Banco Santander SA (SAN) 2008 Q2 法說會逐字稿

Good morning. We're going to begin the presentation of the second quarter's results -- the first semester's results 2008. And we're going to divide the presentation into three parts, as usual. First, I will speak about the Group's main aspects during this first half of 2008. In the second half, Mr. Jose Antonio Alvarez will present the figures for each of the business areas. And, finally, I will briefly sum up our conclusions for the semester and our outlook of the coming quarters.

The first point I'd like to stress is the fact that, in the current economic environment, which is a difficult environment of economic deceleration, nevertheless, the Group has once again demonstrated its ability to obtain earnings with new record profits of EUR2.524b, a little bit -- 22% more than the ordinary recurrent profit of the same period last year.

And I'd like to underscore the recurrence and the solidity of the Group's profits quarter after quarter. In fact, Santander first posted ordinary profits of over EUR2b in a single quarter the second quarter last year, and we have actually surpassed that number every quarter since. And in fact, this year, this last quarter, we've reached EUR2.5b for the first time.

As a result, our quarterly EPS, which was at around EUR0.32, EUR0.33, is now on EUR0.379, which is also a record figure and is also on a very solid quarterly trend. I'd like to remind you that, in calculating EPS in 2008, we're already including in the denominator the total number of shares in which the Santander shares will be converted over the next five years.

As a result, we've obtained EUR4.73b in the first half 2008 in profits, which is 22% higher than in the same period of 2007 and 12% higher than the second quarter -- the second half 2007. And this number includes some profits from ABN, basically Banco Real, EUR291m. Subtracting the financing cost net of taxes, their contribution is -- well, gross was EUR477m, net EUR291m.

And since, as you know, there was no definitive separation from Banco Real, these profits are recorded in the quarter in the equity account method line in financial management and equity stakes, and do not appear within the operating businesses. Last week, we finally had the separation approved and, so, in the accounts of the third quarter, those profits will be incorporated. The EPS for the first half was EUR0.71, which is 14.3% up versus the first half 2007.

These growth rates are based on very positive year-on-year comparisons of our business units in Europe. Profits are up versus the first semester of 2007 by 13%, in the UK, where profits were up 20% in pounds sterling and our businesses in Latin America, which grew at 20% in dollars which is, as you know, the currency we use to manage that area. In fact, growth was 25% if we accounted for it before discontinued operations.

Additionally, ABN Amro has contributed a profit of EUR477m, as I've explained. Comparisons are also excellent with respect to the second semester of 2007 since, as you can see in the charts, every area has accelerated its growth. And the question to ask now is how we can keep up these growth rates in the current environment.

I will focus over the next slides and those at the end of the presentation in explaining how the Santander Group can maintain its upward trend in a difficult banking environment. In fact, the first thing I'd like to point out is that, in such a complex environment, our Group's strengths, our business model and our ability to quickly adjust our management priorities, including prices, spreads, costs, risks and recoveries and the strength of our balance sheet in this new environment, are enabling us to maintain the quality of our results and to remain optimistic about our ability to outperform our competitors and achieve our growth targets.

The first point I'd like to emphasize is price management. Price management has enabled us to improve our spreads, especially for loans, continuously over the last quarters. This management has enabled us to offset the lower increase in business volumes in a general decelerating environment. And, in this context, I'd like you to look at the top right-hand side chart, where you can see that the lower growth in lending is going hand in hand with a faster rise in deposits which, in relative terms, are growing faster than lending when, a year ago, they were only growing at half the rate.

This combined management of prices and volumes is being done successfully throughout the Group and, as a result, all our units in Europe and Abbey and the main Latin American countries are growing notably in their net interest income and, therefore, clearly improving their return on assets.

And this growth in our net interest income, together with growing fee income, means that the Group's most commercial revenues, that is, net interest income not including dividends plus fee income plus insurance, have been growing continuously each and every one of the last 15 quarters. That is, for almost four years now, our revenues have been growing continuously.

This performance reflects the very successful behavior of our units and the solidity afforded by our high degree of diversification, both geographic and by business areas. Also, as you can see on the screen, it's not only the Group overall which has been growing, but also each and every one of the three major geographical units which have been growing quarter after quarter.

The second point I'd like to refer as a main growth engine is our efficiency gains. Our combined management of costs and revenues has given us, in the last two years, jaws at around 10 percentage points and we will continue at the same level in 2008. In this lower growth environment for gross operating income, it is essential to manage costs successfully and we have an excellent track record in this context.

In 2007 our expenses rose by 10.5%; slightly higher than usual for the Group because of ongoing business projects launched in previous years, including the opening of new branches in Spain and Latin America. We have begun 2008 increasing our costs by only half as much, 5.7% in the first quarter, and we're still containing cost growth, and they're currently growing at only 3.4%.

I have said many times that we're committed to an ongoing efficiency improvement and we stay on track in 2008. We've closed the semester with a cost income ratio of 40.4%, which is four points lower than in the first semester of last year and nine points lower than in 2006. We have been, for years now, amongst the top banks in terms of cost income ratio improvement. And this year again, we've not just been one of the best to improve, but also are currently the top Bank in terms of cost income ratio amongst our benchmark, including pretty much all banks except the British.

This performance at the Group level is the result, as you can see in this slide, of the successful jaw management and, therefore, of the cost income ratios of all of our major business units. You can see that our retail network in Spain, plus Santander Consumer Finance in the UK, all have margins of over eight percentage points, even greater in Latin America, as a result of which we see improvements between two and four percentage points in cost income ratios which, I'll remind you, always include amortizations.

The third point in income statement is always provisions. In the chart on the left, you can see an increase of 65% versus the first half 2007 in provisions, similar to what we've shown in the first quarter. The inter-annual increase was due to several factors.

First, again, a less favorable macroeconomic environment which has meant rising NPL rates in some markets where we do business, also the growth in lending which in Latin America was around 20%, to the Group's growth strategy which has meant a change in the business mix in some countries, and to the release of provisions in some units during the first quarter of 2007 which have not occurred this year.

In any case, as you can see in the chart on the right, the Group has the capacity to absorb this increase in provisions. Our net operating income grew by 26%, which has enabled us to increase the result minus provisions by 15%.

Let us now look at the comparison by business areas between the provisions this first half of the year and last year's first half. In the chart on the right-hand side, you can see generic provisions. In this semester, we have continued to assign generic provisions and to increase the total volume.

