Banco Santander SA (SAN) 2007 Q2 法說會逐字稿

Good morning. We're going to begin the presentation of the Santander Group's Results in the first semester of 2007. I'll be dividing the presentation into four chapters. In the first, I'll highlight the main developments in this first half of the year for the Group. In the second chapter, our CFO Jose Antonio Alvarez, will give you more details on the business area. He'll go into the different numbers for the different business areas.

Thirdly, I will review the status of our joint offer for ABN together with Royal Bank of Scotland and [forces]; and finally, I will conclude with a brief summary of my views on the coming quarter of the year.

The first idea I'd like to share with you is that the second quarter was another excellent quarter for the Santander Group and it confirms the trend seen throughout 2006 and in the first quarter of 2007. Growth drivers are basically the same - strong firm business growth, strong profit growth plus maintaining high quality of that growth and we continue to make progress in the strategic development of our businesses.

In this chapter, I will present or I'll base my comments on five key pillars for this quarter.

The first of these - strong growth in earnings, especially in earnings per share, based (inaudible) high quality growth. Last quarter when I presented the results I told you about the high quality of our earnings growth which is essential because it determines their future sustainability. In this sense, I'd like to underline the strength of our revenues, all the Group's units have seen strong revenue growth and this reflects the efforts that the Group has been making to increase our customer base to improve our share of wallet with existing customers and it also, I think, demonstrates the very successful price and spread management policy in the different units which as we will see has enabled us to improve our spreads in many of them.

Another key aspect in these results is our consistent efficiency improvement culture. We've been able to combine growth projects, projects for the future, with our target of becoming one of the world's most efficient banks, as part of our vision of becoming the most efficient bank in the world.

The first point that I'd like to underline are our provisions which are still in line with target. We still have a significant year-on-year increase because of the change in our business portfolio towards retail and consumer credit, especially in Latin America. And the final point is the soundness of our balance sheet. We are combining our successfully balancing short-term growth with a very solid balance sheet. We still have excellent solvency ratios, excellent NPL rates and we have managed to continuously, over the last four quarters, improved our core capital.

I am now going to go into further detail about each of these points. The first idea I want to convey is the marked increase in EPS. Without considering extraordinary capital gains obtained in this quarter from the sale of our stake in Intesa Sanpaolo without including these capital gains, our earnings per share were EUR 0.335 cents in the second quarter which is 60% higher than in the first quarter and 21% higher than in the same quarter of 2006.

This higher EPS reflects behavior of our overall results. Attributable profit without capital gains after taxes have reached a record level this quarter of EUR 2 billion. This quarterly profit has put us at 3.892 billion in the first semester which is 21% higher than the same period of 2006 and that clearly puts us on target for the figure we quoted in the last AGM which was a figure of EUR 8 billion for year-end without including capital gains.

If we include non-recon revenues and capital gains, the 566 million obtained in the second quarter from the sale of our stake in Intesa Sanpaolo, total profits up to June would have been EUR 4.458 billion which is up 38.6% versus the same period in 2006 which means that our earnings are of extremely high quality. We're going to look at them both vertically and horizontally.

As for vertical quality of our statement, it is based in the earnings, expenses, cost to income ratio, [cascade] and, as you can see, we begin with a growth in our gross operating income of 22% which is double to the rising costs since income has grown by almost 22%. While costs have only grown by 9.7%, our net operating income has increased by 34%, which is 5 points higher than the growth we reported in the first quarter which, in turn, was much better than that for end-of-year 2006. So we're not just experiencing very significant growth rates but that growth is also accelerating because of the successful performance of the underlying business.

The lower part of the statement do not boost profits and, in fact, subtract from them because of larger provisions and higher tax rates in some units as a result of which profit from ordinary activities is 24.1% higher. But below this line we have discontinued operations in 2006 on the sales from minority interests in Chile, all of which brought the growth in attributable profit, excluding capital gains, up to 21%. These increases have, in fact, been negatively impacted by exchange rate which for the whole of the Group have lowered our growth by approximately 3 percentage points and because of including drive in the perimeter by about 2% so the overall effect cancels out and, therefore, has been almost zero. But in any case, the exchange rate effect is having a negative impact, although the consolidation perimeter has had a positive effect because of drive.

Instead of looking at it vertically, we look at it horizontally. We can still confirm the high quality of our growth and our earnings. All businesses have shown strong growth in profits. Continental Europe rose 45%. All units grew a great deal, very well balanced growth. I should underline Santander's growth as well as Banesto and our Global Wholesale Banking or Global Wholesale and Markets which is what we're now calling this division, also Santander Consumer which had a much better second quarter than its first.

The pound market, Abbey, grew 20% in sterling after absorbing the impact of the sale of its insurance business last year. If we didn't take this effect into account, profits would be up 47%.

Lastly, Latin America rose 28% in dollars, although it had a slight negative impact due to the exchange rate with the Euro so in Euros the growth was only 18.5%; but in any case, the rates of growth are much higher than those of the first quarter since last quarter it was 20% in Dollars and 10% in Euros which means growth rates, again, are accelerating in this region in business and earnings, as we will see when Jose Antonio Alvarez explains the figures for each business unit.

In the chart on the right, we go through the same process, not looking at geographical areas, Euro, Pound, Sterling and Latin America which is Dollars. If we look at it by business lines, retail banking, wholesale banking, asset management and insurance, we see excellent growth, balanced growth as well. In retail banking, earnings are up profit -- before taxes is up 30%, wholesale banking up 85% although, of course, this division this quarter benefits from lower generic provisions which were established in the past, especially when major corporate operations were launched and underwritten. And asset management and insurance, although apparently having a less brilliant profile due to the lower contribution of the pension fund, business in Latin America has clearly performed better than in the first quarter where I will remind you growth was around 6% and now it's at around 15.5%; so overall, excellent performance of all operating areas, both looking at it by geographical areas and by business areas and all of them with faster growth rates than in the first quarter.

