Banco Santander SA (SAN) 2009 Q2 法說會逐字稿

(Interpreted). In the first section of this results presentation I will speak about the fundamentals of the quarter and I will review the Group's results. Then Jose Antonio Alvarez, our CFO, will analyze the evolution of the different business areas in more detail. And finally, I will conclude with some conclusions about the semester and also our priorities for the second half of 2009.

And the first point I'd like to make is that the Santander Group has once again had an excellent quarter in an environment, which is still difficult. As I explained at other times, this is a great acid test for distinguishing the good and well managed banks from the rest.

And so in the second quarter, the Santander model continues to demonstrate its strength, because of the consistency of its results, strongly supported by the evolution of our business areas and with results, which reflect our management priorities; mix management, very strong cost discipline, large provisions in accordance with the point in the economic cycle and very active risk management, both in terms of anticipation and also of recovery.

Second, because of the strength of our balance sheet; credit quality, which is better than that of our competitors; large provisions; solid solvency ratios; and an ability to generate capital and to continue to pay dividends.

I'd like to look at each of these points in turn; first about the consistency of our results. We've ended the quarter with an ordinary profit of EUR2.4 billion -- EUR2.7 billion (sic - see presentation), which is 4% less than the same quarter last year, but it's 17% more than in the first quarter of 2009.

In this way we reach a profit of EUR4.674 billion (sic - see presentation), which is 9% higher than the second semester of the previous year. And these are all ordinary recurrent revenues. They do not reflect the impact of any extraordinary revenue derived from the later sales or those on the way.

The sale of the Banco de Venezuela and the Cepsa stake did not contribute any capital gains. And the exchange of preferred shares is still underway and the result will be incorporated in the third quarter.

As for the capital gains obtained from the Visanet IPO in Brazil, all of them have been assigned for anticipated write-downs and so have had no impact on profit either.

And this evolution is better if we look only at the business units, which are up 17% in the second quarter versus the second quarter of the previous year. In part, of course, benefiting from the increased perimeter at some point, however, which spoilt, so to speak, the business performance and prevent it from being fully reflected in the Group's profit.

Principally they are the reduced income because of the use of the equity accounted method, smaller dividend volumes received and the lower gains on financial transactions at the corporate center, which Jose Antonio Alvarez will discuss later.

Going back to the operating areas in this slide you can see the full details. I should underscore, first of all, the considerable diversification of our businesses, which confirms the resilience of our units to the cycle by geographic areas.

The retail units of Continental Europe have maintained fairly stable results. The two Spanish and Portuguese units have increased their recurrent profit over the first half of 2008. Our worst performance was that of Santander Consumer Finance.

In the UK this semester once again confirms the sustainability of our business. Abbey is still going strongly, to which we now add the positive contribution of Alliance & Leicester and Bradford & Bingley.

Latin America was very hard hit by the impact of exchange rates versus the dollar. But in constant exchange rate terms Brazil's trend in the last few quarters has been clearly growing and its second quarter profit was 25% higher than that of the same period of 2008. The rest of Latin America is basically stable and it reflects the negative impact of our exit from Venezuela, which has contributed no results to the semester.

Finally, I will also underline the excellent results shown in these last semesters by Global Wholesale Banking where we have been taking advantage of the market situation and the gap left by other competitors, whilst maintaining strict risk liquidity and capital management, as our CFO will discuss later.

Going back to our income statement, I'd like to clarify a point to start with. As we did in the first quarter, the first column of changes is the purely accounting one and, therefore, reflects the favorable perimeter impact and the negative impact of exchange rates. That's why we have included a second column without the perimeter increase or the exchange rate impact in order to facilitate the analysis of the underlying performance.

Additionally, the results obtained from the Visanet IPO have had no impact on profit, since we have established provisions for the same amount. To facilitate the analysis of the account they are not included in the different lines of the income statement but below in the area of write-downs and extraordinary provisions.

These capital gains of EUR262 million correspond to the sale of our initial 5.67% stake. There's an additional tranche which was closed in July and which will bring in another BRL272 million or about EUR95 million, which will also be allocated to provisions.

The income statement continues to reflect the economic recession and also the management priorities; the first, very active management of spreads and loans reflected by growing net interest income offsetting a worse performance of fee income more affected by reduced activity volumes.

Second, strong cost discipline; costs have been growing at almost zero or negative rates in every unit. These costs are beginning to benefit from the first synergies derived from the integration underway. As a consequence of the evolution of costs and revenues, our cost income ratio has been growing and as has our efficiency ratios; our rates are close to 20%.

Thirdly, active risk and recovery management, which is beginning to show some positive signs, although there is still a strong increase versus the first semester 2008.

In summary, the net operating income after provisions was 4.3% higher, which compares very favorably with the first quarter.

If we compare these changes with those we reported in the first quarter we see that things are improving almost every line. Basic revenues remain strong overall, growing at 10% still. Costs are still dropping. We have moved from almost 2% growth in the first quarter to almost zero in the first half of the year. Provisions continue to rise strongly year-on-year, but at a lower speed. And as a result, our net income -- our net operating income after provisions, which dropped slightly in the first quarter, has now grown by 4.3% as I've just reported.

Let's now look at each of the main lines of the income statement. First, I'll speak about the solidness of our most commercial revenues; that is our net interest income without dividends and our fee income.

Fee income has been harder hit in some of its lines by circumstances in the environment and also by our recruitment strategies, especially those related to securities and mutual funds, while net interest income is still performing strongly. Looking ahead, it is reasonable to assume that this current trend will slow down with lower growth in net interest income, but with slightly better performance of fee income.

If we look at the different areas in the slide -- the bottom half of the slide you can see how even in this very stressful scenario of the last quarters, Europe and the UK have continued to show growth, as has Latin America if we subtract the exchange rate impact.

Focusing on net interest income it has risen by 24% or 18% if we don't take into account the perimeter effect or the exchange rate effect. And this reflects our successful management of spreads and volumes.

In prices we have improved our spreads on loans very significantly in recent quarters in order to offset the fall of spreads on deposits. In volumes, both loans and deposits demonstrate the Group's management priorities and the needs of the environment. Excluding acquisitions lending rose by 3%, lower growth than in previous quarters due to the economic downturn and, of course, also due to the demand in each market.

