Banco Santander SA (SAN) 2008 Q4 法說會逐字稿

(Audio in progress). Given the evolution of the business results in more detail. And finally, I will end with our vision and our growth engine for 2009.

The first idea I'd like to put across is that Santander has achieved excellent results. The sharp economic downturn, the extreme volatility of markets, and the scarcity of liquidity and capital has affected all banks in varying degrees.

As I have discussed before, this environment is a major asset test for banks and it will enable us to distinguish the good and well managed banks from the rest; and Santander is clearly amongst the former. And I say this for four reasons; the size and the recurrence of our profit; the strength of our balance sheet; the payout to our shareholders through dividends and total return; and lastly, the improved potential and diversification of our business portfolio. And I will examine each of these points.

We have ended 2008 with [the] ordinary attributable profit of EUR8.8 billion, 9% higher than the attributable profit of 2007, excluding capital gains and extraordinary provisions. These EUR8.876 billion include the charge of this last quarter for the fund established to the customers affected by Madoff and Lehman.

We have managed to increase our profit with the contribution of every geographic area. The three major areas have increased their profits at a good rate in their respective currencies, plus we had the contribution of the Banco Real. The fourth quarter was a good one in Europe, particularly in Wholesale Banking, also excellent in the UK. And the situation was slightly weaker in Latin America, because of the strong impact of exchange rates, especially versus the dollar, and some write-downs in Mexico.

Ordinary EPS also rose by 2.4%, up to EUR1.22 per share.

As I've pointed out, in the last quarter we have established a fund for those affected by Madoff and Lehman for a total, net of tax, of EUR450 million. This fund has been charged to the corporate center's gains on financial transactions against ordinary results. As a result, the fourth quarter's profit was below what was the Group's recurrent run rate of around EUR2.2 billion to EUR2.3 billion a quarter. In any case, the strength of our P&L account has enabled us to endow this fund and to increase our recurrent profits for the whole of the year by 9%.

Additionally, or on top of increasing recurrent profit, Santander generated EUR3.572 billion in extraordinary capital gains after taxes in 2008. EUR586 million had already been announced from the sale of Santander Financial City and the gain corresponding to the distribution and subsequent sales of the ABN liabilities, EUR741 million. We add the EUR2.245 billion from the sale of the Italian businesses acquired from ABN. So the Group's total profit combining ordinary profit and capital gains was of EUR12.448 billion.

In the current environment we have preferred to be conservative and to allocate all of the capital gains to various funds and write-downs; EUR1.43 billion to record at fair market value the stakes in Fortis and Royal Bank of Scotland. EUR904 million to amortize Abbey's intangibles, brand and core deposit. EUR386 million for a fund which includes the restructuring costs that might be needed for the integration of the acquisitions made in 2007 and 2008. EUR382 million for an early retirement fund, EUR295 million to amortize Santander consumer finance goodwill and portfolio; and finally, EUR175 million for a fund that anticipates any further deterioration due to the crisis.

All of these allocations either strengthen our capital ratios or anticipate future charges, which will no longer have an impact on the Group's results in coming years. The application of all the capital gains means that they will not feed through to the bottom line, unlike what happened in previous years. As a consequence, the total attributable profit for 2008, all of which is ordinary, is 2% lower than the total profits of 2007 where we included EUR950 million in capital gains net of allocations.

This evolution puts us amongst the top three banks in growth and attributable profit and EPS in comparison with our peer group. That is the 20 large international banking groups which, because of their size, characteristics or competitive position, are our reference group for comparisons.

And this enables us to continue to climb up the global ranking in absolute profit. In 2008, and based on reported figures or market consensus, we are the fourth bank worldwide in terms of profit; the second if we exclude the Chinese banks. But what's even more important is that, of the banks, which were in that top ten in 2006, we're one of the only two that remain in that list, and the only one to grow its profit. In my view, this is a good example of the resilience of our banking model to extraordinarily complex environment.

My second point is the strength of our balance sheet. In a world in which the soundness and the strength of banks' balance sheet are constantly being questioned, Santander has a well capitalized balance sheet with very low risks and high liquidity. It's a very liquid balance sheet.

Our deposits, excluding repos and capital finance, have more than 80% of our customers' loans net of securitizations. And we have improved our position during 2008 when our deposits grew, without taking into account the exchange rate effect, by EUR119 billion, of which EUR40 billion are organic growth, distributed almost a third between Spain, the rest of Europe and Latin America, and EUR79 billion from acquisitions.

It's a very plain vanilla balance sheet and it's all about the Retail business. Loans account for 60% of our assets, and 90% of our loans are retail and have high collateral. This is a clear example of a Retail Banking balance sheet and it reflects the performance of the Santander and, in general, of Spanish banks who have spent the last few years making loans instead of investing in financial assets, which in practice has meant lending more to the real economy than in any other European country.

The NPL ratio and coverage ratios are good and we ended 2008 with almost EUR12.9 billion in provisions, of which EUR6.2 billion are generic. Moreover, we have high quality capital. Our core capital is at 7.23%, which we combine with a shareholders' equity over total assets of 4%.

Let's look at the last two points in more detail. In a recessionary environment, our NPL rates have increased and will continue to rise. Therefore, our competitive advantage will depend on our starting point and the evolution compared to our competitors. And in both we are doing very well, both at the Group level, and also in the three main areas where we operate.

In Spain, our evolution over the last years has clearly been better, especially in the last few quarters in which we have stood out from the rest of the sector. And something similar happens in the UK. We also compare very favorably in Latin America.

To conclude speaking about the strength of our balance sheet, I'll say a few words about capital. We ended 2008 with a core capital ratio of 7.23%. It's a very high ratio in relative terms for several reasons; because of the low risk in our balance sheet and because of our stricter definition of core capital.

In the future I remind you that, in the first quarter we will have the impact from Sovereign's incorporation. And in the current growth context we are capable of generating between 10 and 15 basis points in free capital per quarter. This confirms our objective of maintaining core capital ratios of around 7%.

The third point, which distinguishes Santander from its competitors, is its payout. The evolution of our profits in 2008 and our confidence in our ability to generate future recurrent results enables us to suggest to the future AGM a nominal divided per share charged to the results of 2008 equal to that of 2007. That is EUR0.65 per share.