Second point I'd like to stress which I mentioned at the beginning is the strength of our revenue growth. And within that, the main growth drivers, which are net interest income and fees, represent 84% of the revenue growth. The net interest income has grown by 23%. I'll remind you that in the first quarter it grew by 20%, which was already a very high percentage, and this quarter we've improved that rate even further. And I'd also like to underline the performance of our insurance business with excellent 28% growth.

Overall, our commercial margin, our sales, increased by 20% and that has a positive impact on our gross operating income once you include gains in financial transactions which reflect a very good performance of both customer funds and market trading. So in total, our revenues support the growth of our net interest income which is up 3 points faster than in the first quarter of this year.

If we look at it by quarters, this revenue growth is also clearly very consistent. In the chart on the right-hand side, you can see how our core revenues which are the net interest income and the fees have been rising very consistently every quarter. Obviously, this growth is due to a) volume growth but also, b) to very good spread management. And, obviously, increasing fee income is due to more activity and also to the excellent performance of our insurance business.

The third point I'd like to highlight is our efficiency gains. Again, together with the very solid growth in revenues, continuous efficiency improvement is one of the essential priorities for us and it's an essential requirement for a bank like ours which wants to become a global leader.

We've been improving our efficiency for many years and now -- and already back in the -- at the end of 2006 we were amongst the top international banks in terms of efficiency. In 2007 we're still focusing on that objective and in the second quarter of 2007 we have, again, improved our ratios in this area. We've gone from 49% cost income ratio in the first half of 2006 to 44% in this first six months of 2007. And, again, we used the international efficiency ratio, that is, we include in the costs or in the expenses depreciations.

Continental Europe was at 37%. That's well below the 40% barrier which we reached in 2006. Abbey is almost at 50%. In fact, in June it was already below 50%. I'll remind you that just over two years ago Abbey's cost income ratio was at 70% and this is probably one of the clearest examples we can give of the group's ability to manage integrations and derived synergies.

And finally, Latin America's cost income ratio is almost 40%, a level which not so long ago seemed unreachable, even in Europe. And, yet, we have some units in Latin America which are already below this level. To do that, obviously, you need to manage your costs successfully and, of course, your income too because we're talking a ratio of costs to income which means that we have continued to implement a very selective policy for growth in our costs trying to reconcile growth and costs in our ongoing recurrent business while investing strongly in new business developments in those areas in which we're investing to grow more.

Beginning with the European units, retail banks in Europe have, in general, experienced moderate cost increases considering we're extending our branch network. The Santander has grown 7%. Branch network has grown by 6%. So that number is actually quite consistent with the expansion of our branch network for both the Santander and the Banesto and Portugal businesses.

At Santander Consumer Finance rising costs have been due not to just growth projects but also to the inclusion of drive which does not have a significant impact on the group as a whole. It's less than 1 percentage point but it does have a significant impact on Santander Consumer Finance, 13 percentage points. And Abbey, of course the perimeter effect does contribute as well and so apparently costs are up more significantly.

They're still continuing with the cost rationalizing process. However, this year we'll be spending, again, less money than last year. Our budget, in fact, is going to be down 3% in terms of costs versus last year in Sterling. And finally, the Latin American countries are basically on target and like in Europe, any cost increases are due to business expansion projects and to the launch of new products. Number of branches has grown 7%, number of ATMs is up 14%. We now have 1,800 more ATMs than in June 2006. And, also, as well as in retail banks, projects to develop global businesses and those connected with technology and the single brand have also had an impact on our costs this quarter.

In summary, efficiency is up significantly both because income is up and also because costs have been successfully managed with these two drivers I've mentioned - control, on one hand, but also business expansion and financing -- business expansion on the other.

The fourth highlight in our results are provisions. On the chart on the left you can see that total provisions for the group are up 37% versus the first semester last year. If we subtract drive, provisions would be up only 20%. A 20% provision increase when the Group's investments have grown by approximately that amount means that growth in provisioning is very much in line with the growth of our investments. This growth was due to the rising, specific provisioning offset, partly by lesser needs for generic provisions as we will see in the next slide.

As for the last quarter, second quarter in 2007, the rise versus the first quarter was due, in part, to again an increase in generic provisions. In the first quarter we released 40 million as a result of lower balances with non-banking correspondents. We've increased our specific provisions and that increase has been divided almost equally between Santander Branch Network. Portugal and Latin America had different effects that we will look at later. However, we are always talking about very small increases as shown by the overall result of the cost of credit in the first half being .08% for the Santander network and .05% for Portugal, so we're talking about really very negligible amounts.

This increase in provisions, on the other hand, is in line with the performance of the Group's results. In fact, if we look on the right-hand side at the net operating income, net of provisions, you'll see that it's growing at 38%. A lot of the products that we are promoting right now give us very good margins but also increase provisions. And that's why I've said there's been a 20% increase in overall provisions. A 20%, 37% in specific, in margins, which shows that both parameters run parallel and that's something you always have to look at how well these are matched when you look at provisions.

If we now look in a bit more detail at each business area and its provisions and we compare it with the first half of 2006 and concentrating mostly on specific provisions which are the ones that really make economic sense or a proxy for risks and their quality, you can see very clearly two things. First, the growth in specific provisions, half of it in Europe was due to drive to the consolidation of drive results and that is the reason for over half of the increase in Europe. And Latin America the biggest impact was activity growth and the change in the business mix we have experienced.

In Mexico, especially, there's been an impact because of the growth of our credit card business. We have experienced in Mexico a rise in the risk premium for credit cards although our NPL ratios are very acceptable and still lower than those of our competitors. We should not forget that in Mexico the margin credit cost for credit cards is approximately 20 points and the reduction in generic provisions was mostly due to the lower needs of the wholesale banking business in contrast with the rise we experienced in previous quarters because of the launching of major operations. And now since they're syndicated and off our balance sheet have freed up a lot of generic provisions; Brazil, because of activity growth.

