the annex.

Now I'd like to talk about Abbey. Here we're going according to plan. Revenues have grown 7%. Costs have fallen 4%, so we're doing well with net operating income, 21%, attributable profit, 20%, although profit before discontinued operations was 38%. That was before we sold off the insurance business last year. Gross operating income is great. We're well in line with our target for Abbey when we drew up the business plan.

Now we have a look at where the figures come from. We have good spreads, good evolution in spreads, and we've been a lot more selective about our activity. Last year, we discontinued Cahoot, and the unsecured personal loans. We didn't discontinue the most profitable products, but we reduced the very low profit ones.

And in lending, we're growing at 8%, customer funds only 1%, but we have improving spreads, especially in deposits. So our actual management, in terms of retail spreads, has been very good, as the figures in the bottom left slide show.

So with this mix, as I said our spread is growing 10%. Fee income is suffering pressure through regulatory issues. There's a lot of pressure on the whole British banking sector because of media pressure about banking charges.

Now Abbey is generating 23% more income with lower costs than when we bought it, so the jaws are actually now open at 40 points in two years and one quarter. I think that is quite a significant figure, and that means of course increased profitability in Abbey.

Risk quality continues to be good. There are no issues there, so no more comments there. If we have a look at our mortgage business, that was an 8% increase. Spreads up by 3 basis points. UPLs declined because, of course, we ended the Cahoot activity there. But spreads have improved 65 basis points, and in savings 19 basis points, with more moderate growth, because as I said, we've been a lot more selective in pricing terms.

Our investment business is growing 27%, and we're launching new products, and there's a significant improvement in sales productivity. I think it's been a very good quarter for Abbey, and we're definitely in line with our targets.

What about Partenon, you may be asking? We're working in line with the schedule for that, too.

Now, Latin America. We have very strong growth in all revenue lines there. This is in dollars, 27% increase. Costs, as we mentioned on Investor Day, we're investing in the region, so costs are growing 16%. That's an 11 point difference in that, and that means that operating profit is up 38%, net operating income. There's an exchange rate impact, 10 percentage points, and you actually notice that in the corporate center. Commercial banking is doing very well. We have $280 million in net operating income.

Now, if we look at the different countries. In general terms big increases in revenues and operating profit, and then I think I need to explain some of the differences in Mexico attributable profit change because of tax increases. We only had 16% last year, was our tax rate, now it's between 25% and 30%. Chile 25%. There's an impact there of associated undertakings, otherwise growth would have been 32%. And in the other countries, well, Argentina is growing 50%, and Santander Private Banking, we always put it there but it's last but not least, and it's generating very solid results in excess of 20%, in fact 24%.

I'd like to talk about the macroeconomic environment, which is good. Brazil is going well, both in lending and savings; 20%. In our specific case, our franchise in Brazil, good customer evolutions. When we talked about this, on Investors' Day, we did think there would be free choice of banking for civil servants, but that didn't actually occur, so we think there will be lower revenues for us throughout the year. It's not so noticeable in the first quarter, but it will be throughout the year.

Although we have good activity, and you can see this on the income statement, because of the fact we have new branches, and so in general terms we've maintained the aggregate results for the year, and we think we can continue to grow at about 20% for the rest of the year.

Gross operating income grow 30%, basically driven by larger volumes, good fee performance, and good trading income, although margins did suffer, because of product changeovers in the same market segment. This has had an impact, plus of course the fact that interest rates have fallen. That means revenues are a bit slower. Costs are in line with target, slightly ahead of inflation. Our cost to income ratio's improved by 6 percentage points. Our net operating income rose 46%, that's net of 32% provisions.

There were more provisions than in the first quarter of 2006, and risk premium has become stable in the last quarters. It's about 3.9 when last year it was 2.5, but for the last three or four quarters we've been around 3.6, 3.9.

Mexico, we have a very solid macroeconomic scenario. We're gaining market share. We're actually outperforming the market in SMEs businesses and individual lending. We've increased our number of customers. Net interest income is growing 46%, thanks to greater volumes and a change in the lending mix. That means that our spread's been increased. Costs are growing in line with expectations, and that means we're getting net operating income, that's increased 49%.

The cost of lending has increased in the country, basically through credit cards, but we can see that growth net of provisions is still 26%, and fees. And I did talk about the tax rate, because we're actually paying more taxes now, so we have solid, profitable growth in Mexico, and that's been true for several continuous quarters now.

