Banco Santander SA (SAN) 2009 Q1 法說會逐字稿

Good morning. We're going to begin the results presentation of the Bank's first quarter and I'll divide the presentation into three parts. In the first I'll speak about the highlights of the quarter and I'll review the Group's results. Then I will give the floor to Jose Antonio Alvarez, our Group CFO, and he'll analyze in detail the performance of the different business areas. And finally I will close with some conclusions about the quarter and our priorities for the year.

First thing I'd like to say is that Santander has had an excellent quarter in a very complex environment. As I've explained before, this environment is an acid test for banks and it's going to identify the well-managed banks, which will stand out from the rest.

Santander, as you will see, is clearly amongst the good ones and there are two key aspects in the quarter which confirm what I've just said. First, the very consistent results we've obtained backed by the performance of our operating areas, and an income statement which demonstrates our management priorities; mix management, volume management and return management, strong cost discipline and an effort to provision based on forecasts. We have been carrying out very active risk management, both in terms of anticipation and of recovery.

And the second factor confirming the consistency of our results is the strength of our balance sheet. Our risk quality is better than that of our competitors. We have large provisions. We have strong customer ratios and we have great ability to generate capital organically and to continue to pay out dividend.

I'm going to speak in a little more detail about each of these aspects. The first is the consistency of our results. We closed the quarter with EUR2.096 billion in attributable profit. 5% less than in the first quarter of 2008, but it is 8% higher than the attributable profit of the fourth quarter of 2008.

And this profit has been obtained through the contributions of all the operating areas. As you can see in the chart on the right-hand side, the attributable profit in the operating areas have grown more than the Group profit, both in annual comparison and with respect to the last quarter. The first quarter of 2009 is the best in this whole series that you have in the chart.

The operating areas have grown their profit by 9% if we look at the profit in the local currencies. There are however, some aspects that have a negative impact on these results. The reason why? They're not entirely reflected in the Group's profit; a strong negative impact of exchange rates in the operating areas, which subtract EUR148 million from the growth. And secondly, the lower profits of corporate businesses, mostly because of a decrease in revenues with the equivalent method and the [ROS's]. We will explain when we talk about the different business areas.

In order to understand the underlying performance in the Group, we should discuss the results of each unit in the local currency, and this is a complete picture from this perspective.

And the first conclusion we can draw is the enormous diversity of our businesses. And this diversity increases the resilience of our units to downturns in the economic cycle. By geography the retail units in Continental Europe have performed in line with the first quarter last year and clearly better than in the fourth quarter 2008.

In Spain our two Retail networks, which are 28% of the Group, are growing at between 6% and 7% their profits, in comparison with the first quarter 2008.

In the UK, which is our second major geography, the quarter once again demonstrates the sustainability of our British business. Abbey continues to grow strongly, and the new contributions from Alliance & Leicester and Bradford & Bingley.

Latin America has been hard hit by the exchange rate, but in constant currency they show sustained growth in this last quarter, both in Brazil and in the rest of the region.

Finally I'd like to highlight the very successful performance of GBM, where we're taking advantage of the gap left by other competitors whilst very strictly managing risk, liquidity and capital consumption.

Moving on to the income statement, I'd like to mention that in the first column we have included the Group result, that is including Sovereign, Alliance & Leicester and the smaller acquisitions of Santander Consumer Finance from General Electric and Royal Bank of Scotland.

The first column of percentage change reflects this favorable perimeter change, adding 2% approximately to the profit, although differences in the different lines; and a negative impact of the exchange rate of between 7% and 8%. For that reason we've added this last column on the right-hand side where we have subtracted the perimeter effect and the foreign exchange effect, and this I think will allow you to understand the evolution of the underlying results better.

In this income statement, of course, we see the impact of the strong economic recession, but also the management priorities we announced last quarter. And the first, very active credit spread management or asset spread management is seen by the increase in our net interest income, offsetting the lesser growth of fees due to decreasing activity.

Secondly, our strong cost discipline with costs staying stable or even dropping in some units. These costs are starting to benefit from the initial synergies of the integrations under way, but there's still a long way to go. The consequence of this evolution in our cost and income is a further improvement in our cost income ratio. Even including the new companies whose ratios are worse than Santander's, our net operating income is growing at double digit rates, 15.4%, at 17.5% if we excluded the perimeter effect.

Thirdly, very strong recovery activity, which is starting to show results and slight deceleration of NPL ratio, although the growth is still significant if we compare it with last year.

And now let's speak about our most commercial revenues; that is net interest income. And if we look at fees and commissions, we will see that in some lines fees and commissions are affected by the dropping volume. However, net interest income remains solid. Of course, this is enhanced by the new acquisitions.

You can see on the chart at the bottom that even in a very difficult scenario like that of the last quarters in Europe and in the UK, our growth trend continues. There's only a drop in Latin America because of the exchange rate impact. Subtracting that, they're also very stable.

What this demonstrates is the successful commercial performance of our units and our strong resilience because of our geographic diversity and our very diverse businesses. This evolution of net interest income, which has grown in the year by 22% or 19% if we subtract the perimeter and exchange rate effect, shows the success of our spread management policy.

And customer spread, in the last quarter we have been able to offset the drops that have been experienced by customer spread with lending spread. In volume, volume in loans and customer deposits have followed suit. Loans have decelerated, because of less economic growth, and falling demand. In Spain it has grown by 2%; in the UK by 8% in pounds sterling without the new acquisitions; in Brazil and Chile, double-digit growth, and in Mexico we have actually decreased our lending. We don't have any liquidity or solvency issues and so we are still funding the needs of families and companies as long as the projects are viable and fit with our own strict and prudent risk management policies.

We have been very active in lending programs for individuals and SMEs, promoted by the ICO, or the official Credit Institute of Spain, and also by the Portuguese Government. And as for customer funds, we're still focused on deposits. We've grown by 15% organically; and then there's the acquisitions. And we have substantially improved the ratio of internal finances in the Group from customer deposits.

So, overall, we have succeeded at this policy and so most areas are showing significant increases in their net interest income, as you can see on the slide.

The drops in Mexico and Chile are due, in Mexico, to strong recession in the country, but also to a deliberate change of mix towards lower risk products in the last months. In Chile, the activity is greatly affected by a dropping inflation rate, which will be offset as the year progresses since our customer policies have been very successful.