Fourth -- sorry, the fifth highlight is the soundness of the balance sheet. And here I'd like to underline the fact that this good performance has been achieved while maintaining very high credit quality standards and a very solid balance sheet. Our NPL ratio remains at .83%, same as in the first quarter of 2007. Our NPL ratio has remained constant and that's without taking into account the change in our criteria in Portugal which, on a like for like basis, would have meant improving our NPL ratio by 5 basis points, down from .88.

Hedgings are still at very levels, 169%. We have generic provisions for our almost 6 billion in our balance sheet. Overall, our provisions are 9 billion for 6 billion generic of 3.1 specific. So really our solvency is extremely high. Together with risk management, another of our priorities is the efficient use of capital. In June, our [BIS] ratio was higher -- was over 13% with a better breakdown than in previous quarters. Core capital up to 6.27%, that's 3 basis points higher than in March, 10 of these from the sale of our Intesa Sanpaolo stake as a result of which our core capital rose for fourth quarter running and that's not just due to our revenues but also to very active management of our risk weighted assets which grew under 10% compared with a growth in our lending business of 16%. This concludes the first part of the presentation which I have summarized the results of the second quarter and results of the first semester. And now I'm going to go to the floor to Jose Antonio Alvarez so he can tell you about the performance of each of our business areas.

Good morning. As the CEO said I'm going to talk about the different business areas and, as usual, we're going to begin with the main ones, the geographical areas, continental Europe, Abbey and Latin America and then I will explain things by type of business - wholesale banking, retail banking and asset management and insurance.

As a general idea, I can say that very few times have we offered results with such recurrent growth rates as we are doing so far this year. If we start by continental Europe, attributed profit has increased by 45%. I think this reflects a very high growth of revenue by almost 30% in mature markets and costs are growing at 13%. There's a slight perimeter effect which is only 2 or 3 points. It doesn't really change things much. Instead of attributable profits growing by 45% without the drive effect, it would be growing by 42%. Therefore, in our model revenue are growing much more than costs and the gross operating income grew more than double the pace of costs lifting the operating income by 41%. And the other businesses have also had a very good semester although the trading gains had obtained in the first quarter excellent results because of lots of operations in the market but they are still growing quite well in the second quarter.

If we take a look now at the main units which make up the area of continental Europe, we see if we start on the revenue side that all of them are growing at very good rates, more than 15%. In the case of Banesto, where we have 14% increase in revenue, in the earnings presentation we mention that the [ALCO] effect was important there. But excluding that effect, it would be growing at 20% its revenue.

The CEO also mentioned that we are controlling our costs well. It's under their consumer finance. Here we have the drive effect that I will mention later on more in detail when we talk about this specific area but we see that the net operating income is growing significantly in all areas. Finally, attributable profit in the network is growing by more than 30%. In Banesto, if we exclude the ALCO effect, it would be growing at 22% and in accounting terms is growing at 12%. In Santander Consumer Finance, the profits were up 25%. Although in the second half of last year there was a specific operation which meant that [extride] is growing recurrently at 15%.

In Portugal there is an impact of the capital gains although the -- it's impact is of only 8 points on the bottom line. Without that it would be growing at 20%. And in Europe, excellent results for Global Wholesale Banking which is based on the increase of customer revenues and investment banking and treasury.

So the main driver here is still the increase in customer revenues. In the Santander Branch network, we see that the earnings show a new record. Here we have a combination of an increase of volumes with a very good management of the spread. The improvement of the liability spread has been very significant in the past 12 months but the asset spread has increased, so in the scenario of increasing interest rates means that the management of the network is very good. In terms of volume for growing at a lower pace of 13% and this is due to a slow down of the mortgage market and the fact that we are comparing with the second half of 2006 which was particularly good.

This good combination of growth and volume was a good evolutional performance of the spreads means that the revenue grows more than cost and, therefore, the cost to income is below 40%, 38% now. And the net operating revenue is EUR 700 million in the second quarter of 2007.

And I'd like to remind you that our strategy is - we want to be your bank. And this is getting very good results in the number of linked customers and the -- in our quality surveys we see that we are improving our quality and this makes it easier for us to obtain more customer revenues in the future in our Spanish network.

Banesto, I think, its figures are well known. It is still growing at 27% in terms of activity, 20% is the growth of the net operating income. Costs are increasing by 4.4%. Therefore we have an improvement in efficiency. The quality of credit remains at very good levels. 27% of the increase of that is supported by SMEs. So I would say that the quarter for Banesto has been excellent but I'm not going to say much more about it because the Banesto team already gave all the information in the earnings presentation.

Santander Consumer Finance - The impact of increase in interest rates and prices takes its time. And we have some additional elements that have affected the performance of this business, the increase of VAT in Germany. And this has penalized our activity and the activity has dropped by 1% because of that. But the performance in the first -- in the second quarter has been very good and there was a 6% raise in gross operating income.

In the case of drive, which has a significant impact here, its figures are better than our expectations in an environment where it has been able to improve its spreads and, at the same time, it has been able to improve the FICORs in the first half of the year. If we were to take a look at this area without drive, its attributable profits are growing at about 15%. And if we take a look at the figures it would be growing at only 8% because last year a building was sold which generated a capital gain of 20 million for that period.

Portugal - In Portugal, growth is based on customer growth and that of the SMEs were growing very well and earning market share in individuals and SMEs and on the funding side we are growing more in mutual funds and capitalization insurance.

The results for the semester, while I already mentioned the capital gains, I also mentioned that in the bottom line of the account it had an impact of 8% instead of growing by 20%; it grew by 20%. The impact therefore in attributable profits is only EUR 16 million.

Portugal - While given the economic situation in Portugal, we're doing quite well. Costs have remained under control and the cost to income has also improved by 2.3 points. And provisions remained moderate. Here we've had a change in the criteria mentioned by the CEO which did have an impact on the specific provisions.