To repeat the same nominal dividend means in practice to increase the effective dividend paid into the shareholder's current account of 4.2% because of the larger number of shares they now own, after the capital increase with rights completed in December (technical difficulty) annual rate of 14%.

If together with the dividend we also take into account share prices, the Santander's total shareholder return, or TSR, was higher than the market's and our peers' average. And we do this both short, medium and long term, as you can see in these charts.

The fourth and last point is that we have taken advantage of the opportunities in order to improve our business portfolio in our core markets and businesses. I'm not going to go into detail, because these are all operations we've reported already and which you're all sufficiently familiar with. However, I will summarize by saying that they all give us a great ability to grow our earnings in coming years, both in terms of revenues, but also because of the expected strong synergies.

Going into the results, I'd like to first clarify something. The Banco Real consolidated in the first quarter for the first time by global integration, which means that the Group's balance sheet incorporated for the first time in December the Banco Real's balance sheet. And the income statement that had been incorporated during the nine months with the equity accounted method has been consolidated in this last fourth quarter for every line in the P&L account.

And this consolidation gives us the changes versus 2007, which you see in the first column. The percentage variation, except for profit, cannot be compared easily with P&L lines of other quarters. And for that reason, we have included a second column of comparisons based on what the Group would have looked like if Banco Real had been accounted for using the equity method in the fourth quarter as well. And this way, it is easier to make a like-for-like comparison with previous quarters.

I will refer to these figures in my analysis, which I can summarize as follows.

First, consistent, solid commercial revenues, which, in a recessionary environment, have nevertheless grown by 12%; second, the flexibility in order to adjust the costs, which have only grown by 1.8%; third, management of our jaws or our net operating income, rising by 16%, which has enabled us to absorb the rise in provisions. And fourth, our net operating income, minus provisions and profit, have grown very strongly, supported by the different business areas.

I will, first, refer to our solid, more commercial revenue. That is, net interest income, without dividend, plus fees, plus insurance, which had risen for 16 straight quarters and not in the fourth quarter, because of the strong impact of exchange rates in Latin America.

As you can see in these charts, the bottom of the slide, even in the very stressful scenario, like the one in this fourth quarter, Europe and the UK have grown and it's only Latin America, which falls due, as I've explained, to exchange rate impacts. These trends reflect the very good business performance of our unit and their strong cycle resilience, given our high degree of geographic and business diversification.

In loans, we are still growing in our major markets. In Spain, lending has grown by 5%, in the UK by 10%, in sterling with incorporations, in Brazil and Chile by around 20%, and in Mexico by 8%.

As far as customer funds, we have focused on deposits. We've increased deposits by 14% organically, to which we can add acquisitions. And we've considerably improved the ratio of loans funded by deposits. We've improved our spreads in the last few quarters, especially for loans.

So, in summary, spreads and volumes are being successfully managed in the whole Group. And, as a result, all the large units have experienced significant growth in their net interest income and their return on assets.

The second basic pillar for our results is our sustained cost income improvement. In a period when revenues grow more slowly, you needed to be stricter managing costs. Our recent cost performance is the best example of that focus. In a year of strong revenue growth, like 2007, costs rose by 10.5% through projects and investments. We began 2008 with costs growing at 5.7%, and we've ended the year with costs growing only by 1.8%.

This adjustment in our revenue and cost growth has enabled us, in 2008, to maintain our jaws wide open at around 8 percentage points, and to continue to improve our cost income ratio, which was 2.3 percentage points better. And we are one of the few large banks which improved their cost income ratio this year.

Third point I'd refer to are provisions. In the current context, provisions grew by 61% for various reasons. The first, and most important, because of a macroeconomic environment which has worsened more quickly than predicted; another reason is the growth in lending, which in some units, as we have seen, still rising by around 20%. Both effects impact our specific provisions.

Meanwhile, in the fourth quarter, we have begun to recover generic provisions with two components; those derived from business performance for around EUR300 million for the Group, and those originated by sub-standard provisioning in Spain, EUR380 million, which were due to a specific risk classification we had to meet according to the regulator. These risks have to be provisioned with generic provisions by 10%.

We will now look at the comparison of specific and generic provisions by areas. Starting with the column on the left, specific provisions, there's nothing new in comparison with previous quarters. And growth is still concentrated in Europe, and more specifically in Spain, both in our retail network and in Consumer Finance, because of sharp NPL rises, and in Latin America, in Mexico, with cards. Abbey, on the other hand, was a lot more stable.

As for generic provisions, we have begun to use them up in the fourth quarter, as I've mentioned earlier.

We ended the year with a fund of EUR12.863 billion loan loss allowances, of which EUR6.181 billion are generic. Of these, almost EUR4 billion are in Spain, with the [series we're] working well and our consensus scenario.

Our generic allowances should last us at least two years, 2009 and 2010. Later, we will see why.

So, in summary, revenue management, as well as cost and provision control should enable us to maintain the quarterly recurring profit in 2009 that we had obtained in 2008 in all of our business areas.

And I will now give the floor to, Jose Antonio Alvarez so he can explain the business areas in more detail.

Yes. Good morning. As we tend to do every quarter, now the Chief Executive Officer has discussed the main aspects, I will talk in a little more detail about each of the business units.

In connection with what the CEO has just explained, and as we saw in some of those last slides, I'd like to highlight the sustainability of our revenue generation, and the strength of revenue generation in our businesses, which have shown sustained growth throughout the year.

Second, very strict cost management, which has been mentioned also by the CEO, those 8 or 9 percentage point jaws that we've managed to preserve, which have enabled us to grow our net operating income by almost 20% with sustainable growth throughout the year.

And this net operating income is what enables us to absorb the significant growth in provisions throughout the year and to, nevertheless, grow our profits by 10%; or 7% if we don't incorporate Banco Real in the fourth quarter.

Going down to the first geographical area, Continental Europe, you can see that attributable profit was over EUR4.9 billion, 11% higher than in 2007. I wanted to basically underscore two ideas; one is the growth of income, gross operating grew by 15%, and also a very significant recovery of our Wholesale revenue, which we have announced for the coming quarters, but which has been noticeable already in the fourth quarter. We'll talk about this when we talk about Wholesale Banking.

We've adjusted our costs very sharply. We've ended the year at below 2% growth. And that has enabled us, in Continental Europe, to finish the year with a record cost income ratio of 35.5%. Obviously, as mentioned already, this has enabled us to increase our provisions given the worsening NPL environment.