In Spain growth has been flat for the last 12 months. In the UK we have grown 4% without taking into account the new companies. And in Latin America, Brazil is still showing double-digit growth while in Mexico lending dropped by 6%. As for customer funds we are still focused on deposits, which have grown by 19% in terms of organic growth.

If we include acquisitions growth rates are much higher, 16% for lending and 36% for deposits. And we have improved by 17 percentage points the ratio of loan finance from deposits in the last 12 months.

So in summary, our combination of price, volume and liquidity strategies are being successful throughout the Group. And as a result, most of our units, especially our large units, have shown significant increases in their interest income, as you can see on the right hand side of the slide.

Mexico's drop is due to the deep recession in the country and also to our own deliberate policy to change our mix towards lower risk products in the last quarters.

Chile repeats. because its performance has been significantly hit by a drop in inflation rate and its impact on US-indexed portfolios since net interest income has grown very successful; double-digit growth. In any case, the trend is clearly better than that of the first quarter where total net interest income dropped by 7%.

The second basic pillar behind these results is sustained efficiency improvement. In an environment with less growth, stricter cost management is a priority. And in this sense our total costs, deducting perimeter and exchange rate effects, have been basically flat with respect to the first half of 2008, only rising by 0.3%.

This is the result, on the one hand, of our usual cost containment approach. But also we're benefiting from the first synergies of the various integrations. We are optimistic about attaining or, in fact, exceeding the initial forecasts we had made for 2009.

As you can see in this slide, on the right hand side, cost savings are going very well in the UK, Germany and especially Brazil. Also in Sovereign, we have also seen that it will be possible to achieve savings in the year exceeding the $100 million that we had initially envisaged.

This performance is reflected in the good progress made by all our units whose costs are registering zero growth or, in fact, decreasing as in Brazil's case. Thus we maintain our efficiency improvement track record. Our Group's ratio is at 41.6% and all our large business areas have improved significantly.

I'd like to underscore that Sovereign has already been incorporated last quarter with a cost income ratio of 74.5%, which we have brought down in the first half of the year to 66%. These were Abbey's levels at the time of the acquisition and today Abbey is already at 41%.

Excluding the recent acquisitions, our cost income ratio would be below 40%.

A third point I'd like to discuss is provisions. The faster deterioration of the macroeconomic environment in every country has hit our credit quality and has pushed up loan-loss provisions. In the second quarter, they were 51% higher than in the same period 2008. In like-for-like it would be 32% if we did not take into account the perimeter effect.

As you can see on the right hand side of the slide we should stress that in the last few quarters there has been a decline in specific provisions. In fact, in the second quarter 2009 these were 2% lower than in Q1.

The opposite has occurred with generic provisions. Since end Q2 we have recovered less at the Group level than in Q1. This was due to an [air] between releases in Spain which, as we will see later, were similar to those of Q1 and also lower recoveries, or in some cases provisions, for other units such as the UK, Germany or Sovereign.

Beginning with the chart on the left for specific provisions, there's no change with respect to previous quarters. The increase was still across the board, particularly in Spain, both for our Retail networks and for Consumer Finance. There is currently a change due to our increased perimeter, which is reflected in Europe, Consumer Finance in the UK and Sovereign.

As for generic provisions, we have released in the first half of the year at the Group level EUR601 million, most of which, EUR431 million, in Spain both through our retail network and our Global Banking & Markets business. This figure is in line with our targets for the year, which we had reported in previous quarters.

After the provisions of the previous quarter, we have a total loan-loss provision of EUR15.7 billion after rising by EUR600 million in Q2. Of these, EUR6.16 billion were generic with the breakdown you see in the slide.

For Spain, we have EUR3 billion, after using up EUR431 million in Q2, which is basically the same as the EUR406 million we used in Q1. This decline is not reflected in the Group's total, because of the additional provisions made in other units, and from a favorable impact on a generic fund m the evolution of exchange rates in Q2.

As for the recent changes in provision requirements by the Bank of Spain, they've had a positive impact of EUR270 million for the Group in the mortgage area, which we have allocated to anticipate specific provisions. As for consumer lending, changes do not involve provisions, since we were already completely covered.

Our Group's NPL ratios have risen, as you can see in the slide. But in any case, they're still good, if we consider the current environment. Our Group's NPL ratio is at 2.82% and coverage is at 72%.

And if we look at the different business areas, the NPL ratio for all the businesses in Spain, that is Santander, Banesto, Consumer Finance, etc., was at 2.7%. Abbey is at 1.5%; lower, because of the higher mortgage component, which also means lower coverage. And Latin America is at 3.97%, with a coverage of almost 100%.

How do these ratios compare with those of our competitors? As we have done on previous quarters, we compare very well at the Group level, but also in each and every one of the geographies and business areas where we operate; Spain, the UK and Latin America. In all of them the Group compares very well with its peers. And in fact, the gap has widened in the recent quarters, especially in Spain and the UK.

The second component of the strength of our balance sheet is capital. We have ended the second quarter with a core capital ratio of 7.5%, calculated in accordance with Basel II criteria. It's a ratio that we feel very comfortable with. In the quarter, we have improved the ratio by 20 basis points and we're still generating free capital in an environment of reduced growth in risk-weighted assets.

To end this first section, I will make some comments about the exchange offer for shares. It's an operation which is part of our desire to manage our capital efficiency -- efficiently and strictly in our balance sheet. With the new issues, we maintain the capital ratios. And the capital gains generated will be used to reinforce our generic provisions. We don't yet know what the final result of the exchange will be, although so far I can say it has gone very well.

Today, we have the full volume exchanged in Europe and the UK. 54% participation; that is EUR3.1 billion of the EUR5.7 billion offset, with gains of EUR555 million. In the US, the offer is underway and we expect the final results in August. In any case, our expectations, given the type of issue, are for a substantially lower acceptance level than that we've had in Europe.

And now, I'm going to give the floor to Jose Antonio Alvarez, who will explain the different business areas.