The second basic engine is our improving efficiency. In the current scenario we need to have stricter cost management. And in this sense, our total costs subtracting the perimeter and the foreign exchange impact, basically remain flat with respect to the first quarter 2008. Also, as you can see on the right hand side, all the units are well under control, with almost zero growth in real terms.

This control of costs, and the growth in revenue has enabled us to keep our [current levels] open for 5% absorbing the impact of the new integration, because without them the margin would be between 7 and 8 points.

And secondly, we're still improving efficiency. We have dropped our cost, income ratio already by 4%; 3% would be without the perimeter effect, but the efficiency ratio without the new integration would be at [41.9%]. We have improved with respect to the first quarter of the previous year in the three major segments.

In summary, we continue with our successful policy of cost income improvement. In the past few years we've improved year-on-year, and there's only a slowdown when we integrate companies with worse ratio, and we then continue improving our cost income ratio by controlling costs and promoting revenue. For example, we have just integrated Sovereign, whose cost income ratio was above 70%. I remind you that these were the levels Abbey had when it was acquired. Nowadays, Abbey's cost income ratio is 40%.

And a third point I'd like to mention is provisions. The macro environment has worsened faster and more deeply than expected, and as a result there has been a worsening credit quality, and a strong increase in provisions. Versus the first quarter of 2008, provisions have grown by 73% which, with a constant perimeter, would have grown by only 54%.

As you can see on the right hand side, upper right hand corner, it's important to point out that in the last quarter subtracting integration there has been a deceleration in the establishment of specific provision. Now on the other hand, generic provision we have started to recover more intensely in the last two quarters, and we have used up between EUR350 million and EUR400 million a quarter in the Group.

I remind you that in the fourth quarter of 2008, the number was higher, because we incorporated EUR380 million in one go because of sub-standard credit.

Starting on the left, with specific provision, there is no change with respect to the previous year. There's slightly greater impact in the Spanish network because of increasing NPL ratios in the sector. Additionally, there's a perimeter effect which is seen in Santander Consumer Finance, Sovereign and the UK.

As for generic provision, in the last quarter we've used up EUR420 million in the Group overall, most of it in Spain where the Santander and Banesto network have used EUR326 million. This number is in line with our estimates that we reported last quarter, that is to use up between EUR1 billion and EUR1.5 billion in 2009 in Spain.

All of the provisions in the last quarter, and the Sovereign incorporation, give us a total loan-loss provision of over EUR15 billion, of which over EUR6.3 billion corresponds to generic loans; a number which has grown in this quarter because of the Sovereign integration. In Spain the allowance is at this level, which if we used it up the same rate as the same quarter, would keep us going for the next eight quarters.

Finally, I just comment about the Group's ability to absorb larger provision. We see on the chart, strong provision growth in the last years has been offset by spread management and operating leverage. As a result, our net operating income over net loans has remained almost entirely stable. That is, even if we were to double the provisions with respect to today's rather high figure, the Group would still be profitable, and also with a clearly advantageous position in comparison with our competitors.

In the widespread economic crisis, our NPL ratios have grown, as you can see in this slide, and they will continue to grow. But in any case our ratios are very good. The Group's NPL is at 2.49%, and our coverage is over 80%. Considering the mortgage guarantees, the coverage is of 115%. And by areas, the overall NPL ratio, all the businesses in Spain; Santander, Banesto, Consumer, etc., is at 2.4%, with a coverage ratio of 81%.

Abbey is at 1.25%, lower because of the mortgages in the portfolio, higher mix and also lower coverage for that reason. Latin America has a higher ratio, 3.27%, but quite stable in comparison with December 2008, and coverage is over 100%.

How do these ratios compare with those of our peers? Well, as we've reported in previous quarters, we compare very well at the Group level, but also in the three main markets where we operate; Spain, the UK and Latin America. In all of them, we clearly outperform most of our peers.

In Spain, in the last quarter, we have outperformed the sector and the gap is widening. Today, we're slightly more positive than in the previous quarter, because then we said that we expected our NPLs in Spain to reach 4.5% by year end. Now we feel that we won't reach that level.

Second set of strengths in our balance sheet, our capital base; we have ended the quarter with the core capital ratio of 7.3%, calculated on the basis of Basel II requirements. This was 7.5% in December, and it's slightly higher than what we reported initially than when we use Bank of Spain criteria. The main difference is because in the Bank of Spain criteria, you subtract IT investments, which are amortized in our case in three years.

It's a high ratio, especially from a qualitative point of view, for two reasons. First, because of the low risk of our balance sheet, it is very plain vanilla, very retail; because of our very strict core capital definition, where we subtract valuation adjustment and we don't include generic provision; and because of our ability to generate free capital in a context in which there's low increase in risk weighted assets. In fact, in the quarter, we generated 20 basis points of capital, which have been offset by the negative impact of the consolidation of accounts from our acquisitions.

Additionally, and given this plain vanilla character, and this retail character of our balance sheet, our capital ratios compare very well with our peers in terms of tangible common equity over tangible assets.

Going to Bloomberg data for December 2008, we are number two amongst this ranking of our peers. We have reached this ratio and this place in the ranking, thanks to our ability to generate capital recurrently in the most difficult part of the cycle, whilst continuing to pay our shareholders a dividend; by March, EUR7.83 per share, a figure which has been growing continuously quarter-on-quarter, for the last years.

As a result, our book value per share has grown by 46% since the end of 2005, and the current share price, our book value, in this context would be at EUR0.80. If we take net asset value per share in the stricter sense; that is if we don't [preferred] or minority holdings, subtracting value adjustment and goodwill and intangibles, the evolution is just as consistent, growing every year and every quarter.

Now I'm going to give the floor to Jose Antonio Alvarez, so he can explain in more detail, the different business areas.

Good morning. As we usually do every quarter, I'm going to look in more detail at the different business areas, geographical areas, and I'll also talk about the secondary segments and the corporate center, and I'll also make some specific comments on Sovereign, because this is the first time that it has been included in our accounts.