In specific provisions, there's nothing new. Growth is still located in Europe and Latin America. In Latin America, we continue with the trend of the previous quarters, perhaps slightly faster growth in Mexico and slightly slower in Brazil. In Europe, the largest rises were in Spain, both in our retail network and also in Santander Consumer Finance, because of the rise in NPLs in the sector. Finally, we have smaller allocation at Abbey with excellent credit quality.

Just to give you some details about Spain, which is probably of most interest to analysts, we can see the impact in the increase in specific provisions is being offset to a large extent because of a lower need for generic provisions, since they go against the cycle. If, in the future, there were to be additional increases in specific provisioning, it would have a very limited or negligible impact on our results, since we would start to free up generic provisions. I'd like to remind you in this context that the generic provisions we have in Spain add up to EUR4.4b, or 1.8%, of our lending portfolio.

Fourth chapter is the strength of our balance sheet. Let me begin with risk quality. The trend, as anticipated over the last quarters, is general upward trend for NPLs in almost every market where we operate. This makes sense especially in Spain, where the sector has had several years of continuous improvement and NPL ratios were at historic lows. In this context, although we do see these growing NPLs in the last quarters, our quality standards are still excellent. Our NPL ratio at the end of June for the Group was 1.34% and coverage was at 119%.

In both cases, the main components are in the lower part of the chart. As for NPLs, we can see that, for all the businesses in Spain, that is, Santander, Banesto, Consumer Finance and so on, the ratio is at 1.08%. Abbey, since it has a much larger mortgage component, has a much lower ratio of only 0.7%. And Latin America is at 2.16% after an excellent performance in the second quarter, since last March the ratio was at 2.13%.

And we can say the same about coverage levels. Spain and Latin America remained well above 100% and Abbey is also at a very good level, although not so high because of the lower needs of its portfolio, which is mostly mortgage-based. If we excluded secured mortgage loans, the coverage ratio for the rest would be 150%. These high coverage ratios correspond to total provisions in our balance sheet of over EUR10b, of which generic amount to almost EUR6.3b.

And how do our quality ratios compare? Very successfully, actually, as you can see in this slide. Beginning at the top left corner, we compare excellently with international standards. Specifically, the average for European banks, including our peer group, was in March - this chart is for March, which is the latest figures available - 2.7% in NPL and 73% in coverage, so double our NPL ratio and almost half our coverage.

But also, if we compare ourselves by business areas or by geographical areas, that is, Spain, UK and Latin America, the results are on our side, very clearly, since in all of them our NPL ratios are clearly better than those of the markets. Furthermore, our evolution in recent years has been clearly better in Spain where, especially in the last few quarters, we're doing much better than the banking sector as a whole. Something similar happens also in the UK, and it's only in Latin America that we have lost something of our edge because of our policy of growing strongly in retail products which have a higher risk premium but also, of course, greater returns.

Second point in our balance sheet strength is solvency and, of course, this is a basic aspect in the current environment of intensive capital surges by international banks hit by the loss of value of their assets. There's nothing new here either. As usual, we've managed our capital in the most efficient way, considering our shareholders' interests, and we've maintained core capital ratios at over 6%; using Basel II, 6.32%.

In June, the Bank of Spain circular on determination and control of minimum equity came into effect and this is why we're providing June's figures using Basel I calculations and also Basel II, the new ones, which will be the ones published from now on. As you can see, our core capital improved under Basel II because of the positive impact of applying our own IRB models, approved by the Bank of Spain, in Abbey's case jointly with the FSA. Part of this improvement is offset by incorporating operational risk to the model and some limits on generic provisioning.

Summarizing, our results have continued to grow very notably throughout the whole income statement. This is what we call vertical quality. Gross operating income is up 16%, triple the 4.5% rise of expenses or costs. Combined management of costs and revenues has brought about an increase in -- of 26% in our net operating income, which has enabled us to absorb the growth in provisions and to have net operating income after provisions to rise by 15% and ordinary attributable profit to rise by over 22%, largely due to taxes, since those corresponding to ABN's revenues are already deducted in the income accounted by the equity method, or results are entered net.

All of these increases correspond to the Group's management, that is, without taking into account extraordinary capital gains obtained in the first semester 2007. In 2008, there were no extraordinary capital gains. Including the EUR582m capital gains in the first half last year, the rise in attributable profit was still 6%.

Now, to close this part of the presentation, since we don't yet have the data for the first half of the year for most of our peers, we've included a comparison for the first quarter, where you can see how we comfortably surpassed the average and generated profits in line with our growth targets.

And now, our CFO, Jose Antonio Alvarez, will explain in greater detail the different business areas.

Good morning. As we do every quarter, now that our CEO has reviewed the main aspects of the Group's results, I will take a more detailed look at the different business units starting, as usual, with the main geographical areas and continuing with the different business areas, retail, global wholesale banking and so on.

Before I begin, I'd just like to explain where the Group's revenues come from. There's something unusual on this slide, because we've included the Banco Real as part of this pie chart, showing the breakdown of our attributable profit. This is what we will do habitually, starting in the third quarter, to show the Group's profit breakdown. Currently, 42% of our profits come from the main European operating areas, Santander Banesto, Santander Consumer Finance and Portugal, 21% from the UK, 10% Banco Real and 6% basically global banking and markets in Europe, although there's also a few smaller units in there, such as Banif.

Beginning with the four major units, you can see that profits are up 13% and they represent, as I've said, 42% of the Group's total profit. In the UK in euros, growing at -- sorry, in sterling at 20% and Latin America, in dollars, at 20%, 25% excluding discontinued operations because of the divestment of the Pension Fund business last year. In general, all areas have shown significant improvements. I'll go into detail about the evolution for global wholesale banking and markets, where there's been a drop but, as we will see, the trend is actually quite favorable there as well.

Focusing now in Continental Europe, you can see, first of all, the retail units, where we have double-digit growth; gross operating income up 12%, net operating income 17% up, attributable profit up 13%. So these retail units in Continental Europe showing excellent results. Step down, the Santander and Banesto branch networks have shown similar performances. We see very good profit growth for both networks; profits up 15% and 18% respectively.