(Interpreted). Good morning. As usual, I will speak first about the main areas, the main geographies, the corporate headquarters and then, I will review our Global Banking & Markets, and Asset Management and Insurance businesses; and will also give you some comments specifically about Sovereign and its performance in this Q2 -- first full quarter after integration.

In Continental Europe, our attributable profit was EUR2.66 billion; 13% more than in the first half of 2008. So with or without the perimeter, the growth has been similar, although in terms of gross income, because of the incorporation of the units to Santander Consumer Finance basically. So the top part of the income statement has changed slightly, but at the bottom the difference is very minor.

We see consistent income generation, double-digit growth given -- extraordinary given the kind of environment. Costs are flat. So our net operating income has risen by 18%, which after including provisions, gives us a net operating income after provisions of 15%. You can see that net operating income in Retail Banking has registered sustained growth in the last few quarters. And attributable profit has behaved consistently.

Also, as I will explain later, our Global Banking & Markets area has performed excellently. Going down to the four large units in Continental Europe, here you can see the three Retail Banking units.

Santander, Banesto and Portugal branch networks with similar performance; revenues growing, net operating income growing well, fee income growing more slowly. Good cost control, which has enabled our net operating income to grow. And with -- after provisions and excluding extraordinary provisions, we have between 3% in Portugal and 9% in Banesto.

Santander Consumer Finance grew strongly, but there have been higher provisions. In Santander Consumer Finance there is a different performance by country; very successful performance in Germany and Drive in the US; in Germany EUR185 million in profits; in Spain rather weaker.

Finally, Global Banking & Markets in Europe have doubled their attributable profit in comparison with that of the first half of 2008, with excellent performance in this semester.

Looking at the different units, the performances are similar; slow growth in lending, very significant growth in deposits, accompanied by improving spreads in lending, which I think is behind the income levels we have seen.

As for risk management, as we have explained in Q1 and in the AGM, they have behaved better than expected in the risk side, with better recoveries and slowing default ratios; 30% below what we had seen in previous quarters. And so in this context, with rising spreads, flat costs and improved recoveries, we have been able to generate significant income.

I won't dwell on Banesto's results, since those have already been reported. I'd say the underlying aspects are the same, as discussed. Voluntary provisions have risen significantly, but you all know what the performance was throughout the quarter.

And for Santander Consumer Finance here we do have a significant changed perimeter effect, because of the GE and the Royal Bank of Scotland business in Germany. It helps in the upper lines of the income statement, but not so much on profits where the contribution's still small. As a consequence of that, we had strong growth in volume, improving spreads, which is basic in this business. Elasticity when rates rise or drop is less than 1, so your spreads improve consistently quarter-on-quarter.

Costs are flat, excluding the perimeter effect. So good cost control. And there, we are focusing on our core units, so there are some discontinuities in certain businesses in smaller markets like Hungary or the Czech Republic.

Provisions still are growing strongly. We said in February, when we reported the results for 2008, that we expected an NPL ratio of between 5.5% and 6% for the unit by the end of 2009. And we still expect to be at that level by the end of the year. And the trend is on line with that.

As for results in this unit, probably we are at the lowest or worst point for a comparison, because the second quarter last year was the best one in the year, especially in Germany. And so the quarter-on-quarter comparison will improve towards the end of the year.

Finally, Portugal; I think more or less along the lines of the Spanish retail unit; a little bit more growth in volume, with significant changes in the mix, where basically there has been a strong transfer of mutual funds to deposits. Costs remain flat. There are greater provisions, because of the economic cycle. Although the figure for the quarter is not the rank rate; that would be a little bit lower. Good cost discipline and it is in line with the expectations that we have mentioned earlier.

If we look at the second geographical area, the UK, I think our figures speak for themselves; very high growth rate at constant perimeter as well as with the change in the perimeter. With that perimeter, the Abbey has an excellent performance; gross income 30%. And then, after provisions, there is an increase in provisions that grows 33%, the attributable profit. To that we can add the Bradford & Bingley, which also adds to the profit.

And if we look at it in further detail, on the right hand side, we see that Retail Banking is consistently showing better results, to which we can add a good -- and this is constant in all geographies, a good performance of Wholesale Banking, which adds to the earnings.

Cost control allows us to keep the spread rising at almost 50%; in other words, the net operating income. But the most important thing in the UK is the sustainability of the results and their consistency. Why? Well, here we can give some indications of why we see this sustainability.

I would say that the first reason is the strong asset spread improvement, which is improving quarter-to-quarter. Improvements in terms of new production as well as in the retention of mortgages, combined with a good active management of deposits. And then costs; the jaws are very big.

And number three and very important, we have very good credit quality, as our CEO mentioned. And this is something that the market is requiring less provisions, because we have very little exposure to the riskier mortgage market segment.

When it comes to business turnover volumes, I think, it reflects very well the priorities that we have pointed out. On the one hand, we have a production of mortgages, globally speaking, growing at 1%. Excellent performance of deposits, not only because of the change of perimeter; deposits in Abbey are growing at 17%, in A&L 9%. Loans to companies are not growing very much.

And at the bottom, we see some of the things we mentioned. The Securities portfolio of A&L continues to fall. And this is something that we had announced and we will continue to reduce this. And the UPL business, which for return reasons, we have been reducing. So in A&L as well as the one that came from Abbey; so that continues to fall at about 22% all in all; also the change of the -- in the brand, unifying under the Santander brand, and that will be another milestone in the consolidation process of our franchise in the UK.

So, therefore, very good performance of the UK business, and good prospects for the future, thanks to the repricing and improvement of spreads, particularly on the side of assets.

And Latin America, we presented in the previous presentation the figures in dollars. The capital gains of the IPO, that doesn't have an impact on the Group's results. That has been neutralized, as the CEO mentioned.

So let me just refer with a part -- without exchange rate, where our net operating income is growing at 24% and costs declining at 2%. This is thanks to the Brazil integration process, that the CEO mentioned, also that we were getting ahead of our plans. And strict control in the other units, which are reaching levels of flat costs. Remember that costs were growing two digits in the past.