Abbey - What we see from Abbey's accounts is a consistency. I remind you that we wanted our revenue to grow by 7%. They're growing in Sterling by 8% and Euros 10% in line with our target. This 8% has to be put in the context of a British market where retail banking is still growing at rates of 5%. Therefore, we're doing significantly better than the market. On the side of costs, we're still reducing costs and therefore the net operating income is growing at 20%. So it has remained constant in the first half of this year.

If we take a look at the main highlights in Abbey, we are making a lot of progress in our plans to launch product. We just launched the credit card business that Abbey had sold and that we repurchased from [ABNA] and Parthenon is right on schedule when we decided to implement it. There is an improvement in the spreads, volumes are growing, although on the next slide I will focus more on volumes and spreads by type of product. And efficiency as the CEO said, is up 50%. I remind you that our objective for 2008 is to have a cost to income of 45%. Therefore, we're on our way and we'll probably achieve that. And I remind you that a year ago we decided not to carry out or lend through Cahoot because the personal loans through the Cahoot network had a very low profitability. So we decided to discontinue that UPL business in Cahoot.

Mortgages are growing at 7%. There has been a fall in the spread of 7 basis points in a market where interest rates have increased by 100 basis points. Normally there is an impact but this takes a few quarters to be noticed in a complex market when some of the operators have made profit warnings derived from this. Our policy has been a policy to protect the spreads and we see that our net lending is GBP 2 million and our stock is growing at 7% and we are protecting our spreads very well which is giving us good results.

In UPLs activity it has slowed down. We closed, as I said, the Cahoot operation but we have increased our spread significantly by 91 basis points which gives us a combination which is more favorable in terms of profitability. The 4% of growth in the stock were growing in our network of Branch offices that (inaudible) percent year-on-year compared with 3% for total deposits and the spread has improved -- deposits has improved by 21 basis points.

The India investment business activity rose 44% year-on-year in API with an improved return. The push came from Santander asset management. In short, a good quarter in business growth in the most profitable segment and products as well as decisions taking to improve spreads in the least profitable areas.

Latin America - Latin America has had an exceptional quarter thanks to the excellent performance of customer business and financial revenues in Brazil where we took advantage of the market's conditions. Attributable profit in the first half was 28% more than in the same period of 2006. Profit before taxes increased 35%. Costs are growing at 17%, exchange rate impact well -- has had an impact of 7 points against the Euro and 3 against the Dollar. And we see that the net operating income in retail banking is growing significantly. The net operating income, net of provisions, is growing at 35%.

If we take a look at the nine countries in Latin America, the good performance is generalized. All units registered strong growth in gross operating income and combined with good management of costs produced rises of more than 50% in operating income in Brazil and Mexico, 50% in Chile and 31% in other countries.

Growth in attributable profit has also been quite significant. Brazil, up 38%, Mexico up 26% affected by the higher tax rate, Chile up 27% and private banking continued to grow at a good pace in gross operating income enabling that to absorb its investments in capturing customers and grow by more than 20% in net operating income and profit. If we take a look at country by country, in Brazil the macroeconomic environment is very good. Financial figures are growing at 20%, lending and deposit interest rates have gone down significantly by almost 400 basis points. The market expects it to drop even further.

In this environment, very favorable environment, we've earned market share in lending more to individual customers where we grow 20% and, therefore, in terms of activities our rates are very high rates of growth. This environment leads to strong increases in the revenue. Gross operating income grew 40%. Net interest income was up 30% and trading gains are also obtaining very good results. Costs are in line with what we announced in the investors day. The improvement in efficiency is quite noticeable, 8 percentage points. And finally, the risk premium has stabilized, 3.9%. It has remained at those levels for three consecutive quarters.

In the case of Mexico the macroeconomic outlook is very good. Savings are growing at 12%. Once again, just as in Brazil, we're growing faster than the [system] particularly among individuals and SMEs because our lending portfolio grew 24%, after lending to the government it fell by 4%. And this is due to increases in our activities with customers. We have more payroll accounts, we have also granted more credit cards, we're growing more than the market, clearly, among individuals and SMEs and therefore our net interest income is growing 45% and 21% in fees and insurance caused by the fact that they are growing, as we already announced, because we opened new branch offices and increased the number of ATMs. But despite that, the efficiency ratio was 7 percentage points better. Net operating income increased 67% in the quarter. We already mentioned that the cost of credit in credit cards has gone up while the risk premiums in consumer loans and SMEs have remained stable in the last quarters. So the performance of our franchise in Mexico is excellent as we've seen in previous quarters with increases in market shares and making our revenue and profits grow.

In Chile the economy is growing at 6%. The financial system grew by around 20%. We're very focused on growth among individuals and SMEs. There we're growing at rates of 20%. And in -- among companies the activity has fallen by 5%. The number of linked clients is growing 250,000 clients and 115 of these are linked clients and the gross operating income is $200 million. Here the UES does have an impact when the inflation is higher. Normally the results -- well, are higher and so inflation has gone up and this has an effect on the U.S. revenues, and in attributable profit 7.23% less capital because of the sale last year.

In secondary segments, retail banking represents 73%, Wholesale Global Banking 21% of profits after taxes and asset management and insurance 6% or 355 million. I'm not going to say much about the retail banking, the figures speak for themselves. All the units are showing strong growth rates but I would like to focus more on Global Wholesale Banking which I mentioned previously. And I'd like to mention 3 points.

The strong increase in revenue, 47%. The growth of customer revenues I'd like to point to the sustainability of that increase in customer treasury, a 45% year-on-year. The equity business is growing 50%. So this has been an exceptional semester for Global Wholesale Banking and the Global Transaction Banking which includes the cash management business of lending and custody is growing at 9% because in some cases lending is not growing in Global Wholesale Banking. As we can see from the fall of generic provisions that for two consecutive quarters we've seen related to the fall in the volume of lending associated to this activity. Therefore, wholesale banking continues at very good rates with a fall of the generic provisions and, therefore, we can almost double last year's results.