For Santander Consumer Finance business, in a definitely more difficult environment, it has shown very good growth in profits; 17%. Costs are still growing, although they will decelerate over the coming quarters. They're growing fast because of the expansion projects begun in the second half 2007. They will slow down towards the end of the year towards inflation levels, maybe 4%, 5%. There is a rise in attributable profit in Germany Drive and the Nordic countries, offsetting Spain's worse performance in Consumer Finance business.

Portugal's profit, well, gross operating income fairly flat, this because of the major global wholesale banking operations last year. Retail banking is growing at double-digit rates and, therefore, this trend will gradually become more apparent over the coming quarters. As for the other units, we see a significant drop of 51% there, which is a sharp drop in profits for global wholesale banking, but I will speak in more detail about this when we look at the secondary business segments and when I refer specifically to global wholesale banking and markets, as we call it.

Going into a bit more detail about what's happening and what the different drivers are for income and profits in these different business areas in Continental Europe, we see the growth of lending in the Santander branch network, which is slowing down. It's currently 6%. Same thing for Banesto at 11%, while deposits are accelerating.

We see very good growth of business volumes in Santander Consumer Finance and in Portugal, with double-digit growth, as I mentioned earlier, in Portugal. And we see a very positive evolution for retail banking. However, and as was pointed out by the CEO, at the Group level in each unit we also see that margins compared to the first semester of 2007 have improved very significantly in every unit. And that is the reason, to a large extent, for our improved results, considering that in this context volumes have been growing more slowly.

If we look at our net operating income and our net operating income minus provisions, which is the way in which we're going to report results in the future, we see that net operating income for Santander branch network's growing at 19%, 11% (sic - see presentation) in Banesto. Net of provisions, Santander 13%, Banesto 14%. Santander Consumer Finance, very strong growth in income and net operating income -- and operating income, but minus provisions only one-digit growth, 8%.

And for Portugal, there is a drop in our spreads, whilst volumes have been growing, costs are well under control, provisioning low and profits remain at the same level as the first quarter. But the main effect is from global banking and markets where, as I've said, there were very significant operations in the first semester of 2007.

Looking at the next area, United Kingdom, or Abbey, we see that they've performed excellently at Abbey; income growing at 11%. Remember that the target was between 5% and 10%, so we're over our target. Costs very well under control, 2%, significantly below inflation. And, with that, our net operating income and our attributable profits are both growing at around 20%. You can see on both charts on the right that the trend is very solid, both in net operating income and in profit generation. All of these figures in pounds sterling. Both in retail banking and in global banking the trend is very solid and has been maintained over the last quarters.

And going down to the next step to look at the sources of these profits and these income, we see on the one hand that volume's growing faster than it was a year ago. The volume of mortgages has grown by GBP8.3m (sic - see presentation) in the first six months of the year, more than last year. The spreads have improved noticeably. The same thing we can say about deposits, where volumes have grown by GBP3.9m (sic - see presentation) as compared to GBP2.8m last year. And, therefore, the rate of growth of lending and deposits has accelerated in the past few quarters.

And this has an effect on the results. A very good performance of the net operating revenue. Also, an improvement of the cost to income ratio. And the level of provisions remains basically the same. Credit quality is very good. We mentioned the NPL ratio earlier. And we see that the increase in the net operating income is higher before provisions than with provisions, because the credit quality is excellent. Therefore, excellent performance for Abbey and the trend is continuous improvement quarter after quarter, because it's taking advantage of its competitive situation as compared to its competitors in the British market.

If we look at Latin America now, I'm referring now to Latin America in dollars and before including the Banco Real. I will talk about that later. Attributable profits grow 20%, 25% eliminating the impact of discontinued operations, so growth rates are very strong. Gross operating income rose 39% and net operating income grew by almost 50% and attributable profits by almost 20%.

On the right-hand side of the graph, we see that there is very good performance of retail banking Latin America. Quarter after quarter, it's given very good results. And this basically is based on some of the drivers, the fact that there is a larger number of customers, very good management of the spreads and costs. After the strong investments that were made in the past three years in installed capacity, we will start to see the results of this in the next two years. Well, we'll have better results than in the past three years.

If we look at the main units now, the truth is that there aren't too many differences. Revenue is growing about 40% in all units, at least in the main units, Brazil, Mexico and Chile, but also in the other countries. And we see that net operating income is very good in all units. After absorbing the impact of greater provisions and discontinued operations, we have a performance of 27% up in Brazil and 15% to 20% in the other units. Also, Santander Private Banking is growing by more than 20% in revenue, as well as in net operating income and profits.

If we look at the drivers of these results, we see that growth is quite strong, growth of lending and deposits, in Brazil particularly, where deposits are growing 21%, significantly more than the market. The lending activities continue also to increase in Mexico and Chile and also deposits. So the net interest revenue improves in most countries, although Mexico is improving its spreads, as well as Chile, more than the other countries. And in the last 12 months, interest rates have been going up and this has had an impact.

If we look at the net operating income, as we did earlier for Europe, in Brazil it grew by almost 30% compared to the same quarter last year and 45%. After provisions, it's growing by more than 30%, which is also applicable to Mexico. And in Chile it's growing at slower rates, about 14%, which is also very good performance, despite the increase in provisions, in a context where the risk premiums are stable in Brazil and in Chile and have gone up in Mexico because of the deterioration of credit quality in the Credit Card business that we've seen in the past few quarters.

Banco Real, I will talk about that later, because all the Banco Real has not been included here, so I'll give you figures for Banco Real. Of course, the criteria used for these figures is different. Banco Real became part of the Group last week after we had the official approvals. And the acquisition was completed, as I said, last week.

So if we look now at the results, we see that the -- that they're generating a lot of revenue; up 24%. More than 20% in deposits, good credit quality, good levels of coverage and results are growing by 20%.

Therefore, we can say that Banco Real is following the trend of the other Latin American units, particularly Brazil when it comes to result-generating capacity.

And, finally, the Corporate Center. We see that there is a difference in the results if we compare year-to-year results. Basically, there are three factors that explain this. A positive aspect is the equity method accounting that we use. The figure should be 450. And then we're also -- last year we had a couple of losses because of exchange rate effects.

Last year we sold the Sanpaulo shares in the second half of the year, EUR567m. Therefore, the net of these two figures gives us our difference in results that we see in the accounts.

The other items have very small variations.