If we look at the four main units in Continental Europe, looking first at all of them overall, we see income growing at 15%, net operating income growing at 20%, so profits growing 10%, because of increased provisioning.

For the Santander and Banesto branch network, there's good revenue management and cost containment. And both units, as the CEO has explained, have begun, at the end of the year, to release some generic provisions. And that has enabled them to moderate the growth in provisioning we had experienced in the previous quarters.

In Santander Consumer Finance, the gross and net operating income grew very strong. However, this does not feed through to profit, because of the significant impact of NPLs, very much due to Spain. We will see in more detail by country later, and you will see that the falling profits in Spain is what has brought about this fall in profit in the whole area.

Portugal's performance, very flat, although in 2007 there was a significant global Wholesale Banking contribution, which wasn't there in 2008. And global businesses, as I've mentioned already, and as we'll analyze later, Wholesale Banking has had an excellent fourth quarter. The year has had very positive evolution and in the final months of the year in comparison with 2007, which was weak.

Looking at the different units, the Santander network, moderate rise in lending, good growth in deposits, very good spread management, costs under control, and growth in specific provisioning. And in the last quarter, we've released some generic provisions.

For 2009, the drivers will not be business volumes. There won't be a significant volume growth in -- well, there will be in deposits but not in lending. And the drivers for our revenues will, basically, depend on our spreads for loans, good cost control, and the release of generic provisions, which should enable us to spur our net operating income, both for the Santander and the Banesto networks.

I'm not going to go into detail about Banesto. The trends are very similar to those of our retail network. The only difference is that, in their results, their attributable profit grew by 13%, because their generic fund or those 165 in the extraordinary line, which we haven't applied here.

As for the trends, there's nothing to add in Banesto that's any different to what I've already pointed out for the Santander Retail network.

As for Santander Finance, although -- Consumer Finance, it's, obviously, 55% based on automobile sales. And, of course, times have been difficult with automobile sales dropping in every country, particularly in Spain where the evolution has been worse, because of market conditions. However, Germany, which represents 55% of our profit, generated EUR380 million net in the year. And so that's going very well with double-digit growth of almost 19%.

So, good news is that the spreads have started to improve in the last quarter after several -- almost two years of falls, have changed direction in the last quarter and have started to improve. For 2009, we expect the market to remain stagnant, assumption to stay low. But our competitive position's very good. We are gaining market share. There's lots of our competitors who are no longer in the business in this very difficult environment. And so we see all that.

We have a bad market ahead, but a very good competitive position, improved spreads, as I've mentioned already. And our costs will be enhanced by synergies, mostly by integrating the GE businesses in Germany. However, we do expect a big rise in provisions, which will bring us to, I would say, a fairly similar result to what we've seen in 2008, with the same trends we saw in 2008.

As for Portugal, I mentioned in -- when I was talking about Continental Europe, I mentioned the impact in the difference in Wholesale Banking between 2007/2008. Our margins in Portugal recovered later than in our asset spread, because of regulatory changes that happened in the last part of 2007 and towards the end of 2008, in terms of how you calculate the rate to be applied. And that's had an impact on the results for 2008. But, for 2009, we don't really expect major changes with respect to what we've seen in 2008 in Portugal.

Moving on to our second geographical area, the UK, there's a change of perimeter with the incorporation of the Bradford & Bingley results with minus GBP10 million. But we're not incorporated Alliance & Leicester, whose balance sheet was consolidated at the end of 2008, but not the income statement.

When I speak about the UK, I should explain what the market is doing. What they call Personal Financial Services is a market, which is growing in the UK, gross operating income growing by 4%, profits dropping slightly, so, minus 2%/minus 3%. And this is in contrast with our own trend, with gross operating income growing at 18% in sterling, our costs rising at 6%; if we exclude the Bradford & Bingley effect, it would be only 3%. And our net operating income has grown by over 20%.

So, we've had an excellent quarterly performance although, in the last quarter, I should mention, as you can see in the chart on the top right-hand side, there is a consistent evolution of Retail Banking in the UK. Wholesale Banking has done very well in the last quarter. But profits did not feed through, because there's been generic provisions for GBP50 million in this part of the business.

Moving on to the next point, and I'm sorry because this is a slightly complicated slide to read, but here on the right-hand side we have tried to show half-year's result, and on the left, business volumes, because there's two changes in perimeter here.

The red part is Abbey, which performed excellently. It grew its deposits and mortgages with double-digit growth. Personal loans have dropped. And we see the grey and the white parts, which are the impact on the balance sheet of incorporating A&L, that's the grey part, and the white part, the GBP20.9 million in deposits from Bradford & Bingley.

So, in the end, if we look at the numbers, GBP160 million in mortgages -- billion, GBP120 billion in deposits, personal loans, a business of GBP7 million, and here it says Corporate Banking, but that's in the English sense of corporates. This is SMEs, not really corporates in the sense of major corporations.

So, the idea, basically, is that we have sufficient critical mass in the UK to compete successfully in that market. And the trends are very positive. I'd also like to mention especially, the excellent evolution of deposits in the fourth quarter which, I think, somehow reflects the confidence in our subsidiaries in the UK in difficult market circumstances.

As for A&L and Bradford & Bingley, I'd just mention that when we bought Bradford & Bingley's deposits back in September, we said we were buying GBP20 billion -- GBP19.9 billion, and we expected a potential decline of 20% of those deposits, because of the change of ownership. But we have very good news there. Actually, deposits have grown by GBP1 billion, and so we now have GBP20.9 billion in deposits at Bradford & Bingley, which is excellent.

And for Alliance & Leicester, loans, as you know, the transfer of applications into loans takes three months, and we've had a containment policy. So, mortgages have dropped by GBP1 billion -- by GBP1 million (sic - see press release), but deposits have grown by GBP2.3 billion.

For 2009, of course, we are starting to play in a different league, because we have the impact on our perimeter of A&L and Bradford & Bingley. We will benefit from the synergies. Spreads are helping. However, the economic environment is very difficult and provisions will undoubtedly growth. Our CEO will tell you a bit more about that at the end.

Moving on to Latin America; we include Banco Real. We show the figures with and without Banco Real, so you can compare the different quarters. There's a very significant impact of exchange rates in this quarter. I'll try and elaborate on that.