The first thing I want to say is that our earnings have performed very well. The CEO already mentioned the reason for that is spread. The costs are basically flat. They're growing at 1% [without] perimeter; with a change of perimeter a little bit more. And this is that the increase in revenue as well as good cost control gives us the possibility of making earnings increase by 7%, excluding the impacts of exchange rate and also excluding the impact of the perimeter, which in the current context, I think, is very good given the economic circumstances.

We have obtained the highest profit ever in our operating units, therefore, we are quite pleased.

If we look at the first important operating area, which is Continental Europe, the profits that have been achieved is EUR1.289 billion, 9% more than the same period last year. The drivers are still the same. We are still generating earnings and the global businesses that we will see later on, particularly Global Wholesale Banking, is also having a very good year in terms of earnings and good cost control, which allows us to absorb greater provisions, not so much part of Retail Banking, but basically in Wholesale Banking.

If we look at the different units in the different geographical areas, the revenues are growing, ex. perimeter; there is a change of perimeter in Santander Consumer Finance by a digit. The net operating income, thanks to good cost control, is already two-digit. That, after provisions and the use of generic provisions, means that we have a growth of 6%, 7% and 3% in the different areas.

In Consumer Finance, there has been a change in the perimeter, and we will see this when we talk about this unit. But nevertheless there's good cost control. There is an increase in spreads, continuing with the trend we saw in previous quarters.

In the others, I would like to point out two very good results of Wholesale Banking in Spain, although it hasn't done too well in the world of Insurance and Asset Management, with a fall-off of volume of assets under management, has had an impact on the revenue.

If we look at the network, this we also see in the Banesto network and also in Portugal, where we see an increase in volumes in lending, only 3%, quite low; very good performance on deposits and improvement in the spread.

On this slide you can see the net operating income over total assets and costs are under control, and this means that with the flat evolution of the provisions, because we had used up about EUR350 million in Spain between Santander and Banesto, this gives us results that were the ones that we showed you a minute ago.

In the case of Banesto, well, we can say more or less the same thing. The growth is more or less the same as in Santander. The growth of deposits is greater than the growth of lending, and the use of generic provision also allows us to keep provisions at levels similar to those of last year, which gives us a result of 6% in the case of Banesto; 6% before the EUR20 million that were put into the generic provision.

Let me talk a bit more on Santander Consumer Finance, because here there has been a variation in the perimeter. Here we have, on the one hand, very good performance of the spreads. We expected this. We have been announcing this, and in an environment of lower interest rates, then the -- there you have lending spreads which are going up quarter after quarter.

A significant growth in volume, because of a change in the perimeter, but even without the change in the perimeter, the volumes would be growing significantly; [30%] in lending, 33% in deposits, so -- and without a change of perimeter volumes are growing well.

Cost control, costs are basically flat, ex. perimeters; sometimes -- in some cases they fall significantly, because of the synergies or integration, and the provisions are under control. The NPL, I would remind you that in the previous quarter we talked about 5.6%/6% at the end of the year in NPL rate. We feel very comfortable with our level right now. Provisions increased strongly, but since revenues are growing, we are very pleased with our results in the current economic circumstances.

In the case of Portugal, we -- more or less the same situation, although the volumes have gone a little bit more. The spreads have increased more than in Spain. Provisions remain at low levels and the income statement shows the recurrent trends with 1 digit growth, but in a sustainable fashion. The net margin and the provisions you can see have grown a little bit, 1 digit growth.

If we take a look at the UK, growth figures in the UK are very high for two reasons. First of all, a change in the perimeter, but without a change in perimeter the growth of Abbey is also very strong. And let me elaborate a bit on something which might surprise you, given the negative view that we have on the economic situation of the United Kingdom.

Retail Banking in the UK, the net operating income we see it's growing consistently. We will see later on that this is an evolution of the combination of an increase in volumes and also a good performance of the spread. Revenues grow 25% without changing perimeter and 67% if we include A&L and the Bradford & Bingley business.

The contribution of costs, well, costs are basically flat. They grow at only 2% and this gives us margins of about 50%, which after provisions go down to 30% in Abbey, 50% or 60% if we were to include A&L and B&B which in the quarter give a result of GBP60 million.

Perhaps more than the results, more than the earnings and the quarter-to-quarter growth let me elaborate a bit more on the sustainability of these results. Why is this happening? Why are we having this excellent result?

Well, if we look at the right-hand side at the top, the improvement of the spreads and assets is a driver. Quarter-to-quarter asset spreads, since the first quarter of 2008 have gone up GBP374 million to GBP686 million. In the last quarter it has improved by 40 basis points. This improvement in the spreads on assets pays for the fall on the deposit side. And therefore, this trend which is still in the market allows us to be very optimistic with regards to the next few quarters when it comes to our business in the UK.

On the side of volumes, we see that they do reflect our priorities very well. When we acquired A&L we set a series of priorities and we see that we have a stable stock of mortgages growing at 3%; different performance in Abbey and A&L with 8% and 11% growth respectively. Also a growth in deposits at the franchise in Abbey 15%, A&L 12% and if we put Bradford & Bingley there too we have a growth of 35%.

Corporate loans are growing at a good rate in the current circumstances, 8%. We see that they're growing more on the A&L side, which has more business with SMEs than Abbey. Personal loans, the UPLs, we have reduced our book of UPLs since we acquired Abbey by 50%. They still fall 18% and the securities portfolio, which is not our core business, has also fallen 8%. And this reflects what our priorities are in the UK, which we already announced when we made the acquisition of A&L.

The portfolio has excellent credit quality. Our NPL is half of that of the industry. Our coverage is significantly higher than that -- the average of the industry and the quality of the underlying portfolio is significantly better than the industry. We don't have buy to let, only 1% of the book. The allocations are very low and we don't have self certified, which indicates that the difference in credit quality vis-a-vis the industry is going to only improve.

So things are going as expected, we have gotten ahead a little bit with the integration of Bradford & Bingley technologically speaking and the integration of A&L is right on schedule. So in brief, I would say that the UK, we're very optimistic about the performance of the business in the UK and the capacity to generate results in this environment, given the underlying dynamics of spreads, volumes and provisions of the business.