If we look at the secondary segments now, first of all, we see a very good performance of Retail Banking with increases in profits before taxes in Europe of 11%, and in the UK and Latin America more than 20% in their respective currencies. In euros, obviously, they're growing at lower paces because of the dollar and the UK -- the pounds sterling effect.

Global Wholesale Banking. Global Wholesale Banking has had a very good second quarter in a very complicated environment for its business, and it did so backed by the strength of its customer activity.

On the right-hand side we see that business with customers continues to increase, as you can see, from last year. So we're still generating very good results.

The costs are flat or decreasing because of the adjustment to the new market circumstances. But, in any case, the worst performance compared to last year is due to the specific transactions that we had in Spain in the first half of 2007, and also in Portugal which did happen again in 2008.

We had lots of trading profits that we haven't had this year and, in the first half of 2007, we released generic provisions when we haven't done that this year, this first half.

So, in a year-to-year comparison, the results are very good. Now, where does it come from? I think this can be one of the things that can call your attention the most.

Our increase in customer business. Well, geographically, we have two different worlds; Latin America, customer revenue growth 34% and, in Europe, customer revenue growth -- falls, sorry, 4%. So the Latin American market is growing very strongly. In Europe, it's flat, or revenue is going down.

If we look at it by business, though, we see that the Credit business or the Lending business and Investment Banking is falling in terms of revenue; in Lending because of the situation of the credit market and because the market -- we don't see any transactions of -- to sell debt.

But Transactional Banking and Equity Securities, well, Transactional Banking, because of the situation of cash management and improvement of the spreads and interest rates because of the selling of coverage of interest rate and exchange rate to customers, we have improvements of 30%, 20% and 10%.

Therefore, by geographies we do see a significant difference between Latin America and Europe and, by businesses, we had -- see a fall in the businesses most affected by the market situation and increases where the customer franchise acquires a greater value at this time.

And, finally, Asset Management and Insurance. If we start by the right-hand side, revenue is growing globally by 3% at a rate of EUR1b per quarter in these activities. To differentiated worlds; the Insurance world is growing strongly as it has been growing in the past few years, revenue growing by 22%.

Asset Management, though, assets under management are falling. This is a global phenomena, where revenue falls 16%. Basically, in Spain because in volatile markets where a high deposit remuneration deposit in relative terms turn into a product which is competing very well with traditional and mutual fund products.

If we look at it in terms of profits before taxes, well, we're flat. In Insurance the -- it's higher, the income -- sorry, the profits before taxes, but they're following in the other businesses. So they offset each other.

And now I'd like to turn the -- give the floor to the CEO, who will give us the conclusions and also how we see the future.

Well, to end this presentation, I'm going to give you a summary of first half of the year in the current difficult environment for the Banking business. And in this environment, which is very difficult as I said, Santander has had a very solid second quarter which has led us to improve our results and also to improve, or to do better than our peers in the first quarter.

I think our results are very strong. Attributable profit increases by 22%, higher than the first half of 2007, and the EPS is growing by 14.3%, in line with our target for the year.

But apart from these being very significant results from the quantitative point of view, these results are also of very high quality, vertical quality, because we still have our jaws wide open about 10 percentage points, which allows us to absorb high provisions. And of great -- very good horizontal quality because all the networks are improving their profits by two digits in their local currencies.

And also the global businesses with a good second quarter in consumer and consumption in Europe and in the US, in other words in the [SES] business. And in wholesale activity whose revenues, as we have seen, increased year on year despite the difficult environment.

And apart from having these very good quality results, we focused on strengthening the balance sheet at the level of credit quality and also in terms of liquidity but also in terms of capital.

In terms of credit quality, we have maintained better NPL ratios than our peers at Group level and in the main areas where we operate. We have increased the generic funds in Spain which, as we have seen, are four times the specific annualized provisions of the first half.

And we are also improving the quality of new operations. For example, in the Santander branch network, the new mortgages have a loan to value which is eight percentage points less than in the first half of 2007. Or Abbey, where fewer of -- than 1% of the mortgage applications of the last few months have a loan to value of more than 90%.

We have also increased the level of NPL recoveries in all units. In other words, at the level of credit quality, we are doing very consistent work. We still have a comfortable liquidity position due to a lower needs of our business model. In other words, because of the fact that we're growing less.

And also the Group has demonstrated its high capacity to issue medium and long-term securities, enabling it to capture more than 18,000 remedials and senior debt in mortgage coverage funds in the first half by taking advantage of our high ratings and the liquidity windows offered by the market.

And, lastly, our core capital has remained comfortably above 6%. This means that we have enough leverage to keep increasing the Group's earnings, offsetting the downturn in some markets. Our geographic diversification enables us to take advantage of those countries when they are in their best situation, spread management and control of costs, enabling us to maintain wide jaws.

The capacity to link customers. I can tell you that in the first half of 2008, we have linked 700,000 customers and the ratio of linked-to-active customers is still below 45%, so we still have a lot to do there.

We're also making improvements and developments to improve the quality of service, such as a corporate Contact Center, which will generate cost savings and improvements in sales. We're going to serve our customers better. We have programs such as the [Plan Mejora] 500 and the [Target 100] that we're extending to all units. In other words, not only managing spreads and controlling costs but we also have the capacity to link our customers and link them with a good quality.

Plus, we have specific advantages in some units. The networks in Spain have generic provisions to leverage revenue growth and cost control. Consumer business has the critical mass to grow organically and the potential to obtain synergies from the latest acquisitions.

At Abbey, despite the tough market environment, we will still grow profitably in mortgages while continuing to advance toward our goal of becoming a universal Bank and, thus, our bid for Alliance & Leicester.

Finally, Latin America will continue to grow, backed by solid macro-economic fundamentals, the increasing degree of bankarization and our proven capacity to execute projects n the region.

And, lastly, Banco Real will contribute growth and also synergies.

So this is why we remain optimistic about our ability to outperform our rivals and to meet growth targets which management has set itself.

Thank you very much for your attention.

(OPERATOR INSTRUCTIONS). First of all, we're going to take questions from the Web and then we'll take questions over the phone.

The first question is from [Marco Trojano] from Standard & Poor's Equity Research. He asks several questions. The first one is, where do we see the NPL ratios in Spain? What will happen with these NPL ratios in 2009, 2010?