Chile. The Chilean economy is continuing to do well. We're investing in commercial capacity. We're growing more than the market, especially with individual customers, with very high market shares. Our revenues are recovering. I think you might remember inflation was high, and that's been negative, even this quarter. Inflation, well, it's a seasonal thing, and we hope it will come back to normal in the next quarters, because of the US impact. We did have some portfolio sales, so that's had an impact on provisions, because of the selling off of NPLs.

Now I'd like to go on to secondary segments. Here we have our Retail Banking; 82% of revenues, 71% of attributable profit; 27% growth in profit before tax. We've also seen that in Wholesale Banking, with good pre-tax profit and freeing up of generic provisions, although I think I already mentioned that in previous quarters, because of corporate operations coming into line with the final take. And then Asset Management and Insurance, there's 10% increase in revenues, and a pre-tax profit which is 6% up.

So Retail Banking, the figures are very solid. 11% growth in Abbey's gross operating income, its net operating income up by 24%, and then the retail banks in Latin America, 21% in gross operating income, so all our Retail Banking is doing very, very well and sustained, high growth.

Then Global Wholesale Banking. I'd like to focus on two relevant issues. Gross operating income grew 38%, largely due to customer activity. That actually grew 51% in year-on-year terms. The market is very, very active in investment banking, so that of course is very profitable. We've had sustained growth in treasury activity with customers, and what we call our global transaction banking is growing at 20% in everything except basic financing where we're growing less.

The second thing I'd like to mention, and you can see that on the right of the slide, is the freeing up of provisions of EUR51 million during the first quarter, but that's because we'd had to make very strong provisions in previous quarters. And then risk volumes fell by EUR3.4 billion. That was why we were able to free up those provisions. That's because of the completion of different syndication tranches which are now on our balance sheet, unlike in the third or fourth quarter of last year when, of course, generic provisions increased.

I'd just like to give you a couple of ideas about Asset Management and Insurance. We had about EUR1 billion in revenues generated from asset management insurance. Revenue performance was good. Mutual funds, income from fees was up by 7%. Abbey did very well there. And in Europe mutual funds grew well, 11%; pension funds; and then insurance was up 56% and Abbey with double-digit growth in mutual funds. Then insurance up 6%. Latin America -- pension funds fell 13%, basically in Mexico because of management fees after September 2006; insurance is increasing there a great deal, it's doing very, very well.

Now I'd like to hand back over to our CEO for the conclusions and our outlook for the next quarters.

Okay then, just to some up what's happened this quarter then. I think that it's been a very good quarter, an excellent quarter for the Group. It's been a new record in profits which have grown 21% in earnings, and in earnings per share as well. And I repeat, as I said at the beginning, the results are high quality results, in vertical terms and in horizontal terms, driven by recurrent revenues which have grown very well, and that has meant that with costs that are growing at a moderate pace, above all very much driven by the expansion projects that we have in order to get greater depth in our businesses, or to develop new businesses, it means that the differences between revenues and costs is 11 points, and that means that we have substantially improved our cost income ratio. I [mean] diversified profits as well. The three main segments have grown at about 20% in management currency.

So orderly, very tidy, very diversified growth and if you've looked at the different kinds of activity you can see that the earnings are being driven by higher activity and more customer business, especially, or more specifically, in Latin America, that's quite normal. But also in Global Wholesale Banking, which is a business area that benefits from a very positive market environment. But it's also true that the Bank is improving the quality of its operation in terms of its customer penetration.

In Spain, what stands out is something that hasn't started now, it's started some quarters back, a slight slowdown in growth in mortgages and a slight drop in the balances in Global Wholesale Banking -- Global Wholesale Banking and markets really, due to the syndication and dispersion of risks for the big transactions that the Bank was involved in, in the last quarters of last year.

In Abbey we're focusing very clearly on better spreads, above all on loans, and on funds though, in order to get higher returns. And in general throughout the Group we've got very high asset quality, high credit quality. No alarms have been triggered in any market or any segment and our balance sheet is very strong.

And in this presentation I also wanted to say that the Bank is a net investor. You don't see all the things that we're investing in. We've got small transactions from last year, but we're investing in technology, we're investing in expanding our networks, and we're investing in global networks, global businesses, and in credit cards, asset management insurance in the UK. So the Group is not only reaping the fruit of what it's done in the past in the short term, but it's also taking advantage of that to invest, and that's something you can see in the growth of our costs.