Latin America, which is the third important geographical area, the exchange rate, in fact, against the dollar [tells] 20 basis points. We have an income statement where revenues are growing at 13%, without the exchange rate impact costs, and local currency are also flat and the margin grows 22%, which [pays] for that increase in provisions. On the right-hand side we see that ex. exchange rate, we're talking about levels of the first, second and third quarters of 2008 and clearly more than the fourth quarter of 2008.

Given the effect of exchange rates in this part of the business I'm going to deal -- I'm going to talk in constant dollars, so that we can see the percentage changes in local currency, because it's better to understand the business.

In Brazil we have good performance of revenues, certainly better than we expected. We have less growth in volume. The spreads though are a little bit better than we expected. In Investors' Day we expected an increase in interest rates in Brazil, but clearly now they're going down. Costs are falling, that is something we announced as a result of the integration and, therefore, the net operating income is going up 27%.

Provisions are also on the rise, there are some sectors in Brazil which have requested provisions.

We see that profits are flat, but also profits are significantly higher than in the previous quarters, and we think this is a good basis on which to build on our objective; the objective that we announced on Investors' Day in Brazil.

We still have good growth in terms of volume. Credit spreads are the same or slightly up. Costs, we have a strong potential to reduce these costs. We've already done some of that but we still have some way to go there and we affirm the objectives of Investor Day although with a lower volume, but better spreads than what we expected when we made the announcement in Investors' Day.

Finally with regards to the integration, I would say that it's right on schedule. The Central Services have already been changed. We are doing all the integration. We have made a lot of progress. I would say that we're on schedule, and as proof of this integration, synergies in the quarter have been BRL300 million. We announced for the whole of 2009 BRL800 million in synergies. Well, we are on the right track to achieve this objective. And the legal merger will become effective soon.

Mexico has a weak income statement, because here we don't have decreasing volume. We have stable spreads and, therefore, the generation of income is weak. That together with the increase in provisions, comparatively speaking, gives us a significant fall -- a drop in the results in local currency.

If we look at it by quarters we see that the comparison with the first quarter of 2008 is the most [acid], if we compare to the last quarter of 2008 we see a significant improvement.

Why? Why do we have this situation? Well, on the one hand we have a fall in lending, 6%. But even more important to understand the income statement is that there has been a drop in the credit card portfolio of 16%. It's a very profitable portfolio, which has a high impact on net interest income and also on provisions. I'll talk about that later. And that has a very strong impact on the revenues.

We are managing the costs. We're going to zero cost growth. We confirmed two digit costs -- cost growth.

The situation in Mexico is different than in other countries. We had an increase in provisions, a strong one because of the credit card business. We adopted measures. The entries in arrears of credit cards is improving, so we are optimistic. We think that the arrears rate will go down in credit cards and so will provisions. So if 80% of provisions fall for credit cards, provisions for other parts of the business will go up, but in any case since there is no growth in volume, there is no growth in revenues because, of course, we're in a recession.

Chile, the CEO referred to Chile in his presentation. We have strong growth of revenue. We have, of course, the impact of negative inflation on the US hedging portfolios, revenues of minus [EUR60] million. Well, in the next few quarters we will go back to normal figures -- normal recurrent figures that would be double-digit in [China] despite the fact that provisions are on the rise.

In Chile we have good growth in volumes, two-digit growth of deposits and lending. Costs are falling and we have an increase in provisions and the effect of the US that I already mentioned earlier, but also an increase in provisions. With this dynamic of cost and revenues we should be able to absorb this through the net operating income without that impairing the profits on the unit.

And finally a slide where we see the profit of the other Latin America units, the situation is different in the different countries. Argentina and Columbia very much depend on deposits and the Santander Private Banking is suffering because of the fall in returns and volumes in market.

Finally the Corporate center, here we're talking about variations vis-a-vis the first quarter of 2008. There is a negative percentage change of minus EUR108 million (sic - see presentation). Last year it was minus EUR285 million and this year it's minus EUR473 million, because of the equity accounted method that has been applied for Cepsa and Sovereign. That's at EUR112 million. Also lower gains on financial transactions impacted by EUR190 million of Metrovacesa, equivalent to EUR45 per share. And the rest of items, well, we have basically higher costs from renting the Grupo Santander City.

And secondary segments, I'm not going to say much about Retail Banking, because we already went over that. The evolution is very consistent quarter-to-quarter and it shows high returns.

In Global Wholesale Banking, which I mentioned in passing when I talked about Continental Europe, the performance has been very positive. The trends are very good in terms of revenues and very good cost control. The drivers of this is basically the spreads, and earning market share, these are the two drivers.

The balance sheet is not growing, but lending is growing at 2%. Fair value at risk is basically stable, $34 million the first quarter of 2008, there's -- or it's $34 million now -- sorry $29 million in the first quarter of 2008, and we are earning market share in the world of syndicated loans and project finance, because some of the traditional competitors are in more difficult situations. And this has allowed us to earn more market share in this segment.

Finally Asset Management and Insurance, there's been a reduction of 6% (sic - see presentation) in the total revenues of the Group in this business; less intense in insurance. Well, they improve in Germany and Brazil but they fall in Portugal and Spain; and a lower volume of assets under management.

Finally let me say a few words about Sovereign. We did global integration of Sovereign in the first three months of the year. This is the weight of Sovereign in the Group, 6%; a little bit more in deposits, slightly less in lending. But about 6% of the Group is now represented by Sovereign. In business (inaudible) results unfortunately not yet, but in the different item of our balance sheet.

If we look at the balance sheet of Sovereign; $78 billion in assets, this is purely Retail Banking, $51 million deposits and the remaining is portfolio available for sale and liquidity on both sides. We have 60% SMEs, 40% are Retail customers and we have a coverage of 92%.

The Securities portfolio, which has been a reason for concern in some of the units has a volume of $8.7 billion, out of which $4.8 billion are basically liquidity short term Federal bonds with an average duration of three or four months. The portfolio which we have states and municipalities and mortgage backed securities, which is put at mark-to-market is about $4 billion and the rating average is AA. And with the mark-to-market we feel very comfortable vis-a-vis the current market circumstances.

In terms of deposits, this is the [space] of deposits in Sovereign, basically Retail; 82% are Retail deposits [$9.2] billion, 20% more or less are more institutional in nature. The most important thing to point out here is that the deposits we're following the $50 billion to $43 billion in the six months from September to March. Then there's a recovery of deposits and we are at the level of deposits that we had prior to the acquisition and the crisis in September with the Bank of Lehman and which generated a lack of confidence.