He also mentions the sale of the financial city in Borvia. Says we haven't registered anything on this. What is the update on this?

And he also asks for an update on Sovereign.

Well, the question on our vision of NPLs in Spain in the future, I don't usually like to give these forecasts because we tend to get it wrong in these forecasts. The truth is that the NPL ratio is going up in Spain. We finished this first half of the year with 9.08%. And I can only talk for ourselves. And we think this year we're going to end this year in Spain with an NPL of less than one and a half. I'm sure it won't reach 1.5%. But from the information we see, perhaps for the whole banking industry it will be 2%. And for retail banks and savings banks grew there perhaps a bit more than that. That's for 2008, about 2% in general.

And for 2009 or 2010, since we will be meeting in future quarters, then we'll be able to give a better opinion when we meet in three or six months' time. This is how we see things now. We can only make a forecast for about the next six months.

The sale of Borvia has not yet been concluded. We hope to be doing this very soon. And this is why in June 30 we have not included this because it has not yet been completed, although we hope to complete it in the first few days of August.

And regarding Sovereign, there's nothing new to report on. The situation, I think, is well known, and we've been talking about this in our -- all our results presentations, that we have a contract that prevents us from carrying out any movement until the middle of next year. From that moment on, we will have the chance or the opportunity and the capacity to think what we do. So, nothing new to report on Sovereign.

This -- from the same analyst, we have two questions about Brazil.

What do you think is going to happen with growth there, where is it going to come from and what about the competition in the world of mortgages?

And a more specific remark on the results. Net operating income is flat, he says, in the first half of the -- first quarter as compared to the second.

Well, I'm not going to say much about Brazil because we have a specific appointment with the market, with the analysts that is, and investors. At the end of October we will have a special meeting with them. Because I think what is of interest to the market is the -- is the plans that the Group has for the integration of Banco Santander and Banco Real.

So at the end of October we will meet with analysts and investors where we will give a very specific vision of how we see Brazil on the macro side. We will talk about the Brazilian economy as well as on the [macro] side, in other words, our own integration plans and, therefore, our forecast or our business ideas or what results we think we're going to obtain in Brazil in the future.

What I can tell you now, though, is that our vision of Brazil is very optimistic. Brazil is performing very well, it's growing well. In fact, we are growing our business well in both banks, in the Wholesale Banking sector as well as in Retail Banking.

Perhaps mortgage loans, well that's not the best example of course in Brazil but we can't forget that interest rates are still very high there, about 13%. And so, obviously, interest rates at those levels do not make it easy to develop the mortgage market.

But for the other businesses, including the consumer -- consumption or personal loans or credit cards, all of those are performing very well, growing more -- by more than 20 or 20 some percent.

But, to be more specific, well I can only tell you that we will have this special session on Brazil in three months' time and there, of course, we will give you much more information on our plans there and how we see the economy, etc.

From Javier Bernat from Caja Madrid, he has several questions, the first one is on Brazil. I think it's already been answered by our CEO when he answered the last question.

Then he also has a question on profits in Latin America and Abbey that are growing below the CPI in Spain. I guess you're looking at these in euros because that's not the case in local currency.

But he does make a comment on their profits in Continental Europe, which is increasing 13%. But the aggregated profits of the whole unit practically does not go up. Perhaps you will -- well, you'd like to answer that question.

And, lastly, if we have anything to say on what has appeared on the press on the selling of the Fund and Asset Management unit. There are several questions from several analysts on this matter.

Well, I have nothing more to add about Brazil.

Profits in Latin America and the UK are what they are in their currencies. It is possible -- I don't have the figure with me right now, but it is possible that if we transfer that -- or translate it into euros, it's lower than in pounds.

But I [don't] think we should insist on the idea that Abbey is having a brilliant year, I would say. Not extraordinarily good; I would say it's a brilliant year for Abbey. Even more so if we compare it to the development of the personal financial services in the British banking industry. And the same thing can be said about Latin America.

Net profits in Continental Europe it is true that, as a whole, it falls 3%, but we have to understand how we build our geographical profits, because geographical profit is the addition of the unit and of the small pieces that the global units have in that geography. In other words, in Continental Europe we have the profits of Santander as a legal institution, of Banesto, that's another legal institution, of Santander Consumer, all the businesses of Santander Consumer and our Santander Totta unit in Portugal.

And then we have the pieces which correspond to businesses in Europe of Global Banking and Markets, Global Wholesale Banking and Asset Management and Insurance. Apart, of course, from other smaller things which I'm not going to mention because they're not very significant.

Now all these pieces, the Global Banking and Markets, which is -- which comes from the continental -- basically, the Continental Europe has fallen a lot. Global Banking and Markets which, as a whole, has behaved quite well as a whole. But our CFO said that where it's fallen the most is in Europe and where it's grown a lot is in Latin America.

The net figure gives us a very small fall, but with a (inaudible) between Europe and America. What does it mean? That the part of Global Banking and Markets which is allocated to America is about minus 30% or minus 40% as compared to last year, which is compatible with the unit doing relatively well globally because it's growing a lot in Latin America. And the little piece which is added to the businesses of Continental Europe means that these businesses, as a whole, the banks plus these pieces, have less growth.

And the same thing happens with Asset Management because the fall of mutual plans has happened mostly in Spain and therefore the loss of fees and commissions from this business and Asset Management, it affects Spain. And I can say the same thing that I said about Global Banking and Market; the American pieces are doing well, not so the European part.

So this component means that when we include all these figures under the title of Continental Europe, eliminate -- without the UK, we see a growth of 13% of businesses as a whole. These are Santander, Banesto, Consumer, etc. But we have that minus 3 (technical difficulty).

-- we're looking at it. There's still nothing specific, nor how we're going to do it or if we're going to do it as a Joint Venture or how we're going to do it. So when we have more information, we will report on that. But, for the time being, there's nothing else to mention.

I'd like to insist on the exchange rate issue is a series that we show you in the Web. They might be net of the exchange rate and [counter-party] you have in the Corporate Center.

Santiago Lopez from Credit Suisse has a comment. The reason why the -- our reserves have fallen by about EUR4b and assets at risk about 9%. Why?

The second question again about coverage, NPLs, I think that's already been answered pretty much.