How do we see the forthcoming quarters? I should remind you that our policy is not to give specific figures for guidance habitually. The AGM which will be at the end of June, the chairman might give some indications, very general indications, but at the moment I don't want to give any figures; I don't want to give any guidance as such. But I do want to give you a feel for our qualitative indicators. We think that over the next quarters, we'll be maintaining our high activity, our high business with customers. We aren't thinking that any geographical region will see a change in the pace of its growth. It's quite the opposite in fact vis-à-vis the first quarter, maybe for seasonal reasons in Latin America or maybe in Spain with certain very specific products.

Spreads, we think, will continue to maintain their current [tonic] for the Group as a whole. We are focusing very specifically on managing these spreads by units and by businesses, so we're very optimistic about what's going to happen in revenues, and that's vital of course to maintain the quality of earnings. And we're expecting to base that on fee income and on net interest income, which will remain strong for the next few quarters.

Costs in line with what we're reporting now, it's tradition in this Group if the market already knows for costs to be kept very closely reigned in, and at the same time we're developing global businesses and we're investing in commercial activities and in technology.

And then, as always, although some things are quite clear, nonetheless we should say it, that we're going to maintain our focus on credit quality and managing the trade-offs between risk and returns. So I'm optimistic about 2007 is a year we've started on the right foot. We've started better than the market expected us to in 2007. We've outperformed market expectations, and I think that we should go on outperforming expectations for the next three quarters.

Thank you very much, that's about it. So shall we start the Q&A?

Ladies and gentlemen the Q&A session has started now. (OPERATOR INSTRUCTIONS).

Your questions. There was something I wanted to say. I know that there will be a lot of questions. I'm sure you've got a lot of questions about our position and our interest in the whole issue of ABN Amro. But I do want you to understand that the proposal that we have made is coming from three groups, so for regulatory reasons I can't say anything more than we've already said in our press releases this morning. The last one was put out -- the latest one was put out, so I hope you'd excuse me. I won't be able to answer any questions that are specifically about that operation. I can only say that the three groups are convinced that we've made a very attractive offer for the shareholders of ABN Amro, and naturally, very attractive as well for our own shareholders.

We've got a lot of experience in acquisition and international integration between the three of us, and that's very positive for these kinds of situations like we have right now. I repeat, all information on that will have to be based on the information being put out by the press office of our three groups, and a communiqué was put out this morning. I'd imagine you already know about it. And that's all I can say, so please don't ask anything else because I won't be able to answer any questions that either directly or indirectly relate to this issue.

So I've said that and now we can open the floor for questions. Alessandro, Kepler? No sorry, Rurya.

Alejandro Rurya from Kepler Equities. What about the standardization of more strict criteria in the Group in Portugal this year. Is that applied to Brazil, Mexico and Abbey as well? And if not, what impact could that have and when are you thinking of applying those stricter criteria?

The standardization of impaired debt and NPLs is for all the countries that don't have IFRS, such as Latin America. In the European countries that are reporting under the international standards, there are some that have some specific national characteristics that mean that the way that the standards are applied isn't the same in all the countries. We prefer to standardize throughout Europe to avoid different interpretations, especially talking about NPLs in Portugal. That has meant things have changed, but elsewhere they haven't changed. So we've brought Portugal into line with the reporting criteria we have for the other countries, so now there's no difference between the different units.

Carlos Garcia from ING. When can we expect a recovery in the net market share for new mortgage business in Abbey? At the moment it's 5.4, and I know that there are licenses for more employees to be able to grant mortgages, but we're not seeing any change in volumes. So what's going on? Is it the market or is it Abbey?

It is true that we are at the moment hiring new employees who are able to sell mortgages. Cutbacks in staffing in 2006 in Abbey brought down the headcount in this area who were qualified to sell mortgages, and we're getting in new people to do that, along with our own policy to focus more on spreads and be more selective in the kind of mortgages that we're granting and to look at the returns that they'll give us is basically the reason why the mortgage market is going down.

We will continue to focus on spreads and returns so we are not going to see an increase in the growth of our market share in mortgage production. Probably later, we will be producing more mortgages, because we will have more people who are qualified to sell them. But probably the overall impact won't be seen until maybe the last quarter of the year, and probably not until 2008.