Where are we right now after two months, after the -- completing the integration? Well we are reducing risks. The Securities portfolio has been adjusted. In fact, the balance sheet when we sold the Securities portfolio is short in terms of interest rate risk and this has affected the spread significantly, because of this reduction of this portfolio. We are reducing some lending activities that we don't consider to be core business, basically motor finance or car finance and others. So the risks have been reduced.

We have increased our write-off. We were saying that we would need $700 million/$800 million. We have increased provisions in the book to 2.7% of the portfolio and we're now seeing the first cost savings. In this quarter we have already lower costs than in previous quarters and this is just the beginning of the cost synergies that we're going to achieve.

All in all, the income statement for two months is not -- doesn't tell us much, but the results are $25 million with a cost to income ratio which is -- can be improved at 75%. That's what it is for this first quarter and with a high level of provision.

With this scenario and with the plans that we are drawing up we can confirm the vision that we announced for the years 2008/'09 -- sorry '09, '10 and '11 for Sovereign in terms of the capacity to generate income for the Group. And now let me hand over to the CEO who will give you the conclusions before we take questions.

Right, so in order to conclude let me give you a summary of the presentation. Santander in the first quarter of 2009 and in a quarter which has been a very difficult one, we have obtained profits of EUR2.096 billion. The operating areas obtained EUR2.568 billion, which is a record in this quarter. The net operating income is very solid, more than double that of the provisions we made.

We widened our advantage over our competitors in credit quality and we see better ratios in Spain than what we had originally envisaged. Plus, we have more than EUR6.2 billion in generic funds, we generate capital to keep our core capital above 7% and remain one of the best among our peers in solvency.

And lastly, and also very positive, we are attaining our objective in synergies and the integration, which I interpret as a better trend than that first announced. In short, the Group's strength and our business model enable us to confidently face the next quarters and maintain our earnings.

And if we look ahead, Santander's management will continue to revolve around two main elements. On the one hand, re-affirm our traditional management drivers, the strength in commercial revenues via spreads with a focus on deposits, maintain the emphasis on cost management and other jaws. We will extract as much value as we can in -- from the business of recoveries through the creation of new units and, of course, we will remain very disciplined in the use of the liquidity and capital.

And the second element is to extract value from the new acquisitions for the Group. All of them are in the first phase of integration and, therefore, have not yet reached normal levels of profit generation. In this sense the integration is going very well in the UK, as Jose Antonio pointed out. And we are managing the first stages of Sovereign where everything is following its normal course, and we will report on this in the next quarters.

For all these reasons we are very positive about the Group's recurring profit for the rest of the year, of course, within the complex environment.

Thank you very much for your attention and now we will take questions.

Good morning, let's take the question that we have received over the Web. We're going to organize questions by subject.

Now when it comes to the strategy, that will be the first group of questions, Antonio Ramirez from Keefe asks, how do we think the financial system in Spain can be restructured, particularly the savings banks? And what is the position of Santander regarding organic growth? Or are we thinking of making acquisitions of assets in the Spanish market?

The theory at Santander is the same for the banking sector as a whole and I think it has become very clear from the AEB. I think they even published a document on this.

I'm not going to repeat what the scheme is but in turn, at least based on the information we have, it looks like it responds literally to what the Government and the Bank of Spain are preparing as the route map, or however you want to call it, for this re-structuring plan.

Basically we're talking about the establishment of a new fund for operational purposes with additional amounts, which will be used for the plan which the Bank of Spain, in agreement with any banks in trouble might require. I would say that our plan is -- or our view is very much in line with that of the Bank of Spain. We are exactly in the same line, and so we agree.

We specifically feel this is a problem that has to be solved by each sub-sector and each company; if there are some banks in trouble, it should be the banks; if it's the savings banks, the savings banks, and to each his own basically.

We don't have any interest, and that's the second part of your question, in asset management. We're not interested in participating in any of these processes if they were to happen.

Sales strategy aspect, it's always the same question, any potential acquisitions in Europe, in the UK or in Europe, if the prices were attractive.

And in connection with the UK it talks also about the equity portfolio if there's been any write-offs. Well, same thing about the loan portfolio, and do we have any portfolios with very high risk in the UK?

No, we don't have any plans for any acquisitions, as we said in the last results presentation and we say it again today in Europe or outside Europe. So our answer is, no, in terms of our interest or our potential -- any possibility of the Santander Group considering an acquisition now or in the future.

As for the portfolios we have in the UK, I guess that's the question, there is nothing worth mentioning. The portfolios we got from Alliance and Leicester, which was the only external one, because Bradford & Bingley did not entail any growth of our asset portfolio, has performed as expected. There has been no write-offs beyond the usual events in our loan portfolio, so it is behaving completely normally.

And as far as dividend policy and profit per share, Santiago Lopez from Credit Suisse is saying that we're in line to get an EPS of about EUR1, and are we going to -- the question is if we're going to pay the same dividend per share we paid last year, which would be a 65% payout.

Well, payout policy will be defined at the time by the Board and so to define it now wouldn't make much sense. It's not the time, but I can give you some guidance in general on this point.

We plan to maintain the level of profits we obtained last year and since our payout policy remains the same, 50% payout, and the cash dividend without capital increases or acquisitions. So basically, the answer would be around sort of what you've said in your question. But in any case, this is a decision that has to be made by the Board. But in any case, for now, we are not planning any changes in the general payout policy.

Daragh Quinn from Nomura also talking about payout and dividends, which has also been answered. He is also asking about treasury stock which has grown significantly, 5% he says it's evolution.

Well, right now we have under 2% or less. Yes, again, less than 2% treasury stock, so we think that's a fairly normal level.

Okay, Ronit Ghose from Citigroup has a question about re-financing and re-structuring in 2008/2009. Have we done any and what's the policy we have for re-financing?

Well, the debt re-structuring we do is based on strict criteria defined by our risk management unit. We do re-financing and debt re-structuring. Some cases have already been reported and are known, but they are always based on solid feasibility plans, which make sense, which are well constructed with a solid and believable and feasible industrial basis, or entrepreneurial basis.