Well, it's true that the reserves show a drop of approximately [EUR4m] and that has two parts to (technical difficulty) to it to offset one another. The goodwill volume drops for intangibles and the volume of reserves drops, and that's the two reasons. That's for the EUR4b in reserves.

And as for the risk weighted assets, I suppose you're comparing June's risk weighted assets and the Basel II with risk weighted assets in March and the Basel I.

Basically what Basel II represents is a drop in risk weighted assets or in the consumption for a credit risk, which in our case is just over one percentage point in terms of core capital, and a rise derived from operational risks and from the dividend which used to be accounted for when it was paid out before. So that's the difference between Basel I and Basel II, and that's why there's a drop in the risk weighted assets. That's only that effect.

Antonio Ramirez is asking about this. And he's asking about latent losses in the reserves available for sale, which are dropping from EUR1b to EUR2b. What's the reason?

He's asking again about the NPL levels and the growth in lending we expect. When do we expect to recoup generics?

When do we think that the Bank of Spain will enable us to use internal models for calculating generics, our IRBs?

Or if we have provisioned any sub-standard lending and if we've been buying assets from customers in trouble, in what amount and what our policies are for the future?

Okay, I think the thing about the reserves, unless you want to add something, Jose Antonio, has already been discussed.

Then NPLs have also been discussed.

When will we start to -- just to use a fairly common expression, to draw on these generics. We don't really know, but probably not this year. Probably starting next year if the NPLs increase.

More or less roughly we, and it's not very scientific, feel that from point five credit costs you should generally start with the generics. I think that's more or less the not very technical rule, sort of rough guide. And so we're below that level and so we're not yet --. In fact, you'll be able to notice that, in 2008 in the second quarter, of course in the first, but also in the first, we have provisioned generics in Santander Spain. And we haven't done any sub-standard provisioning because we don't really have any need to do so. We are following the circular from the Bank of Spain to the letter.

And, finally, we are, as Banesto has also pointed out, acquiring assets, real estate assets. This gives the same philosophy. Banesto also expressed to, on the one hand, reduce the debt developers and also to establish more efficient sale processes for these assets. We -- Banesto, in fact, has bought, I think, for an amount of 300 and some million and, we, for just over a billion. Yes, EUR1b -- EUR1.2b together, Banesto and Santander.

There was a question about whether we had voted any -- we had established any provisioning for any sub-standard (technical difficulty) and there is none.

And McQueen from Lehman is asking again about the outlook for quality in Spain. We've already discussed that.

And he is asking if you think Basel II criteria, where we have quite a comfortable capital position, do we have any idea of where we might use that capital?

And he's specifically asking about Mexico, about the fact that NPL ratio is up a lot in Mexico and whether credit cards are the main reason and what our forecasts are for NPL ratios in that country.

Well, in Mexico it's true that the reason for that NPL ratio is basically the increase in NPL ratios from credit cards. We don't think that's going to get worse. In fact, we think it's contained and, in fact, we already had the data. Week on week and month on month, we see that it is contained, so we think it's reached its peak. And it is credit cards, basically, that are behind it.

Antonio Ramirez is asking why the tax rate in the second quarter is around 19%, 18.5%. And could we update the capital gains that we expect from the Santander Citi and the sale price? And are we planning any early retirements in Spain, employees and costs?

Okay, we don't expect to do any early retirements in Spain. We don't have an early retirement plan. Before Jose Antonio was saying that I didn't answer, and he's right about the capital. We are at 6.31, as I showed you in the presentation, which is where we want to be and where we're comfortable and probably where we should be. So there really is no plan to spend the capital or whatever the question was about. We're fine and we are where we want to be.

And about this question, he's also asking about capital and the tax rate, I'd rather have you or Pepe answer that. The tax rate, Pepe?

Well, the tax rate for the second semester is very similar to that of the first semester and for the same reasons. Corporate tax rates have gone down in Germany and Spain and so is structural. Plus, circumstantially, there is a tax credit I think in Mexico if I'm not mistaken, so that's circumstantial, as I've said.

Carlos Garcia from ING is asking about the Santander Citi.

I think the numbers are the same. We published the sales price and the capital gains. Off the top of my head, I think it was EUR600m in capital gains after taxes. Sales price, EUR1.9b.

Carlos Garcia from ING is asking about the split -- about the breakdown for those new NPLs and the geographical breakdown of those 2.4b and if the 1.1b adjustment negative valuations are deducted entirely from the core capital and, in fact, they are. I didn't quite catch that second question?

Two questions; one is whether those NPLs, the geographical breakdown, and the second is whether that negative adjustment, those 2.2b are subtracted from the core capital. In fact, they are. And there's other questions so there's no issue there. In fact, it's more about the geographical split for the NPL [rate].

Well, geographically, the split for NPLs was EUR2.4b. Approximately 70% or 80% is Spain, and the rest more or less half Europe including Abbey and half Latin America.

Carlos Peixoto from BPI is asking about Chile. The other's been answered already about Chile. And we see that there's a significant increase in provisions. And about the NPL, rate if we can elaborate.

In Chile, what we've seen is a growth in provisions but the risk premium is basically stable. I think last quarter it was 1.8 or at 1.81, and now it's 1.85, so it's relatively stable. What we have is an increase in provision spread and it's a seasonal effect. There's no worsening NPL in Chile.

Christian Sole from Dexia Asset Management is asking about advanced models in Basel II which don't include assets in Latin America, and do we have any idea about when they will and what the impact will be on risk weighted assets.

Well, off the top of my head perhaps you know better, but I think with the models that we've had authorized, we already have 70 some percent of the risk weighted assets already included in these advanced models. And what remain are approximately 28% more or less which we have under standard models. That's, basically, Latin America. And we have a timetable for that which ends in 2013, if I'm not mistaken, with various milestones.

In fact, in some countries we start three years from now, '11, '12 and '13, so by the end of 13 we'll be done with all of them. But, again, with the models we have already we have over 70% of our risk weighted assets subject to advance models.

Pierre Alexander is asking whether we can give an overview of the Drive business in the U.S.

The calculation of Santander Valores with totally diluted shares, that's the 7 billion issue divided by 16.7 which is the exchange rate for those convertibles. And asking again about the assets we've bought and another question is about income statement or contributions from UCI and how the business is doing there? So, two questions, really.

Well, I guess the BPA and the Valores question has been answered already.