This year we've defined our strategy, as I've explained, and it's a strategy that's giving us good results in terms of our accounts and our revenues and profits, but obviously lower market penetration and lower market share.

Christian Saul from Dexia Asset Management. Referring to Abbey, why are we expecting flat growth in fee income whilst mutual funds are growing at 131%? Can you explain this growth?

Quite honestly, I haven't got the data here to hand, but I think that the answer -- I'm pretty sure that the answer has to be found in the fact that we sold off the insurance arm, Resolution, in 2006; in the first two quarters of 2006. And part of the third quarter, we were still booking the results from the insurance arm onto the Abbey accounts, but we sold to Resolution in August, and that obviously had an impact on fee income line. We talked about that when we presented the results for 2006, that in 2007 there would be a drop in the contribution from the insurance business.

At the same time, there's an issue with mutual funds here, and I haven't got all the data to hand, I'm speaking from memory, but we're seeing a phenomenon in which bank charges in general are a hot issue in the UK. Indeed, throughout the financial services industry, we're seeing less growth in the bank charges, fewer bank charges in general. And all of that together means that probably that's why we're seeing this lower growth in fee income.

[Ian Alexander]. What about the mortgage market in Spain. How many of your loans are to developers? What percentage of the business? And what's your forecast for that business for the property business as a whole?

Well, our position in the property sector hasn't really changed, and our vision hasn't changed from what we reported in earlier presentations, because really it's not as if there's been a change in the vision of the sector as a whole, or the Bank of Spain. The governor of the Bank of Spain made a speech about this point just a few days back.

With developers, we've got a market share that is lower than our market share in any other activity segment. SMEs or individuals of the total portfolio for the Banco Santander here in Spain, I'd say developers is about 7%. I think it's exactly 7%. So as a percentage, it's quite a low percentage, of our total loan book. We don't have market shares that clearly defined, because we can only have an approximation really, indirectly. Our market share in developers must be -- if it's normally 14%, 15% it would be about half of that. Yes, about 7% approximately. So I repeat that this figure is not very exact, because we don't have very exact statistics on that kind of segmentation.

And then the NPLs we're seeing. We're getting very low arrears; 0.08% arrears. Much lower than the NPL ratio in any other sector. And we should see developers as a business sector. It would be 0.40% for SMEs, and it's 0.08% for developers. For the moment there's no indication that this loan book is going to give us any problems.

And at a micro level, really breaking things down to individual developers, so developer by developer, we are measuring an element that we've always tracked because we think it's quite indicative of what's happening. The state of health of our loan book with developers; the developers that have risk then with the Bank.

We compare the rate of new starts and the rate of sales, and that means the lending that's been drawn down, and what's actually been sold. Normally if sales are equal or higher to new starts, or draw down of lending, that means that developers are selling at the same rate that they are producing, and that's positive. A developer that's drawing down more credit that it can use to sell its buildings will have a problem in insolvency and their asset quality will be impaired.

But right now sales. Sales are -- and this isn't reserved. It's not a reservation made. It's a sales contract. Sales for our developers are at 46%, so that's what they've actually sold. Whilst at the moment, new starts and work in progress is increasing 41%. This is a very good proxy to understand what's going on. We can also say that sales being made at a year and a half, at the moment it's 46%. It was at 55% before. It wasn't as if it was 95% or anything like that. There has been some slow down, it's true, in the selling rate, but not very spectacular at all.

So that really is a sketch of what's going on with our loan book, with developers. And in fact, I couldn't say more. It's a highly diversified portfolio, which means it's very resilient as well.

Three questions. One is about fee commissions from the Santander network. Is this because of our campaign We Want To Be Your Bank? Can you give us a breakdown? What about expectations for 2007?

The second question is NPL, or worsening arrears in Chile, Brazil, and Mexico. We're going towards businesses with higher spreads, so what about the outlook for spreads in the next few quarters?

And the third question is, about impact on net profit of the weak dollar, because about 68 million, I presume euros there, how much of that have you actually hedged?

Okay, first question was to explain the increase in fee income in the Santander network. There's actually a very simple explanation. When we launched the strategy We Want To Be Your Bank, the idea was that we would suffer a short term penalty for lower fees, because the whole point of the campaign was that we weren't charging fees. However, we did stress that the upside would be to increase the number of customers, lock more of them in, and sell current customers more products, and increase our activity and the number of transactions per client. And this is what happened.