And secondly, any re-financing or re-structuring always entails improved guarantees, additional collateral, always normally we do not increase the initial debt, but perhaps reduce the principal to some extent, or the Bank's exposure is to that particular debt. And I think basically that's the parameters that we handle in our re-finance product core. These are the points that have to be reviewed in any kind of case of this type.

From the financial perspective there's quite a lot of questions about capital. David Vaamonde, Eva Hernandez and some additional analysts are asking about our reported core capital for the first quarter of EUR7.3 million and the difference with respect to the core capital we reported in December, although I think you explained that already in the presentation, but it seems that you might need to explain it again.

Okay, I think it was explained quite clearly in the presentation. The core capital we reported in December was based on Bank of Spain criteria of EUR7.3 million. We're now using Basel II criteria comparable to that of our peers; EUR7.5 million in December and the EUR7.3 million we've published now, but we explained that difference in the presentation.

The Bank of Spain requires that the valuation of IT applications, in our case Parthenon -- the Parthenon valuation, which is amortized in three years, in our case is deducted in one case and not in the other, that's the difference. So for a like-for-like comparison with the rest of the sector, we have now reported the pure Basel II number and not the Bank of Spain's method, that's the only difference.

And talking about capital, Giovanni Carriere from Execution is asking whether we can give him the breakdown of the core capital increases, that EUR1 billion. I think it's already been explained too, but also he's asking about that increase in reserves of EUR8 billion from December, especially because of the profit in 2008.

Yes, it's the retained profit from 2008.

And the changes in the core capital? Do you want to say anything about that, that EUR1 billion increase of 20 basis points you mentioned; you want to describe that in detail?

Well also, when our CEO was talking about the evolution of our core capital, apart from our adaption to Basel II criteria we generated an additional 20 basis points of core capital. We said that in normal conditions we would generate capital. We said 15 basis points a quarter this year.

Risk weighted assets haven't grown much, probably less than what we expected, but it just means the normal capital generation and consumption of 40 basis points for acquisitions. That's basically a few basis points from the integration and the rest is the Sovereign integration.

And in Sovereign's case, perhaps because during the acquisition we spoke about around 20 basis points, it's risen to 30 some basis points, basically for two reasons. One reason is because when we made the proposal to acquire Sovereign, our core capital target then was 6 and now it's 7. And so that change in the target means that what was 20 basis points is now 30.

And then in the last quarter also Sovereign made some adjustments in its portfolio of $200 million/$300 million, which has also increased that by a couple of basis points. So that's plus 20, which is normal and the minus 40 is those two impacts of Sovereign and GE.

Daragh Quinn from Nomura is asking about our outlook for risk weighted asset growth in the year.

Alfredo Saenz; Well, we talked about 5%. It will depend on the cycle. It will be there or maybe a little less, since lending institutions are growing very slowly this year.

Ignacio Cerezo from JP is asking why again there has been this quarterly increase in the goodwill. That's been answered already.

Why is there a reduction in risk weighted assets in the wholesale market in Europe, and why such a strong growth in net interest income in that division? And can we explain the valuation adjustment in comparison with the fourth quarter?

Okay, as for the wholesale market business and drop in risk weighted assets and improving spreads. Okay, the wholesale market business we establish targets based on some parameters, which are growth in risk weighted assets and the growth in liquidity used up by the business. Perhaps we're focusing more on managing those and that's the impact on risk weighted assets.

I also said that loans had grown by only 2%, but net interest income had grown significantly. Improving spreads is simply a reflection of market conditions. If you look at the CDSs of major companies now and a year ago, you will notice that there's been a significant growth in spreads and the first quarter has a small impact, but on the following quarters the improvement in the portfolio will be significant.

And there is also, as I said in the presentation, more market share in some segments because of, let's say, the fact that people feel that the Santander is open for business, while some of our competitors perhaps are not quite as open, or not perceived as being quite as open.

Growth of risk weighted assets and wholesale financial margins, their valuation adjustments. We've already spoken about value adjustments, the market to market of the portfolios available for sale. It's not significant in the quarter. There's a significant improvement actually, because there's been an appreciation of the pound from December 31 to March 31, and also I think of the real. And as a result the valuation of the goodwill improves. There is a drop in negative aspect.

Opposite thing happened in the fourth quarter last year there was strong adjustment, derived from depreciation and now there is a slight improvement.

There is a question from (inaudible) about the possibility of any branch closures. How do we see the sector's reaction to excess capacity? Well, we right now are not really considering any sort of capacity adjustment in terms of closing any branches.

Right, looking at risks or in the risk area and coverage, Santiago Lopez from Credit Suisse is asking about our current coverage policy in equity and income statements.

Well there has been no change in our coverage policy in general. We are still covering the book value of the subsidiaries and different currencies. Basically we're still hedging the pound, the peso and the real.

The same thing for our income statement, I think we are close to 100%, either with forwards or option tunnels, or hedging in all cases.

Javier Bernat from Caja Madrid, Antonio Ramirez and Santiago Lopez from Keefe and Credit Suisse are asking about net NPL ratios, the growth in new quarter; any impacts from the perimeter change and information about the distribution and the growth of NPL by area.

Well, [no] NPLs in the quarter EUR6.5 billion, I think that's the number and in the previous quarter it was EUR4.5 billion, so basically there's been an increase from EUR4.5 billion to EUR6.5 billion, so an increase of EUR2 billion. Basically due -- well, it is exclusively due to Sovereign and GE.

With the same perimeter as our NPL in the quarter would have remained constant, 70 basis points maybe difference between the fourth quarter and the first. The difference all comes again from Sovereign mostly and the rest from GE.

Daragh Quinn from Nomura again is asking about the macro economic situation in the UK and Brazil, and do we see any worsening of credit quality or the cost of risk in either of the two countries?

Well, in fact, we had expected it and in our budget we expected a rising NPL rate, and so some worsening of credit qualities in both markets. But again, it was expected. It was in the budget. When we spoke about our outlook for the year, it was clearly included, this worsening of credit quality.

And so far in the UK we've not had anything worse than what we had targeted. We have seen a slight increase in Brazil, but we think it's purely circumstantial, because we don't quite have our recovery systems fully up and running, because we're integrating them for the two Banks. And when this happens over the next few weeks we think that the slight difference of the first quarter will disappear.