For Drive, Drive's doing okay. First quarter I think it was -- well, it's on target; EUR23m earnings, second quarter EUR29m, so it's grown. It's grown 20% in Europe and so it's on target. No surprised there.

As for UCI, to tell you the truth I don't know if the U -- I think it's a proportional method so we have 50% and then the profit's EUR10m, profit of EUR10m I think it is or it's EUR20m, so 50%, EUR10m.

[Javier Ferraria] from (inaudible) Bank is asking about Abbey and the LTV and why we've increased our activity so much this quarter. Was the activity this quarter in lending and whether there is a lot of contribution (inaudible) or similar?

Well, at Abbey what we're having is in the new businesses a loan to value which is very stable because, in fact, in Abbey in this policy and in this market circumstances where Abbey is having an increasingly solid and strong position, we're seeing significant margin growth. And so what Abbey is doing is to toughen, let's say, it's risk criteria so that there will be a [better] selection, doing away with things which have a more implicit risk, like the self-classified as they call it.

And they're also having a very low percentage, I would say, ridiculously of loan to value of over 80%, and almost nothing over 90%, and that's been a deliberate policy to improve the risk quality. And it can be done and the market is favorable in promoting this kind of situation, and that's what we are doing. That's in terms of risk quality.

And in terms of volumes, clearly, Abbey is having very significant market share growth as it did when we bought, 13%, 14% and at some particular points because the British markets had some more difficulties, occasionally we've had in applications and requests, or that's how we would call it, it's had higher rates. But our normal rate in Abbey is about between 13%, 14% -- let's say 13% and 15%, which is really the share where we should be and where we are and where we want to remain in the future.

There's a question from Hector Martinez from Venture. It's a bit technical and perhaps we can answer this later, because it's about the freeing up of provisions in UK and LatAm. The -- it's not generics in the UK; it's something that's been recovered over a year and a half. And LatAm because there's still a cushion in Mexico, but I think we should discuss this in detail later with you.

There's a question from Alberto Cordara from ABN about the [ROF] in Mexico and why it's up and could we elaborate.

Well, basically, there was a sale of the [Alco] portfolio in Mexico; it's the interest rate risk portfolio. I can't remember the capital gains exactly but there were some, and I think that's really the only reason why the ROF is up.

Okay, Giovanni Carriere from Execution has got several questions. The majority have been answered already. I think there's maybe two we might still answer. One is that some of the securitizations that have been issued are showing worsening asset quality. Could we consider this a leading indicator, the securitizations issued in Spain, where in some cases there's been some deterioration. Could this be a leading indicator for NPL ratios in Spain? Could we elaborate?

And he's also asking about inflation in emerging markets and can we foresee the impact. Do we feel it's a concern in Brazil, in Mexico, in the other countries?

I think the best indicator for NPL rates in Spain are the data, what we the banks and savings banks have been reporting. We each have our different rate depending on our mix and our position in the market. But obviously that's obviously having an impact on securitizations, as we would say, but really the best leading indicator is the actual facts which we handle every day and which we report to the market right now.

And the second question was about what? Yes, it's true and that's bringing down economic growth slightly in these countries and it is also causing, in some of them, interest rate rises. And it's just something which we are also contemplating in our growth forecasts.

In fact, there is a certain slowing down of the Banking business and the demand for lending in these countries in the last quarters, probably because of that kind of phenomenon; slightly higher inflation, more restrictive monetary policies, therefore, rising interest rates and that is to some extent decelerating economic growth and generating lower demand for loans. But a lot of this within a very strong, solid substrate because it's dropping maybe from 30% to 25%, or from 20% to 18%, but it's still high and we are dealing with it -- and it's being dealt with with very orthodox and serious monetary policies.

And so we see it, I'm not saying it as a positive thing for the Banking business because we are seeing a slight slowing down, but we are seeing overall that it's positive for the economic stability of these countries and their economic policies.

[Kimar Arvido] from [Olaf] for the securitizations, just a comment about the securitizations as a leading indicator. In the Group's specific case, mortgage securitizations in our Group -- because in our mortgage portfolio we have a policy which is that loans below 80% loan to value aren't qualified to issue loans, so we don't securitize them. Those where loan to value is over 80%, we have securitized. So the securitizations have a clear bias.

They don't represent the average quality of our mortgage portfolio for this reason and, so, to use them as a leading indicator for our mortgage portfolio overall is not appropriate. Because our mean loan to value is below 50% and the mean loan to value of securitized mortgages is over 80%. So, in that sense, it cannot be used as a leading indicator for the Group, not for the market. The market, I guess, is another story.

Okay, [Ingmar Rodrigo] from Ahorro Corporacion is again asking several questions which have already been partially answered. And the reasons for growth in Mexico, credit cards, which we've already explained, talking about the impact of the currency hedging and -- on our (inaudible) and accounting in the corporate center.

So it's just over EUR200m; EUR220m, EUR230m. Okay.

[Jean Raymond] from (inaudible) asking whether we have a minimum NPL rate we want to maintain, whether we could be below 100%, above 100%? Do we have any criteria for that? Where do we want to stay?

Well, we are clearly over 100% in coverage. If we were to substract mortgages, that's done in a lot of markets, and it's sometimes done in Spain too, we would definitely be, and always be, clearly above 100% coverage. We could be at 100% or close to 100% because of the great contribution in our portfolio of the mortgage business. And when I say our portfolio, I don't mean Spain, I mean the Group. But, again, our coverage will always clearly be above -- I'm not saying just now, but also in the future, above 100% in the non-mortgage business.

[Pedro Arun] and other analysts are asking several questions about Alliance and Germany. We've been discussing it in different form. We don't discuss rumors ever, but they're asking us our vision about Germany as a market both in the Consumer Finance business and also for other businesses.

Well, our vision for Germany is based only on our position in Santander Consumer Finance, because we're not in Germany except through Santander Consumer Finance. And we're now actually indicating the acquisition from Royal Bank of Scotland and General Electric, but our vision right now -- our view is that Germany is doing well in terms of its economy. In fact, our business unit in Germany is growing very well, satisfactorily, close to 20% not just in businesses but also in results and so good.

Demand for cars is strong and that's probably not contained, it's just because it's recovering from the containment it showed last year because of the effect of VAT. So it's a good thing. And it's also good in deposits because although we're not a Bank which is in deposits we do have some activity in Germany bringing in deposits through this unit, which is doing very well too. So it's a very optimistic view, but we don't really know much more about the market than what we know through this unit.