In 2006, fee income for the Santander network didn't grow that much. I think people asked about this at one of our previous sessions, and I think I said at the time, this is the price we're paying for a medium term strategy that will provide excellent results, both in terms of activity, business, number of transactions, and number of products sold. And that is what is happening. We're now reaping the fruits of that policy.

We have very high growth, 18% to 20% in lending, good growth in liabilities. That means high levels of activity. We've attracted 1.5 million new customers, and I didn't really mention it that much, but it's in one of the slides, so it's in the documentation you have, Spanish Retail Banking has increased by 1.5 million customers. That's for the Group, actually, but Retail Banking is providing most of that. And of course, that has an impact on fee income. That's the only explanation for it. There's nothing else. There's no hidden explanation. It's just thanks to increased number of transactions and the fact that credit cards are going very well. But all of these are, of course, linked together because we're busy just selling more products per customer.

Okay. Arrears in Brazil, Chile, and Mexico. We saw this last quarter; there's been a big change in mix, especially in Brazil and Mexico, a very big change in mix. Secondly, in Mexico specifically, we're really promoting credit cards as a way to penetrate new sectors, and we've had huge growth there. And in Chile too, there's been a huge increase in activity. However, I would like to stress the fact that our NPLs are very stable and have been since quarter 2 or quarter 3 last year. So the first quarter this year has not been anything different from the fourth or the third quarter 2006. Everything is more or less the way it was, because the change in mix took place in the second and third quarter last year. So things are actually improving in this first quarter of 2007. So we wouldn't expect that in the next quarters, we wouldn't expect any surprises in this chapter.

And your third question, I think I'll hand it over to Jose Antonio Alvarez, who can give you a better answer.

Okay. Your question was about the impact of the weak dollar. I'd just like to remind you of our exchange rate policy. Some hedges in Mexico and Chile and local currency and dollars, because in our accounts it was in local currency. So I think you asked about what hedging we have at the corporate center. We usually hedge the expected results of the dollar area. That's Latin America plus Drive plus Private Banking. That's about $4 billion, and we have a long euro short dollar position.

The real dollar euro movement has only been about 0.01 in the last month, so we have a negative financial margin at the corporate center because of the negative carry between the euro and dollar interest rates, which is about 15 million to 20 million. And then we have a slightly positive impact of 0.01 in capital gains -- trading gains at the corporate center. So you can see that the hedge is market to market, and the results are in the average monthly exchange rate. So they don't coincide time-wise, and really one thing knocks out the other. In quarterly terms this therefore doesn't really coincide.

But just to answer your question, it's tiny. It's maybe minus 15 million to 20 million because of negative carry on the financial margin, and minus 25 million in capital gains.

Another question about the property sector. I think it's more or less been answered, but Banesto said there have been delays in mortgage repayments. Is this true, and if so, what's your interpretation of that?

Well, I think the head of Retail Banking mentioned this. I think he talked about lack of punctuality. Banesto had noticed that with individual mortgage accounts that there were some delays in payment. However, mortgage arrears in Santander Banesto is low, so I think that comment was probably very much conditioned by the pressure of the market, the press, the media, on the mortgage market, because they are paying a great deal of attention to it, and there's this appetite for knowledge and that's probably why the comment occurred.

We're seeing a slowdown in volumes. That's very clear. As we've been announcing now for several months, and 2007's budget included much lower mortgage growth than in 2006, which in turn, were lower than 2005. And I've said that many, many times now over the last few months. Even the governor of the Bank of Spain mentioned it. Mortgages last year increased by, I think, 26%. We grew at 18, so that was below the market average, and if the market is going to grow 20% this year, we'll be growing at 14%, so we are already aware of what that -- that this is a slow-down in demand, and we are seeing a slow-down in prices. Prices aren't growing at 20% any more, they're growing at 7%. And there's been a drop in demand for second homes, but our second homes portfolio is only 6% of the total mortgage portfolio, so it's really not relevant. And I'm talking about demand, I'm not talking about arrears, here. That's our vision of the mortgage market. And it's not very different to what we said in February.

[Manuel Minotti]. I have two questions. One about Sovereign in the US, and what about Capitalia and any links to Generali and MediaBanca?