And then, there's another thing that we should point out, which is that we deconsolidated Venezuela. Therefore, the attributable profit in constant dollars of $2,204 (sic - see presentation) is the best result in the last eight quarters. And a high impact of exchange rate means that the figures are distorted in the different units, as we can see on the left hand side.

But if we take a look at the next level, the units, I'd like to mention the significant improvement in Brazil. I remind you that in the former quarter, we were talking about zero growth in constant dollars. We also pointed out that the comparison was not favorable, and we will see this later on. We see that Brazil is improving. Revenue is growing 15%. The net operating income is going up 20% (sic - see presentation).

Mexico; the situation in Mexico is difficult. The economy is slowing down, revenues remain flat. Costs are also flat. And a greater demand for provisions is also something that is affecting us there.

In Chile, we had the negative impact of the [UFI], but nevertheless, the generation of results is reaching almost 9%. And there's good performance in the other units, Argentina, Uruguay, Porto Rico, Peru and the New York office, which is included here.

If we look at the Brazilian unit, which represents about half of our Latin American business, it has made profit in the quarter, $1.28 billion. Revenue is growing at 15%. Costs continued to fall, at 3.3%. So we're getting a net interest income of 30%; so a 12% improvement as compared to last year.

On the right hand side, I'd like to mention the flattening of the net operating income. It's because -- well, cost is growing at 6%, as well as net interest. So, net interest income plus fee income 6% more than in the first quarter and costs are 1% lower. So the trend is very good, and this allows us to be very optimistic regarding the objective of getting profits of more than 20%.

What are the drivers here? Still a good growth of volume, not so much in the past few months, where the growth of volumes is weaker; a credit spread in an environment of low interest rate is a main driver, together with cost management, where we have negative costs. Provisions continue to grow.

Here there are two components; a little bit of growth of NPLs and the effect of homogenization of criteria after the integration. But just to -- and a few comments on the integration in Brazil, we've already unified the central services in many of the global areas. We've improved the services and operations. And therefore, customers can do basic operations in both banks as if it were a single bank. Also, in the second quarter, we did a legal merger of the two banks; that was completed.

With regards to Mexico, the situation is very difficult because of the economy. The attributable profit for the first half of the year was $307 million, which compares favorably with the same period of 2008, basically because of the credit card business, which is falling at more than 20%. And this also affects the credit spread, because credit cards have high spreads and this is due to the mix effect, together with the credit card business.

Costs are converging to zero. The NPL rate in credit cards and recoveries in credit cards are showing a certain improvement. This is one of the keys for the future, the performance of this business, which requires about 82% -- 85% of provisions in the Mexican unit. So this stabilization is very encouraging for the future.

In the case of Chile, $343 million of attributable profit in the first half of the year, obtaining $185 million in the second quarter, which was better than the first quarter, 17% better. Inflation continues to have a negative impact on our net interest income. This is offset by trading gains.

Inflation was negative in the second quarter, not as negative as in the first quarter. Good cost control with jaws of 17 points. Therefore, there's an improvement of the cost to income ratio. Higher provisions; we have set up a new unit for recoveries, similar to what was done in Spain. So we think this will give us results in the future. So the lower part of the account reaches a double-digit growth.

Finally, to finish with the main areas, in Corporate Activities the second quarter is comparable to the first and the first half of this year is comparable to the first half of last year. The first quarter is very similar to the second quarter with the exception of the charge of Metrovacesa, which is what explains the difference between the first and the second quarter.

And there you see the main items, which explains basic difference between the first half and the second half of 2009 and 2008. Basically, it's the items that you see there. There is a breakdown there of this effect.

If we look at the secondary segment and if I focus now on the two areas, which I think require further explanation, we have Wholesale Banking and the Insurance business. In Global Wholesale Banking exceptional results, because of good management of the opportunity offered by the market; we have been gaining market share, improving our spread without making intensive use of our balance sheet as we will see later. Therefore, we have sustainable growth quarter-to-quarter, which stems from these different components.

If we now look on the side of revenue, most of the revenue is from customers. What type of revenue is it? On the right hand side we see traditional Corporate Banking growing at rates of 34% (sic - see presentation). This is basic financing, trade finance, finance cash management.

The secondary, which is doing quite well, is the selling of derivatives, growing 64%; weaker is equity securities, although the second quarter has shown a significant improvement, as compared to the first quarter. Therefore, a business focused on customers, on traditional product where the core market, 80% basically of the revenue is generated in Spain, Brazil and the UK, which is where we have powerful commercial franchises.

The drivers, I mentioned them earlier. On the one hand market share; the intensity of competition is lower now, so this has allowed us to gain market share. And we have also been profiting from higher spreads. That's on the top part of the account.

On the other hand this is combined with excellent cost management. This being an adjustment in the structure, which means that the costs are falling as compared to last year by 15%; 13% as compared to the first quarter of -- first half of 2008. So this acts as a lever and gives us an operational leverage, which helps us generate results.

And finally, we have the -- a commitment with a capital discipline. [In the balance sheet] the level of provisions is low. There is higher -- more revenue. Risk assets have remained basically flat and this has not required more liquidity requirement; so excellent performance of the unit, with an underlying quality, which is very good, in revenue as well as in cost management, as well as excellent credit quality.

Finally, Asset Management and Insurance, the area still represents about 9% of the Group's total revenue. We see that the generation of results as a whole is basically stable, although there are two underlying realities.

On the one hand, we have Asset Management where volumes under management have fallen by EUR130 million (sic - see presentation). They reach a minimum level of EUR100 million and then they started to go up again. Good cost management with a fall of 17%, but this has not been enough to offset the fall of revenue.

On the other hand, when it comes to the Insurance business, the performance is more favorable, with significant growth in Brazil, Germany, the UK, and less so in Spain, because last year we sold many save insurance -- saving insurance products that we have not sold this year.

Finally, a few words about Sovereign; the result is $10 million negative, $25 million in the previous semester. Therefore, we still think that we can generate a result of zero for the whole year.

And if we look at the underlying trends, we see that revenues growing at 9%. Costs are falling by 11%. This was also mentioned by the CEO, and we're going to save more than $100 million in costs this year. And the operating income is growing by 66%.