Without Banco Real, net operating income up 27%, attributable profit, 9%. But in terms of the results, we've had poor results in Mexico. And in Banesto's part, in Brazil, we've had bad ROF in the quarter, which, however, do not tarnish the very positive underlying trend for the business.

In general, although there is deceleration in Latin America, as well as in the rest of the world, they are not in recession, with, perhaps, the exception of Mexico, which I think it was yesterday or the day before where they were predicting GDP drops of 1.8%, I think, for [2009].

But going down now to the main unit, you can see that revenues are growing well; that our net operating income shows costs under control; and also, our profits are highly impacted by the dollar exchange, because these results are all in dollars; in Brazil up 31%, including Real, 4% excluding Real.

I've mentioned the unusual fourth quarter because of the low ROFs. Chile up 12%; before discontinued operations in pesos as the growth would have been at about 20%. So here we have a strong dollar impact too. Mexico is the exception with profits falling by 2%. I'll speak about the effects in the fourth quarter, because of exchange rate provisions and increasing generic provisions due to regulatory changes; the other countries growing very successfully with very good performances in our attributable profit of 37% and also Private Banking growing at around 20%.

For Brazil the quarter, I don't know if you can see it in the net operating income, the impact of the exchange rate was very important. However, the corporate center did very well. It was a very volatile quarter in terms of market and so financial revenues were very low. And we're in a transition period with -- immersed in this integration, harmonizing criteria and that has affected some items in our P&L, especially specific provisions.

For 2009 Brazil's economy is deceleration, but not going into a recession. Well, I think we're still where were in Investors Day. We expect the GDP to grow at around 2%; lending to slow down but to continue to grow between 10% and 15%; inflation under control; interest rates on their way down. The Government can promote internal consumption and we have some positive momentum, which makes us feel rather positive in terms of achieving the targets that we reported in our Investors Day at the beginning of November in Brazil.

As for Mexico it's been a bad quarter for Mexico, especially if we look at it in dollars, but we also have the exchange rate effects. But apart from that there has been losses and trading gains, $75 million the impact of Commercial Mexicana and there was another impact of $50 million for generic provisions for credit cards. That together with a few weaknesses in terms of fees and cards, we're talking about an impact of $130 million to $140 million - a negative impact.

As for 2009, the macroeconomic environment is not good. The country is in a recession, growing at minus 1% or 2%. As to lending, we expect to have about 5% growth. The inflation is falling. We will have to carry out a cost exercise. And although the CEO will mention this later, in credit cards we don't expect an additional deterioration, although we do expect some deterioration in lending, because of the economic circumstances.

Chile has continued at the same pace as the last quarter; a fall dollars but basically because of the exchange rate impact. Growing provisions have been absorbed. We also see that the GDP will grow at 1% or 2% as in Brazil, but we think that the loans and deposits business can still grow by 10%. And we think that we have the right policies to carry out a very recurrent business where revenue will grow and, by managing spreads, well we will be able to absorb those provisions.

Finally, financial management and equity stakes, a significant reduction in the quarter; zero results for this quarter and a negative figure in the fourth quarter, and this is due first of all to the use of the equity method -- the equity accounted method except from Banco Real and Cepsa, which is available for sale, and this has two impacts.

One in the equity accounted method and also a positive contribution to our capital, because they had a goodwill, Cepsa, which has an impact of 15 basis points in our core capital. That is from the selling of our stake in Cepsa. Therefore, the results are -- well, it's a double effect. And we have the provision of the Madoff and Lehman Fund, GBP650 million gross, GBP450 million net.

On the other hand, positive impact from the hedging of exchange rates, EUR400 million, which offset part of the falls that we've had in the operating areas. Those are the main variations.

If we take a look at the whole year 2007 on the right hand side, positive and negative effects practically cancelled each other out; of course, without taking into account the capital gains and extraordinary allowances in 2007.

So if we're doing very well for the time, let me just say a few remarks on Wholesale Banking. I mentioned earlier that [it] had a good exercise from minus to plus. The decrease in competition in certain markets, has allowed us to earn profitable market share in this segment. We have a strong increase of revenues, because of greater business activity and improvement of spreads. The growth of risk assets, we've had no growth of that in Wholesale Banking, therefore it's based on more activity and improvement of spreads.

And for 2009 we think we're in a very good situation given the strength of our Bank, and we can leverage that for this business to become a more important benchmark in the market than we were in the past.

And finally Asset Management and Insurance, more of the same; EUR1 billion is what we get from this business every quarter. And here we have two areas that have evolved differently. Mutual Funds with significant falls in volumes as well as in results, 18%; and Insurance where, not only are we growing very well, but we actually think we have significant opportunities in this business, because of specific actions in geographies where we still have not exploited the business at 100%, such as Mexico and Brazil. And we have a positive effect as well from the perimeter and synergies.

And now I'd like to hand over to our CEO, who will talk about the drivers for growth for 2009.

Let me finish the presentation by giving you a summary of 2008 and I will also like to go over our management levers -- our management drivers for 2009.

We have seen why our business is so strong. 2008 is a year where we have differentiated ourselves, because of the volume and recurrence of our profits, because of the quality of our assets and our solvency, for our dividend policy and the improvement of our business portfolio. All of this is summed up in the numbers that you have on screen.

Our CFO has already commented on the performance of the main business units, emphasizing our management drivers for 2009. And I would like to spend this last part of our presentation to talk about the points which we think are the most important ones in our management.

2009; we expect it to be a year -- a very demanding year in terms of management, because of the global recession. A world GDP growth estimated by the IMF to be 0.5%, because of low interest rates which means lower spreads on our deposits, further high cost of wholesale financing, and because of all of this we're going to see a big rise in provisions.

We believe that even in such a complex environment, our capabilities and strength will enable us to weather the storm and maintain strong recurrent profits. And for that we have a very solid starting point, our management model, and differentiated advantages as compared to our competitors, which result from measures and decisions that were taken in previous years.

Throughout the presentation we have shown you the solid position of Santander. I won't say much more about it. I would only like to underscore that we have an intact business model with a quality balance sheet, well provisioned and without capital or liquidity restrictions to continue to grow. And to achieve this, we have developed a series of measures that will reinforce the effectiveness of our management in revenues, in costs and in risks.

Revenue management will adapt to the less favorable conditions of an almost global recession. We expect to reduce growth volumes with important differences by countries nevertheless. In Spain we see lending growing at a pace of the nominal GDP growth. In the UK the business will increase by less than 10%, excluding the [new] corporations, whilst Latin America will grow faster, mainly Brazil, which will be spurred by one of the best macroeconomics scenarios among the world's big economies.