First question, well, I've said this over and over again. Our position in Sovereign is reflected in the contract that we signed, and that means up to 2009. And the second idea is that I said that I did not want to talk about anything linked to the ABN Amro operations, but to limit speculations. Santander is not interested in ABN Amro's stake in Capitalia. Full stop.

[Mario Novus] from Ibersecurities. I have several questions. You freed up generic provisions, but is the risk premium in the first quarter, that reduction, is that recurrent? Could we continue to expect it for the rest of the year? It was, I think, 30 basis points less.

And then, risk-weighted assets growth has been moderate in the first quarter, especially when you consider the increase in lending in Latin America and Santander consumer finance. Is this level of growth sustainable?

And two more questions, one about core capital generation for the rest of the year, and a question about Brazil. What about -- something about 800,000 customers from Rio de Janeiro -- it wasn't that, it was 1,600. I think he maybe confused that with the F1 comment.

Indeed, provisions, loan-loss provisions, have been benefited by the lower upper limit on generic provisioning. This went down from 125 to 123 because of the Bank of Spain standards. What are we expecting in the rest of the year? Well, we think that we'll see quite moderate impact on the income statement. We'll make the necessary provisions, as you've already heard from the CEO. We don't see any especially worrying situations anywhere.

The second question had to do with growth of risk-weighted assets, which you said was moderate. In fact, there's been a slight reduction. But even with lending in Latin America and Santander, consumer finance growing so fast, the percentage of these two units in lending is actually relatively low in the Group as a whole; EUR500 billion. Latin America and Santander as a consumer, wouldn't even be 20% of that, so the impact is moderate.

We already said before, I think in the presentation we've said that we're going to be more active rolling out our securitization policy. We've done securitization this quarter, for about 15 billion, and we'll continue to be actively securitizing this year. Probably we're expecting this year to see a slight growth in risk-weighted assets, not comparable, however, to what we had in previous years.

This links in with the question about the core capital ratios against this backdrop. Assuming that we have the same payout policy of about 50% in the Group, we would see generation of core capital, which hasn't been the case in ordinary activity, of course, taking it for granted that if there are capital gains, one-off capital gains, that will be added on. So unlike other years, we think that there we will be seeing some basis points added to our core capital, which will enable us to maintain our 50% payout policy, and about 50 billion of securitization transactions.

The final question, I think, was about Rio de Janeiro, wasn't it, and what's happening there? In the presentation, we talked about two impacts; the 800,000, which (inaudible) said was the number of Sao Paulo civil servants in Rio de Janeiro, but we have the wage roll of the city council now, but not the state, that's 165,000. So we mentioned that we've opened about 60 branches in Rio, and this operation is going well, growing fast. And I also mentioned that we're expecting some loss of revenues because of what's happening with the civil servants in Sao Paulo, and nonetheless, I said that we do think that we should be able to hit target for the end of the year. And we're helped by the fact that business in Rio de Janeiro is going very well and will help us to keep up the earnings level that we've given already figures on in the Investor Day.

A question about the corporate center. To what degree can we extrapolate the results of the first quarter to the rest of the year, and how much of it is non-recurrent business?

Well, maybe we should explain what the corporate center is. I talked about it in passing talking about the hedging policy for exchange rates, but if we look at the accounts for the corporate center, there are various things we should highlight. Net interest income has looked more negative, perhaps, with interest rates going up, that's really what's behind it. There's a higher cost of funding for the holding. Then booking under equity accounting there we've got Cepsa, which we divested, and net trading income, well, basically it's the same things as we saw last year. The impact of exchange rate, which is positive in reserves, positive in -- when we look at it the other way round. And then there's another issue here, other earnings. There we've got a generic fund for risks for rolling out our technology platform in Abbey, in Portugal, in Santander Consumer Finance and such like.

In minority holdings, it's the other way round from Cepsa. With the equity accounting, it's more positive in one, and less positive in the other, and that's completely the other way round in this case.

Why fee income and trading in the rest of Europe is so strong. Is that sustainable?

Second question about the losses in trading in the corporate center, I think that's already been answered. What was the contribution of Sovereign for the quarter? And what holdings are being consolidated under equity accounting. And then, the other's (inaudible) ABN.