Greater provisions; provisions for loan losses have increased and the loan loss provision fund already represents about 3% of the Sovereign portfolio.

Here we see the performance. We see the loan portfolio and that reflects the realities, our priorities and a weak market environment. Our priorities, well, we defined when we made the acquisitions that there was some businesses that we did not consider to be core. And therefore, we discontinued the activity in those segments. In some cases it's segments.

So the portfolio has fallen, the loan portfolio up to 20% from the moment we made the acquisition. So weak demand, together with being more selective in our lending in the current environment in the United States means -- well, that explains that fall in the loan portfolio.

On the deposit side, I would say more or less the same thing. On the one hand we doing a repricing of deposits and we see very good trends; a fall of institutional deposits, which are expensive, of about 20%, and significant growth in [site] deposits, which are growing at 10.6%. So this is something that we saw in previous trends and therefore, this will be transferred into greater capacity to generate margins or spreads, and therefore, we will see a gradual improvement in the result.

In December -- as compared to December, well, we can say that Sovereign is in a very good liquidity situation, which will allow us to develop the future- policies for the future, which we think are the most appropriate ones given the situation of our market.

So, now I'd like to hand over to the CEO, so that he can give the conclusions.

(Interpreted). I'd like to finish by giving you a summary of the presentation. In this context, which I don't need to remind you is very difficult, in 2009 we have obtained recurrent profit of EUR2.423 billion in the second quarter. In the first half of the year we have obtained a recurrent profit EUR4.519 billion, without extraordinary income.

All the extraordinary income achieved so far have been used to strengthen our balance sheet, with a solid non-operating income that multiplies by 2.5 times the provisions made. And among other reasons, due to our diversifications the UK, Global Banking & Markets, Brazil are being the main drivers of our earnings.

Furthermore, we increase our advantage over our peers in credit quality. We have more than EUR6 billion in generic funds. And in the second quarter we have generated capital to raise our core capital up to 7.5%. And lastly, and also very positively, we are surpassing the targets we set for synergies in the integrations already underway. In short, Santander showed in the first half of the year a sustainability of its earnings, based on the strength of its business model.

Looking ahead to the second half of the year, we will continue to focus on the traditional pillars of our model. In revenues, using all the levers can allow us to improve our revenue, spreads, product mix, fees and commissions that will allow us to offset the environment of foreseeable lower spreads and volumes. We will maintain the emphasis on cost management and on the jaws and, of course, on obtaining integration synergies.

We will be very demanding in our integration of the new units to accelerate their contribution to the business. And now we're on the first phases of this integration and we have not yet reached the levels of profits that we expect from them, but they're doing very well; Brazil, the UK and Germany. And we're also managing the first phases of integration in Sovereign, where everything is going according to schedule.

Another important point is that we remain very much focused on risk management in order to reduce entries and extract value from the recoveries business; and as always, we will remain very disciplined in the use of liquidity and capital.

Well, for all these reasons, we feel very optimistic about the future. We think the second half of the year will be very good and we're convinced that we can achieve our goals that we have announced for the year.

Thank you very much.

(Interpreted). Good morning. We're going to start with the questions that we received over the web and as we did on the previous case, we will do it by areas.

Strategy; that would be the first subject, because we're going to divide the questions into subjects. Regarding strategy, (inaudible) Ramirez, Carlos [Almeida], Berastain from Deutsche and Eva Hernandez from Morgan Stanley and others ask about the possible IPO in Brazil. What would be the rationale for doing it? What would be the percentages? Is it going to be an increase or a sale, if you're going to issue a new share strategy regarding this transaction and the country?

(Interpreted). We're going to place 15% and these are going to be new shares.

(Interpreted). The second subject is on the financial area. Santiago Lopez from Credit Suisse asks why the fall of equity reserves that have fallen by EUR4.6 billion in the first half of the year.

(Interpreted). I think it's the other way around. I think there are less negative adjustments.

(Interpreted). Miguel Angel Alcala from BBVA asks about the tax rate; if it's lower than in other quarters, why is that? And what do you think is going to happen in the future with the tax rate?

(Interpreted). The tax rate is about 20%. It's always been 20%, 22%, 23% and I think it's a sustainable rate. There is no change there.

(Interpreted). Antonio Ramirez from Keefe asks two questions. One is about the breakdown at the level of the consolidated Group and the income statement of the EUR510 million in negative provision, and can we elaborate a bit more on the ALCO portfolio with maturities, yields, contributions and details for the UK and other relevant portfolios?

(Interpreted). The EUR510 million which appear in the P&L, part of it is very recurrent from Brazil; America, EUR362 million; Europe EUR88 million. The European part is basically the EUR70 million that Banesto explained in its earnings announcement. America EUR502 million, EUR356 million is Brazil. In line with other quarters this is quite recurrent, and another EUR49 million, which is basically for the appraisal of our real estate and other things, but this is the main one.

(Interpreted). Carlos Berastain from Deutsche Bank asks about the interest margin, interest spread in Mexico. Do you think it will lose the momentum in the second half of the year? And why the net operating income is lower.

(Interpreted). Well, the first part is very clear. The interest spread in Spain in the future will slow down, because here we see an adjustment impact, because of the repricing of the assets at market rates. With the strong fall of interest rates the repricing there's a lag and this will be noticed in future quarters. So my first answer is yes, a clear yes. And most probably this will also happen in Mexico.

(Interpreted). And the second part of the question was on the performance of the net interest income in the corporate center. Why this impact?

(Interpreted). Look, in the former question I forgot to answer about the ALCO, because that was one of the questions that I didn't answer. The management of interest rate risk becomes on the currency. Where we are more active in having portfolios to manage the interest rate risk is in those markets, where we have a volume of core deposits, significant ones. These markets are basically Mexico, where we have a portfolio of about $6 million, $7 million in Mexican public bonds to control the interest rate risk.

And the other part of the world where we're active is basically Spain, where Banesto already gave its details. And in the corporate center we have a portfolio. I think it's EUR12 billion or EUR13 billion with a duration of basically three years with a yield -- well, it has certain capital gains. Right now the mark-to-market has certain capital gains of a few hundred million and that is where we are very active.