So yes, as for your underlying question in the sense that we do expect to see NPL rates to rise in both markets; but no, in the sense that it might exceed what we had already expected at the end of the year for 2009.

There's a couple of analysts asking how our results are affected by the country risk classification of Brazil by the Bank of Spain? Have we changed our classification for that country's assets?

No, we've always had Brazil in group three, and so we've not changed the rating at any time. In fact, the provisions we have for country risk for Brazil are significant, just over EUR700 million. Although, of course, it's true that in Brazil's case, because of circumstances and performance, and improving credit, we are probably tending towards placing it in group two instead of three, which is where we always had it.

(inaudible) from (inaudible) is asking again about coverage, and can we give some guidance about where we expect it to move? Are we comfortable with the coverage levels we have? Could they worsen, especially when credit quality will continue to worsen in the future and touch [bottom yet], he said?

Well, in that case our coverage -- sorry we can't hear you too well -- okay, our coverage ratio is not an input for our model. It's an output of the different coverage or hedging policies we have in the Group.

So, it will depend on where the defaults are happening. If they're happening in high risk segment coverage levels for that are high. [Look at] Santander Consumer Finance where defaults can grow very fast and so their coverage is at 90%. If it's mortgages with the loan-to-value of under 80%, where coverage calendars are a lot slower, the coverage will be lower. But that's an output. It's not a particular policy. There will be units where the coverage is and will remain high and there's others where will drop because of the weight of mortgage collateral is significant.

Okay and finally to finish with these risk and capital and financial questions, would ask whether we still have any GE assets to integrate.

And Sergio Gamez from Merrill Lynch is asking whether -- or what is our guidance for capital generation in 2009?

For EG there's nothing left to integrate and we've already given that guidance. We have spoken about that quarterly generation figure which remains the same.

Okay. And for Spain, Sergio Gamez also from Merrill Lynch and David Vaamonde and Antonio Ramirez, asking for an update on the real estate assets for this quarter. Breakdown, have we started selling? Provisions we've made? So he wants to be updated on the real estate figures we reported in December?

Okay. As for changes our position in December was about EUR3.8 billion. We have basically executed in January what we had already committed in difference processes, EUR500 million. We have written-off about EUR100 million. We have sold another EUR100 million, so our position in March is [EUR4.1 billion]. There's additionally some of our real estate that has been sold, but contract not yet signed for an additional EUR100 million.

In the previous quarter we also explained what that would represent for the NPL ratio. 12% of this portfolio would have gone into default today if we hadn't bought those assets in lieu of payment.

As for risks in Spain they're asking whether we have a new guidance on NPL for 2009.

With respect to that [4.9] we mentioned how many generics have we used in the Santander network, it was 250. It's in the slides, in the financial numbers.

Alfonso Gomez from Citi and [Matteo] from BBVA were asking and [Paco Riquel] since provisions have been low from your point of view and considering worsening NPL ratios, do we have any idea about this will evolve? I guess he means recoveries also and whether we have any advance indicators that could tell us in theory over 60 days how it might evolve?

Well, I said in the presentation and that when we reported results in January, we said that our best estimate for NPL ratios in Spain at year end would be 4.5%. And that was a guidance we gave, as I've said, back in -- at the end of January.

But right now the only thing I wanted to add is that I think it will actually be lower considering how it's been going, especially in the last few months and what we expect from the coming months, that we will not reach that 4.5%. We will remain at a lower percentage. But I can't really be a lot more specific than that right now.

Just emphasize again, that right now we feel, let's say, slightly more optimistic than we did three months ago.

Okay final question about Spain, about Metrovacesa. Can we explain the EUR190 million provision you mentioned in your presentation, where and how and price of share I guess?

I think I've said that. It's been charged against our earnings from financial transactions of the corporate headquarters and it's equivalent to EUR45 a share, Metrovacesa, which is what the auditor has valued it at the end of 2008.

And for the UK there are several questions about financial margins from several people, Alberto Cordara too.

Question basically is about the evolution of net interest income and financial margins. Why is it growing so fast? Do we have an outlook for that income? Are we going to maintain that strong growth? And any guidance for spreads in the country, I think that's basically the top lines of our income statement questions.

Well, I don't know what the number is that he's referring to. Let's not forget that in the acquisitions that we made in 2008 -- in the last part of 2008 the most important, let's say, were the ones in the UK. And so in the numbers, in the UK we have Abbey. We have the new acquisition. And we also have Global Wholesale Banking, the London office, the wholesale market business, which is based there. So it's a combination of all three things and possibly that's why it looks like the net interest income is growing so much.

But if we break that down and look at the sustainability of each of those elements I'd have to say that the Retail business, that is Abbey plus Alliance & Leicester and Bradford & Bingley, are reasonably sustainable and will continue to grow in the current competitive context in the UK. Spreads will evolve as we expect. So we're not really seeing any changes.

So in the coming two quarters, maybe three, and then later we'll see. It doesn't seem like this is going to change much, so a positive outlook and sustained growth.

Same thing goes for the global markets -- Global Banking and Markets business, mostly because, as we know, the lending spreads to Corporate in Europe, which are the ones which are managed from the London office, and which contribute to this growth we expect will continue at least in the near future to be quite high. So we feel that these spreads in the UK basically are sustainable and will continue over the coming quarters.

And finally, about the UK two questions, also about spreads and margins; one from Antonio Ramirez and whether the liability spreads are really offsetting the growth in the lending spreads, and how we expect this to evolve?

And there's another one from Alberto Cordara about the standard variable rate, mortgages and how our spreads are evolving there and our margins, are they growing, since generally, the price set by Abbey for these products tends to be high? And do we expect to be able to maintain those spreads and those prices for that kind of product?

I think I've said this already. I don't know whether Abbey has big market share in standard variable rate. I'm not certain. But in any case the impact of rising spreads is felt in every market in the UK, and especially in Europe in mortgages and that's consistent and continues and we expect it to continue.