Moreover in the case of Santander, we have a plus of growth that will come from the new units. The focus will remain on actively managing our spreads and loans, and we are confident of maintaining the upper trend of the last few quarters, as you can see on screen.

In costs we will keep our jaws wide open, thanks to two elements. On the one hand the flexibility and adaptability of our cost to the revenue performance and on the other, our proven capacity to obtain synergies and cost savings from the integration of the new units. In both cases, Santander's model of technology and their global operations will be decisive.

All of this will enable us to continue to achieve a sustained improvement in efficiency. We have improved the efficiency by more than 26 percentage points in 10 years, as you can see on the chart.

Active management for risks is the third driver for 2009. It is probably the most decisive element in the current banking environment. We have put into effect a battery of measures in the Group's various units. That, together with a large volume of specific and generic provisions, will be decisive in limiting the impact of the cycle on the income statement.

And I will now look at those steps taken in those markets or businesses that are more sensitive to the current circumstances. First of all I'd like to refer to the retail network in Spain.

According to consensus forecasts, the banking sector in Spain will have an NPL ratio at the end of [2002] of 7% to 8%, as compared to 3.5% at the moment. Santander, which starts with a lower NPL ratio, will also register a lower rise. We think we can reach levels of 4% to 4.5%.

In addition to the usual steps, we also have two special initiatives; the creation of a specific area to manage NPLs and recoveries, and the policy to acquire assets, which I will mention on the next slide. These measures, combined with the release of generic provisions envisaged for 2009 from EUR1 billion to EUR1.5 billion for the network in Spain, will ease the impact of the rise in non-performing loans on our results.

The acquisition of assets is a positive process for the Bank and for the economy in general. The Grupo Santander, just as in other strategies that have proven to be successful in time, has also gotten ahead this time.

Reasons; first of all it means an improvement in our guarantees from borrowers in situations of weakness. Number two, it facilitates the viability of companies by injecting liquidity into their activity, which is also transmitted to and benefits the rest of the economy.

Number three, it makes available the assets immediately, avoiding the deterioration they suffer during a process of foreclosure via the courts. Fourthly, Santander has networks and teams that are specialized in selling assets; and number five, the potential loss in the sale of properties is limited. Even taking the US market as an example, the most flexible in the world, the maximum historic fall in house prices has been one year, 18% or 25% in the accrued figure for two years.

Well, based on this rationale, the Santander branch network and Banesto have EUR3.768 billion of acquired properties at an estimated average price of 10% below the market. And at the time of purchase, an initial provision of around 10% was made. Furthermore, this policy enables us to achieve a higher guarantee, as 30% of the cancelled risk did not have a real guarantee.

And I'd also like to mention that given the current situation of these borrowers, only 13% of these acquired properties would be in NPL, about EUR489 million.

I'd also like to talk about the UK, because there's a microeconomic environment will mean increases in non-performing loans. We believe we will outperform the market and maintain a better run-rate of profit, to which must be added the new incorporations.

This is why we have advantages. We have intangible balances in high risk categories, what in the UK is called the buy-to-let or the self-certified. Moreover, the weight of our foreclosed assets in the portfolio is less than one-third that of our market. This means much better NPL ratios and coverage in mortgages, but also in UPLs, unsecured personal loans. Our traditional admission criteria will remain the same, and we're working on improving spreads so as to offset the higher risk premium.

The third business that is most affected in this environment is Consumer Financing. Our estimates obviously point to an increase in NPLs in Santander Consumer Finance in 2009, to around 5.5% to 6% from 4.2% that we have at present. But the favorable impact of the rise in spreads, the advantages of the synergies and the measures taken to reduce risk in those markets with the worst macroeconomic scenarios and products of greater risk, will continue to limit the impact of profits from the higher loan loss provisions.

And lastly I'd like to focus for a minute in the Credit Card business in Mexico. The NPL ratio in cards reached its peak in 2008 in Santander and also in the industry, about 10%. We forecast a slight fall in cards in 2009 to 9%. The measures taken by us, by Santander, will contribute to this trend.

We have -- we're no longer selling cards to non-customers. We have cut the limits in cash availability of customers with the highest risk. We have reduced our portfolio in 2008 more than the market, 6.5%, where the market has only reduced it by 0.2% and we are already beginning to see the first signs of the improvement in the quality of business. Entries in arrears in different maturities have fallen on a sustained basis since last August.

We are also working to lift (inaudible) return on business with selective price increases that will reflect the greater risk. This is why we do not envisage significant rises in provisions this year.

Summing up, and as we have just seen, Santander faces 2009 from a solid position, and with a very defined management strategy, based on business drivers, but that is not all. Our Group also has specific advantages that enable us to start the year ahead of our competitors.

We have higher profit by perimeter. Alliance & Leicester, Bradford & Bingley, these are new consumer business additions, and Sovereign. All of these we estimate, will give us more than EUR400 million net of taxes, in profits. We have synergies in Brazil, EUR230 million. We have restructuring costs for the year, estimated at EUR250 million, which will charged to the fund created with capital gains in 2008. We have the positive impact of the capital increase, an impact of EUR150 million. And we have a lower impact of the rise in NPLs in generic provisions in Spain, about EUR1 billion.

I'm not exaggerating when I say that no other bank in the world has all these ingredients at the same time. All of them together, turn Santander into a bank with a winning business model, in order to keep on widening its advantage over its peers, and with a solid base of recurrent profits. Thank you very much.

Good morning, we're going to begin the questions. As usual, we will respond first to the ones that have come over the Internet, and then any that come in over the phone.

There are quite a few questions, or questions from quite a few analysts, asking about variations in our annual and quarterly core capital, and the reason for that negative EUR8 billion impact.

As for core capital, both quarterly and annual, we have an annual variation of EUR8 billion; quarterly I think it was EUR4 billion or EUR5 billion. Here, basically there are three elements that come into play.

The first and most important, representing over 50% of the impact with goodwills, which have oscillated quarter after quarter, but to round up, say EUR20 million/EUR22 million you don't cover that with the exchange rate. So that 20% currency depreciation represents the EUR4 billion/EUR5 billion difference in the goodwill, which of course, has not impact on the core capital, because it's [abstract]. It's goodwill from the core capital, but then the adjustment happens at this level.