In the Rest of Europe -- Rest of Europe is a line that brings together all the little bits of the global areas that are generated by the units in Europe. So for example, Global Wholesale Banking, or Global Banking and Markets, as we're meant to call it now. Global Banking and Markets and its earnings are generated in part in Europe, in part in America. The part generated in Europe is booked to Rest of Europe, and the part generated in America is booked in America in all the different countries, so probably that is the most important reason for this big leap in earnings from fee income and profits because the biggest chunk comes from global businesses and markets. We've got Banif as well and other things, but the main reason for this increase in growth is -- Global Banking and Markets -- Global Business and Markets, 8 million in equity accounting.

Several questions which have been answered, but there's a final one about the average returns on new mortgage lending in Abbey?

If you wish, maybe we can give you the technical details later after the webcast.

Regarding Abbey, asking the reasons for the wider spread in deposits and the growth in volumes in the branch based deposits? Brazil, what is the impact of the payroll in San Paulo and the changes there?

And then the growth in costs has to continue to grow to fund expense and projects. Are you still -- how much of that is going into that, and how will that impact core capital spreads for branch based deposits in Abbey?

Well there are two things here, first of all the fact that the Abbey's strategy has actively focused on growing deposits in all different areas in savings. And you can't see that so much, because savings is growing at 1% in Abbey, but it's growing very well on the right-hand, but savings were very, (inaudible) the ones coming from Cahoot above all, so those are being reduced.

So the growth doesn't look very high but the spreads are growing very fast. If you put savings at good spreads whilst you're taking away the bad spreads, then it means that spreads will improve all the time. So quantitatively you can't really see what's happening in activity, because it's only growing 1%. Nonetheless the impact in terms of our returns is pretty big.

Obviously, interest rates have gone up in the UK as well, and that means liabilities have higher spread, and that's another explanation. It's also true that Abbey has a very active policy with respect to current accounts. Growing very fast in current accounts, very well, and that means, as you can imagine, that with interest rates rising in the UK, we're getting high returns. And if you look at the Abbey liabilities, obviously that's reflected there too.

So we're doing well in business banking. Business banking is an activity that has lendings and deposits, but it's veering towards deposits more, so that gives growth and good spreads. And then investment banking as well. There you get more in from fee income than anything else much more than through the net interest income because investment products, mutual funds and similar.

So all the activity of gathering customer funds in Abbey is being handled very well. We're very positive about the management of volumes and of spreads and that can be seen, what's happening in margins and in fee income because it has a knock-on impact to the account.

And then costs. Well I think we've talked about this. Jose Antonio talked about it when he was talking about the impact of F1, as we call it. We think that it could mean -- well, if you look at it quarter-by-quarter, or year-by-year, one-off way, the loss of the (inaudible) of the San Paulo civil servants for 2007 in Brazil, well, the impact could be 4% lesser revenues.

But this is just looking at it in one year in Brazil because at the same time we will be developing with other positive impacts; what's happening in Rio and other things we're doing to bring in more business there. So we think that in the long term we don't think it should have an impact for 2007 as a whole, but it's a one-off issue.

And then costs. Indeed you might find it surprising that a group that's always been very much focused, very strict, very hard, very harsh in reigning in costs is presenting cost rises of the kind that we have this quarter. But there are a lot of explanations for that. First of all, one explanation has to do with the perimeter. If you break down costs in Europe by units, you can see that Santander's network is growing at 6%, Banesto at 5; I don't remember the exact figure, I think that's right; Portugal 1%. So we're containing costs but we're expanding networks in Santander and in Banesto.

So we are maintaining cost discipline in these units with figures that don't look sensational maybe like they did other years, because we're not cutting back on staff as we did before with early retirement policies and things before. But we are controlling our costs very closely, which are following inflation pretty well, the underlying costs that is. We don't talk about new projects and expansion. Santander Consumer Finance, this (inaudible) having the same impact as Drive, I can't remember. It's adding a lot of points to cost increase which has gone up to 11% I think.

But we're seeing a high level of expansion in the branches in Germany and new units being launched that aren't yet profitable. Santander Consumer UK for example. It's taken up the car finance business that Abbey used to have, and so we're re-launching this business, and that will give us bad results and high costs for 2007, and probably into 2008. But it's a core business for us, and it's a core business we want to develop further in the UK.