Okay, moving on to Santander Consumer Finance, there's just one question from [Paco Riquel] and he says, the cost of risk in consumer finance has stayed flat in this quarter in comparison with the previous quarter at 3.5% in spite of worsening NPL ratios. Could we discuss this cost of risk? Has there been any generic provisions used and what's our outlook?

Well, yes, in effect Consumer Finance, to talk about the trends in the NPL rate and in risk we would have to do it by geographical areas.

We have Germany, which is practically half of the business and more than half of the earnings, which is doing very well in terms of volume growth and risks. The NPL rate is going up but very little. We have Drive in the US, which is performing very well as well, in volume as well as in the capacity to generate earnings.

And then we have our weakest part, which is in Spain where the NPL rate has gone up -- went up strongly in 2008 and now we are at levels where it still goes up, but at a lower pace.

The cost of credit in Drive is related to the second hand car prices. These prices have gone up in the US, and this is why costs have gone down, because we get more recoveries, although I'm not certain 100% that that is the effect. But we said in December that the NPL rate was going to be 5.5%/6%. We think that is still the case.

If we go into Latin America now, Francisco Riquel asks about the offset between trading gains and the net interest income. He doesn't say it by country. He asks in general terms for the division as a whole.

Well, in Chile it's very clear with the US effect, the US brings down the net interest income, and normally there is a part -- not all of it but a part of it, which is offset by the trading gains.

In the other countries I don't think there is any compensation, any direct offset. It is true that the trading gains have performed very well in Brazil and in Mexico in a context of lower interest rates. The reduction of interest rates hasn't been as strong as in Chile, but it has happened and that affects the trading gains. And then, of course, we have [ALCO] in other countries, which have some capital gains but we haven't obtained significant figures of that -- from the ALCO.

For Mexico, David Fernandez from La Caixa and Ronit Ghose from Citi have questions. Both of them ask about the performance of the interest margin over asset, which is falling. What are the reasons that explain this drop? Is it going to continue to fall? And if that happens, how are we going to offset that with perhaps other cost cutting exercises?

And they also ask about the fall of the portfolio for the division; the portfolio Mexico. They say it falls from MXN230 billion to MXN245 billion, there's been any transfer or selling of portfolio?

In Mexico I think I mentioned this in my presentation. The main fall is the credit card portfolio, which is a portfolio whose spreads are about 20%.

When there is a fall in that portfolio the other -- the remaining part of our portfolio, basically the commercial portfolio with lower spreads, 3% or 4%, that has a directive impact in the interest rate margin, a strong impact, which has not been offset by increases in volume in other portfolios, which tend to increase those spreads, but the net effect is very negative.

The fall of 16% I think comes -- I'm speaking about euros. EUR12 billion in portfolio in Mexico, the credit card portfolio represented EUR3 billion/EUR3.5 billion, so therefore that drop is very strong and that explains that performance.

Is it going to continue to fall? We don't think so, at least not at the same pace. We've started to introduce measures in February 2008 when it comes to credit cards. And this is the effect of several quarters taking measures on admissions and sales procedures and recoveries in credit cards.

They also refer to operating cost. Have you taken any measures to offset the fall in margins?

In the presentation I also mentioned that the costs were going up two digits and this year they think they're going to grow zero. In fact, we are reducing the structure in the country and we think this year we will have about zero cost increase in Mexico.

To finish with Mexico, a question on whether the provisions and the impairment of the credit quality if we take -- if we hit rock bottom or things are going to get worse? This is a question from Ronit Ghose from Citi.

Well, we think in credit cards we left the (inaudible) in past. In the rest of the portfolio our credit quality has been impaired. 80% of the provisions in Mexico were for the Credit Card business.

And therefore, we see a certain fall in provisions because of the credit card portfolio, because a fall in the volume and because of an improvement in quality, and an increase in provisions in the other portfolios, because given the economic circumstances in the country, there's going to be also an impairment of the other portfolios apart from the credit card portfolio.

Brazil; two or three questions, Santiago Lopez from Credit Suisse, do you have that -- still that objective of BRL100 million net income announced at Investors' Day in November?

What is the performance of spreads that you expect in the future for 2009, and if we have suffered a significant impairment in the credit quality of the consumer portfolio? This is from Alfonso (inaudible).

The objective, yes. The performance of the spreads, I would say that it is relatively stable. It has improved a little bit, but we could say it's relatively stable. In the spreads -- there's a reduction in the spreads, but they're more or less stable.

The impairment in Brazil is related to some industries in Brazil, particularly the meat industry which is suffering, and is in a very difficult situation, and that is where we see an increase in the NPL rate and, therefore, an increase in provisions more than we expected. This isn't really too related to consumer lending, but to the industrial sectors that are suffering.

That's it for Latin America.

Now Sovereign, two questions from Giovanni [Carriere] from [Cavelli] Execution; one is the reconciliation between the historical data and the presented or reported data. But you will find that information on the web.

Can you give us an idea on the increase in the NPL ratio in Sovereign? And what about the objectives that you announced in -- the day the acquisition was announced? Or in terms of profit, do you still have those same profit targets?

Well, the increase in the NPL rate, well, it's because of the market circumstances. We have given it broken down, portfolio by portfolio. Too much of our real estate, for example, is suffering; companies a little bit less.

We've gone through the whole portfolio in detail, and we think that the levels of coverage and provisions are the right ones and, therefore, we feel comfortable that we will be able to achieve those figures that we announced when we made the acquisition.

And now to finish, the last question from Ignacio Cerezo who asks about the Wholesale Banking. You earlier discussed this but his question is on the strong increase of the net interest income over total average -- the average total asset. What do you expect there?

Well, we mentioned this. These corporate portfolios, despite the fact that in our case they're not too significant in size, they come from the old world of very low spreads, and every renovation or extension of a credit line means bringing up the net interest income.

Most of the companies included here have a CDS, and if you look at the CDS of companies today compared with CDSs of companies two years ago you will see that they multiply by five to 10.

The mix was getting worse. But now for 18 months, we have been improving the mix, and this is just the result of that. But there is no volume, only a 2% increase in the portfolio, so it's pure spread.

Well, then I think we have no further questions. We haven't received any calls over the conference call. We hope we have answered all your questions, and if we have not answered all the questions that we got over the web, please do get in touch with the Department of Relations with Investors and we will answer your questions there. Thank you again.

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.