And then we have a second element, which is the variation that occurs in the capital gains in the portfolios available for sale, which I think are about EUR1,500 million. And then finally, we have the impact of the exchange rate. So the book value in all of our subsidiaries, it is very similar.

And we have non coverage in some small places, other places where there's that 5% to 7% impact, and in other places we have perfect coverage. So that's the reason for those other impacts. 90% of the variation is purely the impact of exchange rates on the goodwill, which I think is EUR2.8 billion in the quarter.

Matteo Ramenghi from UBS is asking about the real estate we have bought. I think that that's been answered already, in the presentation.

Francisco Riquel from [Cheuvreux] is saying that he thinks the risk -- the cost of risk in the UK is low. He says we're talking 20 basis points for Alliance & Leicester, what's the reason? What are the expectations for 2009?

Well, it's low, because as we have said, if you look at our performance in the UK and the CEO spoke about this point, when he said about -- that in 2009 our portfolio, we have no buy-to-let. So in comparison with some market, our NPLs are half than working average of buy-to-let, when in the market it's pretty significant.

Our percentage is very low. Self certified mortgages, we don't have any. So these are the most sensitive segments and we don't have a problem in those. Additionally, you've seen that in our APR portfolio, basically Abbey, we have had a continuous drop. It was very high quality UPL portfolio. We closed Cahoot two years ago, first. And then with Abbey, we have been very selective with our UPLs risk.

And as a result, we have a portfolio in Abbey, but that's also applicable to Alliance & Leicester. It's a very low loan to value, 50% on average. The front book is coming in at 60%, 62% loan to value, so our portfolio, as we've said again and again, is extremely high quality, so the lower cost of risk is simply the result of that.

Plus, we have triple the coverage, as we showed in the presentation. It's at [27%] when the full market single digit. However, as I said also, we expect that in the fourth quarter, provisions will grow, but nothing too dramatic. It's a very high quality portfolio, and it will perform much better than the sectors average.

And Antonio Ramirez from Keefe and David Vaamonde from Fidentiis are both asking about the capital gains from the sale of the Italian businesses. And their question is, if initially we expected the cost of acquisition of ABN, Banco Real to be lower? Whether reflecting them in P&L meant that Real's goodwill was higher? What's the number? Could we explain that a little better? And the same thing with ABN's liabilities, can we explain both of those better?

Okay, with regards to the sales of the businesses in Italy, we said that the cost of acquisition would be lower, and that necessarily entailed reducing Banco Real's goodwill by the same amount. In order to bring about this reduction, you obviously had to do an impairment, and that means, as you know, that you need a report stating that the asset purchase is worth less for some reason.

If you look at ABN Amro's results, or Banco Real in Brazil, EUR1.25 billion, if you do that impairment, there was impossible, and so what we have done is to charge them to capital gains -- to capital in some way, and to net them with charge against capital, against Abbeys intangibles and anticipation of future charges, restructuring, other goodwill, generic sort of capital gains. So we've netted it with other areas, so the impact's zero.

And the other one was about the liabilities. Right, you'll remember that when we bought ABN, we bought a series of businesses, and then there was one thing that we called shared assets, where we held 27.9% which was our participation in the consortium. Of these shared assets, we had every issue -- every ABN issue in the wholesale market.

And then after the acquisition these assets have been distributed and [with who] have taken over those issues -- well, they've been assigned to Fortis and Royal EUR741 million are the market valuation of those issues, on March 31, and [our] 27.9% of that. So these were Euribor plus two, plus 15, plus 20 basis points, which is where the market was before the summer of 2007, have been valued in March 2008 at market value, and that has generated certain gains. And in our case we don't use those issues, but it's equivalent to EUR741 million.

Ignacio Cerezo from JP, and some other analysts, are asking about risk weighted assets. Basically, what is the contribution of Real and of Alliance & Leicester, the evolution of risk weighted assets in the quarter, and why they have grown as they have?

Well, as for risk weighted assets, going back to the exchange rate issue, you're asking about Real. Real is EUR43 billion; Alliance & Leicester EUR25 billion. What happened with the risk weighted assets? We had risk weighted assets of EUR472 billion at the end of the third quarter, EUR514 billion.

But of course, here first you have to deflate. We have EUR100 million risk weighted assets in Latin America, and EUR77 million in the UK, at the end of this quarter. So you have to deflate that with the exchange rate impact. So there's a significant drop there.

And then there's the EUR43 billion in Banco Real, which is why Brazil has EUR70 billion, and then an additional EUR25 billion in the UK. So the main impact is, because you have to deduct the -- or deflate the September base with the rates at the end of the quarter, and that's why it's only growing [40] when we're adding [68]. But that's because you had to take into account the impact of the exchange rate.

(Inaudible) is asking whether we're planning to sell any assets, and there are some other analysts are asking about M&A and acquisition and sales, and what's our strategy right now?

Well, every asset classified as asset for sale, could be sold. And so if we have a chance to do it we will. As for M&As, we don't actually have anything to say right now.

Carlos Berastain is asking why the rising provisions in the fourth quarter in Brazil. I guess that's basically the impact of Banco Real, which is consolidated with Global Integration in the fourth quarter and until the third quarter it was the equivalents method.

And he's also asking why such a low level of provisioning in Spain in the fourth quarter.

The actions and also says that it explains the strong rise in the net interest income. So two questions, why low provisioning and why share price in net interest income? All the rest have been answered.

Right, as for the net interest income, I think it's been explained in the presentation, how we manage our spreads and our assets, and of course, there's been dropping interest rates, very significant; and [this drop] and the combination of both is what's grown our net interest income.

As for provisions, we have said that we're releasing generic provisions and that's why provisions have grown so little in Spain. In the presentation, we said (inaudible). We spoke about the EUR1 billion that we could use up in generics in 2009. And in the fourth quarter we've used EUR340 million it was -- or EUR330 million.

Daragh Quinn from Nomura is asking whether we're maintaining our growth -- our revenue forecast growth. I don't think 14% increase in our profits in Spain, and I think we have said profit for 2009 and 20% in the UK, and -- which we reported in the Brazilian Investors Day.

And given worsening economic outlook in Brazil, whether we have changed our targets -- our growth targets for profits in that area too?