In fact, the reason why we've been involved in these Royal Bank of Scotland operations and General Electric operations is because we feel that Germany is, in our business, a good market where we have experience and we have a strong position and we have critical mass and we have management in place, so we have everything we need in order to grow in this business at above-market levels. And that's why we've decided to integrate or purchase these two small units, small in absolute terms but very useful for our business in Germany, which over the next three or four years could even perhaps double its income or profits.

There are several questions about Abbey. Michael Trojano from Standard & Poor's and somebody from Citigroup. Basically they're asking about spreads for the new business and margins and how they evolved in the second quarter versus the first, and why the spreads for deposits have dropped and what our expectations are in that context. And what percentage of the new business is buy to let or self-certified? And since there is -- well, and then there's something about (inaudible) low price to book, or if banks in the U.S. market, whether we might have any interest.

And there's another question from Marco Trojano about M&A and whether we might think some kind of acquisition or something in Italy, so, our strategy in M&As.

Well, start with Abbey, spreads, assets, liabilities, new business. Well the spreads in Abbey, we're clearly having growth of our spreads and assets and deposits. There is a reduct -- sorry, in lending, a slight reduction because of competition in spreads and deposits like in Spain, but very good margins in investment products which are a business which is not so obvious in our balance sheet but where we are being very active, so investment fund, investment products which generate earnings.

Overall, our spreads in Abbey and our return on assets in general has grown very significantly, as you can see. What was the question again, this next one? I just can't remember them all.

The buy to let and the self-certified we've already answered. We're not really doing any buy to let -- no, sorry, any self-certified. And as far as I can recall in the first quarter I said something about buy to let, but if I'm not mistaken right now we have [some of] mortgages under 2% is buy to let and probably that's maybe less than 1% right now because we have been reducing, as I've said earlier, the (inaudible) for these kinds of mortgage requests.

The other question was about mergers and acquisitions, American market, because now price to books are so low. Italy again, anything about M&As. Right now, we're very comfortable where we are. Our number one priority now is to integrate Santander with Real.

Our second priority is to integrate the other businesses we still have to integrate. Alliance & Leicester, if that operation works in our favor as we expect and the businesses we've bought in Germany mostly and in the UK from General Electric, so we have enough work to do over the next quarters.

About Spain, several analysts again asking about whether we can say something about our (inaudible). In Spain, if we have included [Martin Feresa] in the provisions. Just those two questions for Spain.

(inaudible) in Spain is about 1% and 0.3% basically.

For Martin Feresa, yes, it's included. We have included in the Group figures and therefore it has an immediate [corollary] in the provisions.

There is a question on Basel II. If we expect any impact in the second pillar? I understand that the answer is no. And if we can elaborate on the types of calculations that have been used in expected loss, operational risk, etc.?

The impact of pillar two, we hope it will be almost zero. On the one hand, we have the impact of the risks that are not in the capital consumption of the first pillar, which is where we have the credit risk and the operational risk, but we also have the positive effects of diversification. So almost zero, if not zero.

And the calculations, the rates for the calculations, I don't remember. I think the department of relations for the investors can answer your question directly because I can't remember any correlations or ratios right now that we used in the calculations.

Several analysts ask about the net interest revenue in the Corporate Center compared to last year's figures, if it have to do with Antonveneta liquidity, etc.?

Well, yes, the only difference is that Antonveneta was closed last semester so there is a difference derived from that.

There's a question on wholesale banking. I think we can answer this question in our department of relations with investors because it's about the increase in the net interest revenue.

There's a question on Abbey. I don't know if you'd like to answer this. The increase of revenue is slightly lower, and what do you expect in terms of revenues in the next few quarters?

I think you already answered. Would you like to give an outlook for revenue? No? Fine.

Plus, the outlook for Abbey is very delicate because, as you know, we are right now restricted in terms of information because of the Alliance and Leicester deal. So we cannot give any guidance on the Group just because we're going through this deal so we're a bit restricted there.

There are a few questions on the contribution of Banco Real in each one of the two halves of the year. We can answer this question later on. Then, the exposure of Santander to the developers business, which we already said was EUR16.8b.

I think -- yes, there is a last question perhaps from LaSalle. Do you expect to generate capital organically from here to the end of the year without -- in other words, if you're going to generate capital organically from now until the end of the year is the question.

Well, excluding possible capital gains, which might come from things that since they are public -- or like success since they are lifted, usually the way we generate organic capital and, in this case, given the rate of growth of our assets, can be of about 30 basis points approximately. A year, yes, a year. Jose Antonio Alvarez told me say it's a year. Yes, it's a year, but that would be our organic growth and to that we would have to add, if it occurred, capital gains that we might realize.

And we would finish with one last question on the dividend policy, which I think you already paid out because it's about a 50% payout. But what about our policy in Asia?

Well, we have a vision on Asia -- well, we have an interest in Asia but, for the time being, what we're doing is to work on a first business line there, which is trade finance. We are concentrating on that so we have our office in Hong Kong which acts as a hub to get as much business as possible from Europe but also from Latin America; Brazil, Chile, Mexico basically. And ever since we did this, which was last year, and in one year the volume of trade finance that we are processing or that we're acting as intermediaries in, in this hub in Hong Kong, has multiplied by three in less than 12 months. That means it's working. That's our first priority there.

Then our second priority, which is something we're already working on, is working with large corporations where we have a global -- that we have a global relationship with. These are large corporations that might be international, not in all cases, but many of them are international. For example, there's some Indian companies, some Korean companies, some Chinese companies. That is the second priority for us there and for that we are opening corporate offices.

In some cases, these are operational branches like a branch office, and in other cases we have representation offices and their intention is to supply market intelligence so that later on they can turn into operations offices of Corporate Banking or Global Banking and Markets. And that's basically our vision for the time being for Asia.

For the time being, we don't have any interest in making any other types of investments there or investing in other businesses there. And -- but with what we already have there, we have a lot of work to do in the next two years; develop a trade finance business and exploit that business line. Then, to implement where we want and how we want our offices to deal with large corporations.

Well, that's all. If there are any questions that have not been answered technically you can get in touch with us in our department of relations with investors and you will get the answer in the next few hours. 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.