There are other portfolios available for sale. The Alliance & Leicester portfolio is available for sale, but it doesn't have an interest risk function and the UK we don't have ALCO portfolios, because the commercial dynamics makes it -- them unnecessary.

And also Sovereign has a certain portfolio, which is classified there. Although, as we mentioned during the previous presentation of Sovereign, it was short in interest rates, so it had a very low portfolio back then.

Those portfolios in the case of the parent company, its contribution is at the corporate center and this explains in part that the performance of the net interest income in the corporate center.

(Interpreted). A question from Ignacio Cerezo from JP on the goodwill. What about the goodwill? Why are these variations? And Eva Hernandez from Morgan Stanley asks about a transfer of assets to the CC unit or similar movement in the quarter.

(Interpreted). No. There we haven't passed -- transferred anything to IFS. Although I have to say, because during the Banesto presentations I said that Banesto had [that EUR2 billion] as a maturity portfolio. We don't have any portfolio at maturity. At the consolidated level we don't classify it that way and, therefore, there is no transfer between trading and available for sale and there aren't any of these portfolios.

(Interpreted). Then credit quality and risks, Eva Hernandez from Morgan Stanley asks about the new NPLs. What about those EUR5.2 billion more compared with EUR4.5 billion in the past? Can you break these down and can you say why they've gone up? And how do you think this will perform in the future? And the impact of Sovereign and GE in the first half of the year.

(Interpreted). Okay. The first comment is why there's been that gap I guess between the last quarter of last year and the first this year, right? And that's because of the Sovereign incorporation and also the General Electric incorporation, so there's obviously a perimeter effect.

And if I'm not mistaken that's in the quarterly report with a footnote, which says that there's a gap or a difference which is -- yes, it says, EUR4.5 billion in the Q3 2008 and first quarter of 2009. And there's an asterisk, which says that it's the incorporation of GE and Sovereign and then it drops again in Q3.

So really in the EUR5.2 billion of the second semester, which is, I think, the comparison with the EUR4.5 billion of Q4 in these EUR5.2 billion there's a reduction of EUR1.3 billion with respect to the previous quarter, but that already includes Sovereign and GE. So it's not really a rise, it's actually a drop in relative terms. There's an increase of EUR1 billion, just under, EUR800 million really. But, of course, first there has been a EUR1 billion rise, because of that integration.

And as for the breakdown which you asked me for, I guess it was constant perimeter, right, what would be the breakdown? I don't have it to hand, of course. I don't know if you do.

(Interpreted). Okay. There's a slightly more general question about where we expect NPL rates to be concentrated in the future and where we expect to see worsening NPL rates in the future.

(Interpreted). Well, I think we've already given you that. It's pretty focused in Spain and in Spain we've already given you an overview of what we expect for 2009, which is we expect to be at 3.5%. A quarter ago, or two quarters ago, we spoke about 4.5% in January. Now we're talking more about 3.5% and we trust and hope that -- well, this is definitely our forecast and we can confirm it.

But, of course, in the next quarter we will be able to be more specific, but we don't really see anything that might move us away from the trend that we announced in previous quarters. And in this quarter the highest ratios are obviously in Spain and some geographies like Mexico in relative terms. But everything else we really don't see anything worth mentioning; anything really different in the growth rates, NPLs.

We spoke also, I think, last quarter and we confirmed that idea, that in the UK we would finish the year with an NPL rate of about 2% and we ratify it now. So there really isn't any change in Santander's Consumer Finance, which might be a question implicit in that general question. We still confirm that will be between 5% and 6% by the end of the year. So the same thing we said in the previous quarter.

(Interpreted). Okay. There are three analysts, Antonio Ramirez, Ignacio Cerezo and Eva Hernandez who ask for an update in our real estate assets, accumulated stock provisions and so on.

(Interpreted). Okay. Our real estate assets same level, EUR4.1 billion more or less. Same number as in the previous quarter. We already said in the previous quarter that the policy that we began a year, or a year and a half ago, was to keep an eye out and if it made sense at a certain point -- well, then really so we're at the same level.

The policy is the same; hasn't changed. We provision when we include it, 10%. And then we will have valuations and update to the market if necessary.

(Interpreted). Okay. Daragh Quinn from Nomura is asking about the situation in Brazil, looking at how we're going back to clear growth of the economy after some doubts in previous quarters. Do we think that the NPL rates have reached their peak in that country?

And the second question they're asking is about the new Bank of Spain requirements for provisions and whether we expect any impact in the future?

(Interpreted). Well, I guess we'd still have to wait a little bit to ask that -- to answer that first question. I don't think there will be substantial increases in Brazil, but we'll have to wait and see what happens to the Brazilian economy. But we are seeing positive signs of growth.

And as for provisions, in our numbers the figures are not very significant. We already said earlier that it may be [EUR250 million], which have been used to anticipate specific provisions based on the criteria used by our risk analysts. But, of course, for the future we don't think that that's going to have any sort of important significant impact on our numbers.

(Interpreted). There's a question from Matteo Ramenghi from UBS about where we expect the coverage ratio to be by the end of this year, 2009, and also our forecast for 2010.

And there are some other analysts who were asking, something that's already been answered as for our NPL rates forecasts, and whether we expect flat cost growth. So, I guess the only new question is about the coverage maybe.

And as for -- well, Jaime Becerril from Redburn is asking about recoveries and whether we could be more specific about how we've managed to increase that recovery percentage in the quarter and what efforts are we making?

(Interpreted). Well, that sort of would be telling wouldn't it. But in general what we've done is to implement the priority in which we have prioritized recovery over other business aspects. We have involved our whole Retail network, all of our branches. And that, in an organization like ours, which is very efficient in complying with the objectives that have been set, gives us recovery percentages which were much higher than those we had before we made this first recommendation and that's why.

(Interpreted). Domenico Santoro from BNP is asking us to elaborate a little more about the Investment Banking environment and about the evolution for the first semester -- for the second semester of 2009.