Well, we already explained our views on 2009, in that last presentation in Brazil, and right now we don't want to make any further forecast or mention any different targets to those.

And from Fox Pitt, a technical question, which if you agree, we'll answer later. The breakdown of the generic provisions by area, the alphas and betas, the risk weighted assets question's already been answered.

The total coverages for our hedges for foreign exchange in the year and in the quarter; we could talk about that. And can we update the integration of the banks in Brazil? And can we shed some light on the evolution of Sovereign's loan portfolio? The others have been answered already, or we can answer later.

As far as the exchange rate, I think I mentioned that the hedging was EUR400 million. The previous quarter's, I can't remember off the top of my head, it was EUR100 some million. But the main impact in the fourth quarter, and that's where we've had a strong shift in the pound sterling, and in the Latin American currencies, versus the dollar and the euro.

The integration of the banks in Brazil, I don't think there's any news. Everything on schedule; we're happy with the way things are going and we're on schedule, as we -- or as Flavio explained in detail in that Investors Day in Brazil.

As for Sovereign's loans, there's not much to add. We just bought the Bank and we're going through the usual audit process, and we have more information than we did initially.

Antonio Ramirez from Keefe is asking about the EUR500 million pre-tax from (inaudible) for which he assumes are charged to the corporate center. That's right.

And he's asking what other positive results are offsetting that. It's what you said about the exchange rate impact.

Santiago Lopez is asking for clarification on what's been issued and how it's been dealt with to offset the Madoff costs; so the preferred 10 year shares and how we're approaching that with our customers, what do we offer them? I guess he wants us to explain the Madoff compensations.

Okay, we are now involved in that process. We're offering our preferred shares -- our preferred share with the usual characteristics, with a 2% coupon, and with a call for 2010 and then successive calls like the rest of the Bank's preferred shares.

On that treatment we charge the [500] is the net present value of those preferred shares, discounted at today's market value for preferred shares.

Carlos Peixoto has a specific for Portugal. Since forecasts are flat, could we elaborate on where they're going or why they're flat?

No, I don't really have a lot to say. I suppose in Portugal, just like in Spain, we went from a situation of growing at 3% or 4% with extremely low NPL ratios. That was not the case for Portugal. They had had several years -- first, a bank, which when acquired it, went through strong restructuring.

But Portugal hasn't been growing and its economy has not been growing over the last few years. So there's no significant change in Portugal, that might have grown our NPLs. So that's why we haven't grown our provisions as we have in Spain.

Also, remember that the model applied here is the expected losses model, which we've been applying for four or five quarters. So it's based on the model we had in place already.

And [John Karidis] is asking about the UK, about our strategy and our vision in a market in which nationalized banks might be under pressure to implement not very market focused strategies, and do we have any idea what might happen in those markets? What do we think?

He's also asking about our foreign exchange hedging for Sovereign and Alliance & Leicester. When did we do that versus the point of the acquisition?

Well, the first question is rather speculative. What could happen, or what might happen, or what might we expect to happen, in terms of the performance and behavior of British banks in the current context? It would be to speculate. Facts are facts. And facts are that UK banks are undergoing difficulties right now.

We are very solid and very strong, and that's why we're doing and performing as we have, and as we -- and we have the vision, as we explained, for 2009, which is to grow successfully, although the economic context is difficult to continue to grow, to carefully select the assets to invest in.

And as Jose Antonio Alvarez (inaudible) that's the key to our better quality of loan portfolio, to move away from higher risk products, both in mortgages and in consumer finance, to be a lot more proactive in the deposit or customer fund business. We're seeing the impact already on how our deposits are growing, both traditional deposits and also investment products and that's really it as far as the situation.

Everything else, we just have to be alert and to see what happens. For now, there's no indication that these behaviors by these banks would significantly shift the rules of the game in the coming year.

Carlos Peixoto from BPI again asking something that was answered in the presentation, which are the contributions of Banco Real and Alliance & Leicester to the Group. Banco Real $1.35 billion, Alliance and Leicester integrated December 31, so zero.

And [Christian Soley] -- almost there, and Christian Soley from Dexia is asking why risk weighted assets for Banesto are lower than what they reported by EUR7 billion? We'll look into this in detail but basically we think it's probably intra group transaction.

And there's a question from Luis Pena and Mario Lodos and a couple of other analysts, which is why had the goodwill grown in the balance sheet by EUR5.5 billion in the fourth Q versus 3Q?

That's moving Banco Real from the equivalents method to real integration, that's the effect. So, basically it has not grown. It was there already.

Eva Hernandez from Morgan Stanley, the questions she's asking have all been answered except the last one, which has been answered in the presentation, but maybe you want to elaborate on how we might use our generic provisions. She's speaking in general and not about Spain, but how we might release our generic provision in 2009. I don't know if you wish to elaborate or if you feel you've already said enough.

I think we've said enough.

Diego Barron from Fortis asking whether we can update them -- some other analysts have asked about this, can we update them on the potential impact on our core capital of the Sovereign consolidation?

And can we elaborate on how we internally or organically generate that kind of capital that we've (inaudible)? And can we confirm our commitment to maintain that nine payout versus eight per share?

Mergers and acquisitions, we've answered. And can we explain the reason for the Abbey intangibles amortization? I think that's already been answered; plus, the goodwill that we've provisioned also both.

Okay. The potential impact of Sovereign, we've spoken about 20 basis points. Of course, there's an audit on the way and we'll have to wait to see the final number, but basically that's what we were talking.

Internal capital generation, we're still using the same parameters we've always used. If you look at the results of 2008, our payout on the growth of risk weighted assets was as expected in this current scenario, growing single digit in various places. So if you look to the number, we'll be between 10 basis points of generation of free capital in a quarter, which is what I think I mentioned.

As for the dividend?

As for the dividend, I've already mentioned that there's no change in this area. And, in fact, in the previous question about free capital, implicitly we are using the same parameters for the dividend calculations which we've used in the past.

Mario Lodos from Ibersecurities is asking about the portfolio of toxic assets in Alliance & Leicester, and how we're evolving there and can we give any details. Have we consolidated it? Obviously we have.

How is the process evolving and he's asking about the risk premium for Santander Consumer and why there's a reduction of the risk premium and can we elaborate on the NPLs in Santander Consumer, but the risk premium is not going down in the quarter?

No, it's going up and I think in the presentation, we said that we expected our NPL rate for 2009 in Consumer Finance to rise and so the risk premium would evolve in the same direction.