And finally, in asset management and insurance, if we take a look at each one of these three areas the insurance activity is growing at rates of 35% in a semester. The revenue from insurance activity, EUR 942 million, a very significant figure, is growing at rates of 35%. In pensions there is a [fall] this is related to the (inaudible) in Latin America.

As you can see on the right-hand side, the revenue in pension funds fell by 7% in Latin America in Dollars. They fall more in Euros which explains a total fall in Euros of 8%. And mutual funds have recovered basically in Latin America. Last year we had lower levels. Right now they have recovered and are growing at rates of 10%. Therefore, these areas of insurance pension funds and mutual funds which basically affect the income statement on the fees and commissions line are giving us EUR 1 billion in revenue per quarter.

And now the CEO will make the last two parts or chapters of the presentation.

Our CFO has already wonderfully explained the different business units and their specificities this quarter and this semester and I'll conclude the presentation with some of my conclusions; but very briefly I'm just going to discuss the offer that the consortium presented on July 20th for ABN AMRO.

On the 20th, as you soon, we published all the related documentation for the bid, maintaining as you know, the price of EUR 38.4 per share. What has changed is the percentage to be paid in cash which has risen from 79% to around 93% and the Santander retains its participation in the joint bid.

The period began on July 23rd last, will conclude on October 5th unless it is extended by the regulators or for any other circumstance that might develop. Right now we have no further information to give you, no further news to convey and so I'll say that since our policy, as you know, that any announcement about the offer will be made jointly by the consortium you will understand that I will be making no further statements or giving you any additional details on this operation.

With that, I would like to close by saying that we've had an excellent semester at the Santander. We've, again, had record profits with our EPS up 21%, very solid results in terms of revenues and efficiency, with current revenues as well, and efficiency as main growth engines. So it's a very sound balance sheet horizontally because all of the businesses, all of the geographical areas, are growing their profits by about 20% and some of them more. Plus the underlining business is growing very significantly, especially in Latin America and wholesale banking. But really every unit is growing its customer business. In addition, very good risk quality ratios and capital ratios and we're very pleased because at the same time we're expanding our networks, we're investing in global projects, we're investing in IT and, therefore, we expect to be able to continue pumping additional revenue that will bring about further improvement in productivity and efficiency.

In fact, right now as we do every year, we are involved in a process of discussion of the I-10 which is our three-year plan because, as you know, since 2003 we have been launching an annual three-year plan which we revise every year. And so now we're working on I-10 updating these three-year plans, extending our vision one more year and the only thing I wanted to add is that in the last year this medium term, three-year, vision for launching projects and activities regarding future earnings has been, I think, one of the pillars contributing to this growth. For that reason, I am confident and I say we can really be confident of growing faster than our competitors consistently.

In this chart we are comparing ourselves in the first quarter, because we really only have published results for the first quarter, with a series of banks which are our benchmark, our peers, with whom we usually compare ourselves as far as everything. And comparing ourselves with this peer group, and I don't mention any names but you probably can imagine who they are, you will see that our EPS without extraordinary revenue in the quarter - because this is only for the first quarter, first quarter with first quarter comparison - is going up 31% when the average for this benchmark is 9%. And we are amongst the top three in EPS growth in this first quarter compared with the first quarter of 2006 amongst this sample of 15 banks.

How do we see the coming quarter, very briefly? We truly think that we will be able to sustain very strong growth rates in our customer business and, therefore, with active spread management by units and businesses, we expect no major changes in the revenues for the group as a whole. So we expect solid revenue growth to continue, solid net interest, income and fees growth, costs on target with our business plans, part as a way to manage our global businesses and our ordinary business and part to finance expansion plans. And we also believe that our credit quality and NPL ratios will remain where they are so stable credit quality, stable risk premiums and that means that in one way or another we can confirm the target we announced for our attributable profits without capital gains in 2007 are over EUR 8 billion.

And that's all. Thank you very much. We will now start the Q&A session.

(OPERATOR INSTRUCTIONS) Javier Bernat from Caja Madrid.

Several questions. The first is, what would be the impact of lowering of interest rates in Brazil on that unit? Second, can you update your subprime exposure in the U.S., especially through drive? Third question, why are you divesting pension business in Latin America? How does this strategy compare with that of your main competitor who considers it a strategic business. There's three others but let's begin with those three.

I am going to answer part of this question and then perhaps the rest Jose Antonio Alvarez will answer. In Brazil we have been experiencing lower interest rates for quite some time and, in fact, we do expect further lowering interest rates because they are still very high and so it's probable that as the country's economy is able to, interest rates will tend to go down.

In terms of the banking business, with a very strict forward interpretation we could tell you that this lowering of interest rates will affect our margins, lower margins on our deposits. But as you know, in Brazil there is no margin on deposits and so, therefore, the impact will really only be felt in assets more than liabilities.

On the other hand, undoubtedly, and we're seeing that very clearly already, this convergence of interest rates in the Brazilian economy is actually driving the country's activity and as a result growth both in lending, consumer credit and credit card credit and corporate lending. And so as has happened in other markets we've seen in Spain since the Euro was introduced and in the last year in Brazil, although these effects are always very mixed and complex, lower interest rates generally mean more banking business, better risk quality - and that's important too - probably also will free up a lot of their [compulsory] deposits and so we'll probably have better, more profitable, fund business and it will probably have a negative pressure on our liability spreads. But overall, I don't think it's too much of a concern. I don't think that lowering interest rates in Brazil are any kind of a threat; quite the contrary, if anything.

Why are we selling the pension business in Latin America?

Simply because it's a business that we've been thinking selling for some time. In fact, I think it was two or three years ago that we negotiated with someone, didn't actually sell it because we didn't reach the asking price that we felt was right, but right now we're negotiating again. These are well advanced and will probably end soon with a sale and we simply view this business as not being one of our core businesses and so if the price is right we feel it appropriate to sell regardless of whether we need to finance the ABN AMRO operation or not because some people have connected the two things and, in fact, they are completely unconnected because, as I've said, years ago we already thought of selling this business.