(Interpreted). Our Wholesale and Markets business is not really Investment Banking at all it's more Retail Banking with large customers. It's not at all the same thing. And in fact, we emphasize several ideas related to this a lot.

The business model is again a Retail Banking model. It's basically the traditional business, basically traditional with our customers, first of all. In fact, the majority of the revenues are derived from customer activity. And secondly, 80% of these are within our footprint, so where we have banks, not in areas where we don't have a bank. So they originate in Brazil and Mexico and Spain and the UK, and that's another defining characteristic of ours on our business model.

Thirdly, this growth we've had as Jose Antonio Alvarez explained, when you were talking about Wholesale and Markets and without reducing the Group's liquidity, which is really important too. And all of that means basically that this growth has been the result of increasing spreads, also commissions or fees but mostly spreads.

So the difference -- people responsible for this division consider that the kind of growth they've had will probably not be repeated over the next quarter. I think 2009 will continue, because we already have a pipeline, as I say, which is strong enough to continue that growth.

So 2009 overall will be a very good year, a strong growth in this business area. But I think possibly in 2010, because of spread management, the growth of profit in this unit will slow down.

(Interpreted). And speaking about credit quality there's two final questions. Raymond James from Euro Equities is asking about the breakdown of our real estate assets amongst different asset classes?

And from CitiGroup, they're asking about the refinancing book. Whether we've done any or not and so on?

(Interpreted). Starting with the second half and the refinancing book, numbers are extremely marginal, in Spain I think we have maybe [EUR100 million]. So it's really tiny. But I think we've said it already last year.

(Interpreted). And as for real estate assets there is really nothing to mention. There's sort of three parts which basically reflect the composition of our portfolio. This is a company with established Altamira,. The rest are houses which are in the construction phase, which will be put up for sale when the construction process concludes and are legally available for sale. And the second part is basically soil and that's to do with percentage -- well I've seen the percentages of the portfolio.

(Interpreted). There's a couple more questions about strategy and financial management. About strategy, Raymond James from Euro Equities is asking whether we could talk a little bit about regulation and the new requirements, whether we expect higher solvency ratios and what we would do if faced with these regulatory changes?

(Interpreted). About this point, of course, we could talk about this for hours, because it's quite an extensive issue. But I'd just like to say one or two things very simply. First, I don't think there will be any substantial regulatory changes, at least not until the situation has changed. And that's really our view or our mindset.

And the second point, as time and months go by things become -- for example, there are some issues where we are seeing a much more realistic take what a big bank is and what the different risks are. So we don't really think there's going to be any real threat beyond the more general aspects; perhaps higher capital requirements, but always after the crisis ends. And I don't think that these are the ones that the Santander Group generally has, They're thinking more about security businesses and trading businesses.

So for now we don't see any threat. And in fact, the type of business model that the Santander has, I think within this ambiguity, which we see, I think it will be enhanced eventually.

(Interpreted). There's another one by [Ignacio] Ulargui, which has been answered; the thing about the Wholesale Banking.

Sergio Gamez from Merrill Lynch is asking whether what we are thinking for Brazil at the IPO whether we could do this with other units, like the UK. And we've spoken about a minimum core capital of 7%, but given such strong internal capital generation, do we expect an increase in payouts at any point?

And finally could we update our facilities in Brazil and are they on the rise?

(Interpreted). Well, as for the first question there is nothing to say, because there's really nothing to say on that point or about payout. Payout has been defined at 50% and that's something that has been recommended by the supervisor, and so in any case we will always maintain it regardless in the Group.

What was the third question, I have forgotten it?

(Interpreted). About synergies in Brazil.

(Interpreted). Right, sure. Yes, we do, in fact, expect to see those improve over our financial target. In fact, when I spoke about costs in my presentation, I already said that in Brazil we were exceeding our target. In annual terms we were ahead of the target for synergies that we had set for ourselves.

We had spoken in the first year of synergies of $800 million -- sorry, BRL800 million for year one and we are now for year one up at BRL1.3 billion so -- in the first year. So I think that can confirm the improvement.

(Interpreted). And in the financial area there's two questions. [Christiansen] from Dexia, can we say how much we have lent or how much we have been lent by Central Banks, specifically by the Central European Bank?

And Domenico Santoro from BNP is asking about whether we can quantify the impact of hedging and how it might evolve in the future and what our policies are?

(Interpreted). In the Central European Banks we operate with the Central European Bank, the Bank of Spain and the Bank of England. But I think that the assets available for discount or write-down must be about EUR100 billion. There is one in the UK used up when the Bank of England provided three year liquidity and there is some occasional uses for this with the Central European Bank. But it doesn't mean -- well, there were discounts available for EUR85 billion, which have not been used.

The situation of the Markets now is substantially better, especially for short-term lending and there is abundant liquidity and finance costs are improving.

As for the second question about the impact of hedging, what kind of hedging do they mean? I suppose it's exchange rate hedging. There's been no change really in this policy basically.

As you know there has been two sorts of hedges for results where we try and cover -- or have 100% of the results budgeted covered in the UK, in Brazil, in Mexico and in Chile. And the same thing with the usual balance sheets.

Normally depending on countries sometimes the hedge is perfect forward. In others it's done through tunneling. There's really been nothing significant, or negative or positive in this activity. It's a slight negative, some slight positive in some cases, but no real net impact.

(Interpreted). And Matteo Ramenghi from UBS is asking about that change in EUR200 million in our financial margin in the first quarter versus the second.

(Interpreted). I suppose you're referring tom the Metrovacesa transaction.

(Interpreted). I guess so. It doesn't actually say, but I think that's what they're calling, what they're referring to.

(Interpreted). I think in the brochure in corporate activities we explained that between the first and the second quarter there's been a change in the rating of -- the classification of Metrovacesa. So that's really the only change, I suppose that's what you are referring to?

(Interpreted). Moving on to the units, there's not a lot of specific questions about the units in the UK. Miguel Angel Alcala from BBVA is asking not just about England, but also about Brazil card exposure -- well, UK and Brazil and what effect are we seeing on the business?