So we've got Drive expansion in Germany, especially in Germany, and the launch of new businesses. Finally, apart from minor issues, the expansion in Scandinavia plus Russia. All of that at the end of the day adds up. Projects that aren't bringing in revenues but are costs at the moment, but they are projects that are really investment at the moment because we're thinking about our mid term strategy.

What is the underlying behavior in Santander Consumer Finance? Well 5 points, 6 points probably. We're very well within our normal parameter.

Then Latin America, I'm not going to talk about Abbey because that was minus 4%. They've reduced costs in pounds, not quite so much minus 2 point something in euros, but they're managing costs very well there.

Then Latin America. There the figures look very good because if you look at them in euros you've got low growth, but if you look in local currencies, then they're growing about 12, 15% in some of the markets. But again, I have to say it, in Latin America we are expanding strongly in branches, ATMs and IT, and these are markets where we have to create infrastructure still in IT and in our branch networks, and that's what's behind that growth. But the message I want to put across here in response to the question is that the Group is still focusing on efficiency and costs. It's cost income ratio is one of its basic priorities.

So that's the questions from the web. There was a final one -- no that's been answered. I've eliminated all questions related to ABN Amro because, what's already been said. So now let's take some questions over the telephone if you've got any?

Good morning ladies and gentlemen. We have one question from Arturo de Frias from Dresdner Kleinwort, please go ahead.

Good morning. I have a couple of questions. The first one is about provisions in Spain. You did talk at length about developers and the property market, so you sound quite calm and reassuring. I'd like to ask about provisions more in line with an interest rate hike. What level of interest rates would start to get you worried about affordability rates in Spain?

And could you just confirm that the Bank of Spain's provisioning system will, once specific provisions in Spain go up, this can be offset by lower generic provisions and will the loan-loss provision be stable?

And then I have a more detailed question. In the European division that [isn't] included under others there's being big growth in financed operations. I think this quarter has been very, very high indeed. So could you just clarify what that is due to and is it recurrent or not?

And sorry, then I have another question about ABN. Maybe you won't answer, but I'm going to try anyway, because it's not an opinion or a vision. The fact that the consortium is not going to publish the price of a new bid in the next seven days, is that because of Dutch legislation? Thank you.

Okay, provisions in Spain. And sensitivity at risk premium, lending quality, and sensitivity to interest rate hikes. All the tests that we've carried out are not just for the mortgage market, which is where you started your question, but it could actually be extended to consumer lending or businesses in mortgages and consumer lending, though stress tests show that real sensitivity to interest rates is not so much interest rate increases, but unemployment, as long as interest rates are reasonable.

And what do we mean by reasonable? Well we're talking always about increases of 0.25 or 0.5; so 0.25 or 0.5. So let's imagine it was 0.5. That would take us to 4.5% interest rates or 4.25%. Well honestly there, sensitivity is really non-existent. You would start to see sensitivity from, say, about 7%. That's when you'd have to start and worry about NPLs and arrears. But I don't see 7% interest rates being a possibility unless something really dramatic occurs. I don't think that there's any danger there. And the affordability rate, or whatever you wish to call it, would be in danger.

We have to be vigilant about unemployment and, therefore, the general economic situation. So I would say, therefore, very low sensitivity to interest rate increases, as long as we're still talking about 4%, 5%, 6%.

Then you asked a question about the generic provisions accumulated under good times. Can they, will they be enough to cover NPLs if there's a change in the economic cycle. That question is actually very difficult to answer. If we go back several years in time, yes, there have been crises when we might even need higher provisions, although I don't think that that is likely to happen. I don't think we're likely to see those circumstances. The safety net, or the larder that the Bank of Spain is obliging us to have through generic provisions, would be more -- we have 6 billion or 5.8 billion in generic provisions. So we feel pretty comfortable with that safety net.

Of course, this is all a question of opinions and if you have a very, very negative outlook then you might not think it's enough but to be honest I think it's more than enough.

And then I'm sorry. I'm not going to say anything or answer any questions about ABN Amro.

And the Rest of Europe, the trading gains. I think it's because of Global Wholesale Banking; because all of that in Europe including Spain -- trading gains in Spain is the biggest in the Group, and that's included in trading gains in the rest of Europe because that's really where our Global Wholesale Banking activity is.

It probably includes Santander Global Connect and Santander Global Markets. Part is in the Retail Banking network, but the other part is in treasury and of course that's included there.

Are there any more questions through the conference call? No? Okay then. thank you very much everyone.

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.