Core capital at the end of 2007 if we were to get ABN AMROs assets; well it's for certain no change, we still think that it will be up around 5.3%. We have no new views on this matter.

How do you see the real estate business in Spain? Do you agree with the view that there is about to be a sharp price drop? And if so, job creation continues and the GDP stays at 4 -- grows at 4%, how will it affect the Santander? And the second question is about the evolution spreads in Europe, in Spain, in Portugal and mostly on Santander Consumer Finance.

Well, the real estate market question comes up again and again. We've been talking about it probably for over a year and one-half. And forecast -- well, more pessimistic forecasts about a market crash are just not happening. I think the general, more reasonable consensus, is that the market will gradually decelerate and, in fact, it has been showing a smooth, slow deceleration. Price increases are also decelerating but gently, nothing (inaudible) overall. And then by segments there are some segments in the market which are being affected more than others.

Today, in fact, I was reading in the paper that the IMF, which talked about the Spanish economy and whether it's heating up and what have you, but talking about this point the real estate market the IMF - somebody called Chas Collins who is the Deputy Director of the IMF Analysis units - said that they foresee a slowing down in Spain of the real estate market which will be less marked than expected and, again, the same thing that there will be a slowing down of price increases. But we don't actually see any indication that could make us think anything different. When I say indication I mean nothing to do with the demand for mortgages or growth in lending in general in the real estate business, developers and so on or prices. So we really see no indications of that type. On the contrary, we do see indications of a very slow cooling.

As for spreads in Europe until the end of the year we think that they will stay fairly stable. We don't -- even with rising interest rates -- well, of course if interest rates rise our liability spreads will improve a little but assets will remain constant and we don't expect any major change.

Subprime exposure in the U.S. will drive -- what was the question?

Update us on your subprime exposure through drive in the U.S.

Well, we have a consumer finance business in drive. It's not a direct business, it's through car dealers. And in the U.S. the car finance business is highly segmented. It's very technical. They have the FICO rating system and our business deals with the prime and near-prime segment; only a little bit with sub-primes. We haven't changed our policies.

Our policies are performing well as Jose Antonio Alvarez told you earlier in terms of spreads and provisions; in fact even better than we expected. Again we've not changed our policy, we've not changed our strategic approach for that unit, so we're still targeting the same business model, the same customer segments we were targeting before so really no change if that's the question in that respect. No update at all because our business model and our policy is the same.

And if you're asking for an update in terms of more up to date figures, I'll tell you that the more up to date figures are even better than the ones we published for the first quarter.

[Eva] Hernandez from Espirito Santo.

What are your views with regards to Capitalia? If you are successful in the ABN bid, will you sell it or take up more of the holding?

I guess she's referring to the 1.8 we have in the consortium. Well, our position in Capitalia when we took it up, when we took up that stake, it was a financial investment and we said that very clearly from the start. And since it was a financial investment it means it's always available for sale.

Two questions from (inaudible). Securities that's been exchanging in the NPL ratio of 418 million. I wonder if you could tell us more details by division. And a second question about Chile, why has there been that quarterly reduction in the deposit spread and why that strong reduction coverage when NPL issues are actually improving a little?

I can't really, of course, give you the breakdown by division off the top of my head. But I do have it somewhere, so I'll just read it out. Of the 410 million increase in Euros of our NPL in the quarter, 58 are from the Santander network, 17 from Banesto - these numbers as you will see are very small, not substantial considering the growth investment of these units - Santander Consumer Finance, 70, of which 30 are from drive, Abbey up 20, again a negligible amount and mostly due to what Jose Antonio Alvarez was saying before about the UPLs, the unsecured personal loans which we've discontinued but we still have a certain lag and they still generate a bit of NPL but that's just 20 million, Portugal 46 and Latin America 200.

I spoke about provisions in Latin America in my presentation and really the most important point there was credit cards in Mexico where risk premiums are clearly up from 6%, 7% to 10% - but margins are still extraordinarily high and so we feel that risk premium is more than covered - Brazil, up 64 million basically because of business growth and Chile 38 for the same reason. So the numbers are all, as I've said, not substantive and based on business growth and investment growth.

As for Chile deposits - I understand there's been a reduction in the spread in Chile because there's been a slight change in the mix. We've grown more in term deposits than in-kind accounts and that, of course, makes for a smaller spread. And also, in term deposits we have grown more in corporate SMEs than in individual customers and you get less margin there. And that's the basic reason for this reduction in our spreads.

As for NPL rates in Chile, they remain at very reasonable levels, up a little bit, 18 basis points this quarter. It's at 193, our coverage (inaudible) at 31%, down a little, 16 basis points, but there's really nothing of note to say about that.

Carlos Garcia from ING.

Why that 134 number and other results in Brazil?

That's provisions before tax contingencies, approximately 40 million and labor contingencies 90 million which would bring -- which we've considered advisable to establish.

[Yawaba Garcia], Fox-P.

Why is that strong ROS in Portugal in the first quarter? Is that sustainable?

Well, it's a one-off, as I've said. Don't know if they heard you. I was saying that it's because the sale of the stake the bank had in BPI shares and of course it's not sustainable. It's a one-off.

Luis Pena, MG.

Asking for more details on other results for the first quarter 2007, those minus 264?

Sorry, that's actually Brazil. It's what I was just explaining about Brazil is 14 million in tax contingencies and 19 million in labor contingency provisions; nothing consolidated results but it's from Brazil.

[Pia Alexander] from [Odo].

Asking whether we have subprime mortgages in Abbey's books in the U.K.

No. We don't.

Ignacio Cerezo from JPMorgan.