As for Alliance and Leicester, I wouldn't call that toxic assets. I don't think they were. They were assets [with] mark-to-market at some point we said but we look through the numbers, I don't -- can't remember off the top of my head but it was basically a EUR12 or EUR13 billion portfolio, most were the floating rate notes in European financial institutions of good quality. There was a portfolio of AAA ABSs where the mark-to-market was negative and it was reflected and there were some minor issues where the write downs were 70%, 80%, 90%, so there's really nothing else to say. I don't know whether there was anything else.

And the second was about the risk premium for Santander Consumer Finance. I've already explained it, in line with the NPL rises we expect.

And Daragh Quinn is asking -- Daragh Quinn from Nomura is asking about the cost of risk in 4Q in Mexico, and whether it's what we expected looking at 2009 in terms of cost and just to elaborate on the Mexican situation?

I would separate this into two parts. The driver for the cost of risk in Mexico was 100% cards in 2008. Two messages about risk in Mexico; first that in Mexico we think we have touched bottom, so we don't expect the situation to worsen. We don't expect them to improve spectacularly, but the provisions will remain more or less where they are.

And as for the economic context, we do expect the economy to worsen and, therefore, NPL rates to rise. Otherwise the portfolio, excluding cards, would remain pretty much as it is.

Alberto Cordara from ABN is asking the reserves responsible -- available for sale are positive by EUR1.4 billion versus a negative figure in Q3.

Well, we've put into our P&L Royal and Fortis stakes. There were in assets available for sale, but no longer obviously.

Carlos Garcia from ING, can we update them on the sale of real estate assets which we've began or the ones we acquired?

Well, we've only just started. In fact, our marketing structure was set up in January, but I think we've got some interesting signs. I don't have the numbers for yesterday, but I know that we organized the first sales campaign for flats amongst our employees and we sold over 200 and some in just two weeks.

We're now going to extend these campaigns to other groups. So it's just a small scale beginning and it's not significant in terms of numbers, but we have seen that there is a market if the price is right. And if you have the right sales structure and the right sales tools, you can very successfully sell a significant amount. But we will discuss this quarter-on-quarter.

We don't have a lot of time and it's not been a very long time yet since we started to give any kind of general conclusion or forecast on how much we might sell, but our goals are fairly ambitious. But we'll see over the next months and quarters, we might be more accurate in the figures and in our assessments.

[Sofia Gomez] from Merrill Lynch is asking about how do we expect housing prices to -- how much do we expect housing prices to drop in the UK or what are our views and how might that affect us?

And are we buying competitors' portfolios in Brazil, or would we be interested in buying any niche operator in that country?

Well, we are following real estate price drops in the UK. The drops will be significant as they have been in other countries. The affect, in our case, has an initial impact on our loan to value, but as you've heard, our loan to value is very comfortable at Abbey and so those consequences will not be too significant.

We have seen some impact on our property position, the houses that we have taken over because of default, but not very significant, because our P&Ps are not very high in comparison with the rest of the sector. So it's just another element in this whole process of the falls and provisioning, but it's nothing too significant.

And as for Brazil, we have a lot of integration work to do and a lot of consolidation work to do, so we're not really thinking about buying anything, not even niche businesses.

Simon Morgan from MF is asking about risk weighted assets with the Sovereign acquisition, but that's not included December 31; and the core capital with Sovereign, the question's already been answered.

Carlo Digrandi from HSBC is asking what -- our asset spreads are growing in every business, although our customer fund spreads are shrinking. Do we -- what is our expected evolution for our net interest income for the Group for 2009 like for like?

And can we talk about the top part of the income statement?

I think we already said something about this. We could, of course, elaborate and it very much depends on each market. The evolution in Spain is very different from that in Latin America. And even in Latin America, the evolution of interest rates is very different.

Of course, our forecast for 2009 take into account this scenario of low and dropping interest rates and their subsequent impact on our spreads for deposits. And, of course, we have considered hypotheses and (inaudible) in which our loan spreads would grow and in spite of lower volumes. Therefore, the impact would be significant and positive.

And all this overall would probably means that our margins will grow at one digit rate and won't be very high, like other years when it was two digit. But probably 2009 won't be double-digit. It'll be single digit. And to that we'll have to have some businesses, which will continue to grow significantly like the fee generation, which will not so much grow, but it's just that we have more business that generates fees and commission. I spoke about insurance earlier, for example.

So overall, we think that we will have revenues growing by double-digit growth overall, but it's very heterogeneous. Depending on the different markets, there will be major differences.

And the second part of Carlo Digrandi's question, he's asking what happens if housing prices were to drop below 20% before we sell, would we have to provision additionally?

We've already explained that we do a special mark-to-market for these assets, so that's answered.

And [Robert Welshman] is asking; what is our strategy for Sovereign in the US? What is our experience operationally that we are already applying to the 2009 budget? I guess he is basically asking what our vision is for Sovereign in the US. What do we want to do?

Well, there's nothing new about that. We want to turn Sovereign within the time that's required for this kind of process into a full fledged retail bank, with the characteristics and the strengths of this concept; full fledged retail bank for Santander in every market. So basically, we want to have a bank which will follow very closely our own business model.

We'll, of course adapt, it to the American market just like we have adapted Abbey to the characteristics of the British market. That's basically our strategy and that's going to require changes. It will require time and effort.

Question from Dominique [Zantori] and [Manueli] which have already been answered about the evolution of the financial margins and NPL rates.

(Inaudible) from Caja Madrid is asking about the possibility of reducing our payout, our dividend policy, are we planning to do any more capital increases?

Our capital ratio, we said we wanted to remain at 6%/7%. So we're there, so we don't plan any major initiatives there.

More questions from Javier Bernat, but I think they have all been answered. There's some operational questions about customer recruitment which if you agree, Javier, we will answer later.

Questions about mortgage refinance in Spain and in the UK and how do we see the business? Do we think there's going to be more or less? And have we gained or lost market share?

Integration costs we've already answered. He's talking about reducing our leverage in Sovereign by $10 million. I suppose that's the equivalents method this quarter.

And I think everything else has been answered. I don't know if you want to elaborate and that will be the end of it?

Okay if there's nothing else, I don't think there's any questions coming in over the phone. Every question has come in over the Internet, so that ends the results presentation. Thank you.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.