Asking why is this such a big jump in the specific provisions in continental Europe in comparison with the first quarter - 277 million in the second quarter versus 140 in the first. Sounds as if you concentrated in the domestic network. Is there some specific issue? How much was the dividend contribution from Sao Paolo in the second quarter and what do you expect in this context for the future?

Well, that 137 million increase is distributed between the Portuguese network -- the Spanish network, Portugal and Santander Consumer Finance, the domestic network in Portugal, and so nothing special, it's just seasonal. If we look at the first and second quarters of 2006, same thing, it always grows more in the second quarter than in the first, so nothing special.

And as for dividends from Sao Paolo it's 18 million and obviously since we've sold our stake they won't be coming in in the future, but of course also when you sell you will obtain the revenues derived from the corresponding liquidity but not all dividend revenues come from Sao Paolo. There's other stakes that generate dividends (inaudible), basically, is the biggest.

Lurdes Pinho, BPI.

Asking again about the 160 million in provisions.

That's already been answered.

But asking whether the provisioning is for early retirement or if it's any kind of cushion. Don't know if you want to add anything else? No. You've already answered that.

Finally, from Fidelity, what is your exposure to U.S. subprime ABS and CDOs?

None. No exposure at all.

That concludes the questions coming in through the internet and we are now going to hear any questions coming in through the phone, if any. Antonio Ramirez, KBW.

I have a couple of questions and the first is about Abbey. And you are on target, or in fact above target, and the question is once the person on deployment is done at the beginning of 2008, how will the costs evolve? Can we expect additional cost reductions or will all potential savings be reinvested in the bank's expansion? That's my first question.

And the second, although you've already said you're not going to make any further statements about the ABN operation, I wonder if finally the consortium is unable to acquire ABN, what other acquisitions might you consider? Because obviously the group is growing very strongly with its current perimeter but the ABN operation would give you an additional growth pillar, especially medium term. So what would be the next step? Are there any other things that you might be interested in if you didn't buy ABNs assets?

And I wonder if you can tell us something about the funding for the ABN AMRO operation? The chairman said in the AGM that it was going to be 4,000 in ordinary shares and the rest convertibles but I wonder if you can give us more detail about that? Thank you.

As for Abbey, it's true that we are on target for 2007 and something about target. But we don't think that by year-end we'll be too far from the targets which, as you know, are EUR 1.2 billion in net attributable profit with a breakdown of 7% revenue growth and 3% cost reduction. 2008, it's true that [Parthenon] will be fully operational and we think it will generate opportunities of all kinds, especially in that first stage. Opportunities to improve our efficiency in sales and retail but probably also further cost improvements. I don't think that's something we need to work on now.

During this year when we start working on the targets and budgets for Abbey we'll be looking at it in more detail. But I think in principal, from my own experience and understanding of how things are going, I don't think that in 2008 with Parthenon Abbey will, again, cut its costs in absolute terms. This year they're down 3% but I don't think that next year Abbey's cost targets will also be going down even if only slightly.

I think our targets are aimed, really, for next year should be to maintain constant costs, not to have costs grow for a couple of years. 2008 maybe and even 2009, that should be our main aim. But I don't exactly know whether we will manage that or not because we have to look at that much more carefully and in detail when we work on the budget. But basically that would be our aim, overall.

However, having said that, that's for current business perimeter but we've said, and we'll be more specific in the future, that we want to move towards extending Abbey's perimeter and completing its business lines so it can be a full service retail bank with SME business, with -- or business banking as they call it in the UK, plus corporate. And that's going to require investments and that's going to mean that over the next years we will have to invest so that we can transform Abbey into what we would like it to be and that's basically our views on Abbey. But we'll be more specific as I've said in our three-year plan. And in even more detail with firm targets in the 2008 budget.

What would happen if we don't get ABN?

Nothing, as you can see quite clearly. ABN is an interesting unique opportunity for us. Some colleagues have called it - sounds almost too good to be true. Well it fits with our goals and our interests. But if it doesn't work out, then, well that's fine. We have, I think, everything we need to get over the disappointment which we certainly would feel but that would be it. The group will continue to grow successfully, organically. You can see us growing very fast and we will continue to grow very fast in the coming year and beyond because we have potential in markets where there is still a high growth rate.

As for financing the operation, there's nothing new for now. We will be more explicit further along but no basic changes versus the scheme the Chairman explained in the ATM in terms of debt and capital. We haven't changed any of those criteria.

Arturo de Frias from Dresdner Kleinwort.

Good morning. I have several questions, too, a couple about the business and a couple about strategy. Two about the business - in Spain I've noticed a certain divergence in the ROEs of the Banesto and the Santander network which I think are interesting because they both have excellent profit growth but Banesto ROE is down a little while the Santander is growing slightly. Is that because Banesto is following a capital intensive growth policy or because you are securitizing more in Santander? I wonder if you could explain why that is and what the trends would be for the future?

And my second question is also about Abbey. Growth in your financial margin I thought was spectacular, 11% up, when it seems that in the UK there is quite a significant growth. Are you still feeling able to maintain your spreads or to grow your net interest income and have two digit growth in 2008?

And then a couple of strategic questions - don't know whether you'll be able to answer them - one about ABN. If you were to sell any other of these -- if any of the ABN divisions were to be sold and the consortium found itself forced to raise the price percentages that you've agreed between the three partners would remain constant? Or would whatever bank would be more interested in buying that extra division, be the one that would have to raise its offer and put more money in it.

And finally, fourth question, maybe also hard to answer. About the contract you have which wouldn't allow you to sell until 2010 if I'm not mistaken; but if there's some legal possibility of you transferring to a set party that contracts to that without selling [sovereign] you could, if you wanted to, end your or reduce your presence in the U.S.

I'm going to let Jose Antonio answer the question about the ROEs for the Santander and Banesto one in connection with our securitization policy and I'll answer the other two.

Okay. About Abbey, it's true that growing about sectors averages in general, especially the retail business because overall it's growing 8% but the retail business is growing 11% which is certainly a lot higher than the growth rates for the rest of the market.

How are we managing that? Well, we're doing two things. On the one hand we're curtailing our competitive intensity in mortgages. We're reducing our market share in mortgages and focusing on better managing our margins. In fact, Abbey's mortgage market share was 9% and this year I think it's down to -- this quarter I think it's down to 7 so we've lowered our market rate and we're just not going to be obsessed with maintaining a 9% market share in that business unless the profitability is high enough. And that's why the competitive pressure on margins and mortgages doesn't really apply to Abbey, although we have lowered our spreads on the profitability in new mortgages clearly as part of our lowering market share.

On the contrary, rising interest rates have been focusing on the liability side of customer funds with growth in kind accounting, saving accounts and investment products as you've seen, we are obtaining better spreads in these customer fund products and we have greater growth, in general. So one thing offsets the other and overall we are achieving the growth rates you've seen of 11% in our revenues from the retail business. Not overall, because Abbey's revenues are growing, I think, overall at 8%. And that's a policy that we will maintain and that's why, as I've said, we expect our overall revenues to grow between 7 and 8 although the target is 7; and we will continue along these lines with the same policy growing the customer funds business, benefiting from the higher interest rates in the UK and a customer policy which is in line with Abbey's strategy without being so obsessed with our market share in the mortgage business and focusing more on other aspects. So this whole strategy is giving us this better growth rates on the sector overall in the UK.

Questions you are asking which you called - strategic - I can't answer the first one, you are right, because there's a very big - if - what would happen if?

Well, what would happen if -- well, we'll see when an if happens. And then about sovereign I really don't know. Do we have a contract? Our scheme with sovereign is to maintain the status quo until the contract comes due in 2010 as you've said. And it was really a very technical question assuming that we wanted - and that's also another big if - we wanted to do that, then could we? Well, I really don't know actually. So we haven't thought of it, anyways.

And as for the ROEs for Santander and Banesto, I'll tell you that Banesto has been growing, not this quarter, but constantly faster than the Santander network in terms of risk weighted assets. The difference in the semester is due to the fact that we've securitized about EUR 6 million in the Santander network and I think in Banesto maybe 800 million in the semester have been securitized and so, obviously, considering the growth rate of risk-weighted assets, it's had an impact.

There's no difference in the policies. It's just been a question of timing. I think Banesto in the year was planning to secure ties of various amounts and some will happen in the third and fourth quarter. It's not that we have different policies for both. It's just that they have more securitizations in the first quarter in Santander -- or semester in Santander.

Chris [Logan] from Goldman Sachs. Please go ahead with your question.

Thank you. Good morning. It's Chris Logan at Goldman's. A few quick questions. First of all if I can just follow-up. You clarified very clearly what is included in the other income line in Brazil, 134. Now do you have some visibility on that going forward? You said these are tax and labor related provisions. Do you have any visibility as to whether this should be an item that should carry on? If I look back, this has been between 50 and 150 million in the past, negative per quarter. What should we expect going forward?

A second question would be on Abbey. And as you mentioned, the growth or expected growth in unsecured lending and partly it's the agreement that you have to retrieve some of the credit card business. Could you give us indication as to what -- whether there should be any step change in the volumes in the unsecured loans or if this is just going to be now a gradual growth going forward? And secondly, what this will have as an impact on your expected loss whether provisioning should go down? Provisioning ratios should go up as a result of an increase in unsecured lending.

The other question I had was on the networks in Spain, something in Banesto, the spread development. Clearly the sharp widening of spreads in the Santander network in this quarter by 21 basis points and a quite different behavior at just 8 basis points expansion on deposit spreads in Banesto. I was just wondering what was the difference in those two deposit bases? If there's a difference in the size of the core deposit base that allows you to expand more widely on Santander than in the Banesto network on the deposit spreads.

Finally, just a more (inaudible) question. You are very active obviously in the secondary loan market both in terms of syndications and securitizations. What has been your experience most recently over the volatility we've seen and the widening of spreads, etc., and has there been any difference in the behaviors that you can see from your counterparts that you are dealing with in as an active player in that market? Thank you.

Well, the first question was on the other income in Brazil. We talked about those 130 million and we said that that was due to labor and the tax contingencies. I would say that the recurrent ones are the previous ones, not the ones for this quarter. So in the future we would be showing a figure similar to those we showed in the past. So the figure for this half of the year is not really normal, the normal that we would expect. The normal figures would be the ones we had before that.

And your second question was on UPLs, unsecured personal loans, in Abbey now that we launched the credit card business. Looking forward, the volume of loans has fallen because we discontinued activities through Cahoot. Of course with an increase in credit card activities, this will tend to increase. But we're not thinking, really, of having a very aggressive growth policy in UPLs. We would like to grow more on credit cards based on Abbey's customer base and the same thing for personal loans. The expected loss as an average -- I don't think there are going to be significant changes although it is true that the UPLs would have a higher loss but not too different to other credit card businesses in the UK when it comes to credit cards.

And yes, the Santander spread has increased more than Banesto's in Spain and there is a clear difference which are the core deposits. The deposit structure in the network, there are more core deposits in Santander than in Banesto. Banesto has more time deposits than Santander. That is the difference of this increase in the spread. And that is the explanation. And in an ongoing basis we are not going to see significant changes in the spreads of mortgages or other tax loans to companies or consumer loans.

And finally, your fourth question was on the securitization whether in the counterpart because of the market situation if the spreads have widened. It is true that since May, or March I should say, since March we started with the American subprime and there has been a slight widening of the spreads. But I wouldn't say that it's very drastic. It's in [Triple A] it's probably 3, 4 basis points, widening of the spread. In Triple A securitization where the rating is lower than the spread is larger. But proportionally it's about the same.

The levels of liquidity are very good, still. The role we play is in prime. The market does not perceive that there is a subprime element there because the market might be worried about the market subprime but we're not seeing that's very active in that market.

Thank you very much for your attention.

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.