(Interpreted). Okay, exposure in cards basically in Brazil lending most -- it's about EUR1 billion exposure -- theoretical exposure. In Brazil revolving is only about 30%. You will see in the balance that it's 2.6%, but 2.6% is what you pay, and the risk stream is relatively stable.

In the case of the UK, the card transactions A&L had no card, Abbey didn't either. So the card business most of it's what has been brought there and there's that EUR1.7 billion. And the business that we have developed starting from scratch in Abbey, which was EUR770 million total with the arrears at over 30 days and stable -- relatively stable figures of 6% and 7%. And also in Abbey, which is 5.5%.

(Interpreted). And there's also a question about the reason for falling coverage rates in the UK. If there's anything specific and why it's been dropping?

(Interpreted). Well, in the UK it's basically there is two or three portfolios. One is mortgage portfolio, very large, with a very low coverage ratio and there's another one with a very high coverage ratio. And the evolution of the UPL portfolios, which as I showed, has dropped and the mortgage one has risen slightly. It means that the mix with the very high coverage of UPLs, which are now fewer and the lower coverage for mortgages, which are more, is what makes that difference. But there really isn't anything. There's a slight -- there's a bit more, but basically that's the effect.

(Interpreted). Ronit Ghose from Citigroup is asking is asking -- well, is congratulating us again, because of presenting this first or second quarter in Abbey, which is very impressive he says. And he's asking whether the financial margin or our assets, or the interest margin can continue to lengthen or improve in the next quarters, given the excellent situation we're reporting?

(Interpreted). Well, I think it's hard to improve it, but to continue. Of course, our plan for Abbey, especially for the Retail business because. of course, in Abbey it's part Wholesale, part Retail. But we certainly expect the next quarters, and I'm not speaking only about 2009, but also about next year, there will be significant improvement amongst other things, because of the incorporation and the efficiency gains derived from the incorporation of Alliance & Leicester and Bradford & Bingley.

So definitely we are optimistic over the next quarters of that in the Retail part. We probably will see less growth, based on our general view on Retail business overall. But in the UK we'll -- as a business we'll continue to grow next year and strongly; strongly next year.

(Interpreted). And in [writing] to -- from Brazil asking about in Brazil the over income -- the other income and other provisions line, and why is it -- where it is? I think we've explained this Pierre in other reports and that's the recurrent revenues in that bottom part of the Brazilian account, but we can talk about that later if you like.

And we're asked about the evolution of equality. The NPL rates are up. And how much is like-for-like? How much is not? And how much is it worsening? And what do we expect in Brazil?

(Interpreted). Well, we explained -- can't remember the exact numbers off the top of my head, but we're really not concerned significantly over the NPL trends in Brazil. There have been some minor moves in the first quarter, and perhaps the economic circumstances were not the best, but the expectations are now reasonably good. So beyond the specific numbers, which I can't remember off the top of my head we're not that concerned really.

(Interpreted). Okay and finally, I think there's two questions in English over the phone. So let's hear the first please.

It comes from Mr. Geoff Dawes from Fox-Pitt Kelton. Please go ahead.

Hi, good morning, Geoff Dawes here from Fox-Pitt Kelton. Just two further questions [for] those already submitted. One is on Brazil. One is on Spain.

First of all on Brazil, can you give us a few comments on the write-off trends? So, we've obviously seen the loan loss provision run rate increase and we've seen coverage come down after being stable for several quarters. So have we seen any major changes in what you're writing off in the Brazilian unit or changes to your policy there and any particular sectors where that might be taking place?

Second question is on Spain. Can I ask about the funding model, going forward? So Spanish banking operations typically run 200% plus loan-to-deposit ratios. Do you see this as sustainable going forward? And do you think the mortgage bond framework needs to be revised to create a market for them, if that is to be sustainable, particularly because there have been some problems with mortgage bonds issued by some of your peers? Thank you.

(Interpreted). Right, as for the first question I think it's basically the same we answered earlier about the problem of provisions, and whether we've changed our policies in any way. I am not aware of that. The only thing is that in Brazil, as I mentioned last quarter, there's been some sectors with particular problems, some industrial sectors, where we've had some write-offs, but we have no specific concerns really with the evolution of provisions in Brazil.

We've said that we expect a growth -- a double-digit growth, which so far has not actually happened in our loan book. And we expect a growths in provisions of 30% or 40% in Brazil, and we still expect that to happen.

And as for Spain and the financing model; first of all, the loan-to-deposit ratio and so there is no (technical difficulty) Spanish business overall, but the Spanish retail network, the (technical difficulty) ratio is, I think, distorted by the fact that our retail network sells quite a few products, which in accounting terms do not appear as deposits, but which are retail funding.

We have those preferred shares, for example, we've just placed, and all the insurance products we sell are not reflected as deposits or customer funds either. And so, really the ratio you have mentioned of 200% is something that, really, I would say is 150% or even 100%.

And as for whether we should review our finance model for mortgages and placing mortgage bonds or not, the market has actually shown great consistent interest in our profit bonds. In fact, we issued some two months ago. I think the 120 points over Libor five years and they're trading at 70 plus or so. If you look at the current price model, it's simply changed in the current context. We're seeing zero lending growth and deposits growing in Continental Europe at 15%. So, really the gap in Continental Europe and in Spain, which is most of that, is negative. So deposits are growing more than loans by about EUR10 million and EUR20 million a year at this point. So I don't expect that that's going to mean in this context a deleveraging, [that] that's something that we need to revise, or change in terms of our business model.

(Interpreted). Okay, I think there's one final question in English, which we're going to hear now.

Our next question comes from Mr. Jernej Omahen from Goldman Sachs. Please go ahead.

Yes, hi there, can you hear me well?

Yes, perfectly.

Yes. Yes, I'm assuming you can hear me.

Yes, we can.

The first question is on your plan to -- or at least as I understood it from this call, you're planning to part IPO the Brazilian subsidiary. Just for accuracy's sake, I think there was a little bit lost in translation there. Can you just please repeat in English what you have said? Is it indeed the plan to sell 15% of Brazilian shares in a IPO over the coming weeks?

And if that is the case, I would just have a follow-on question on that, I think you rightly point out that Santander has a very strong capital position with your core Tier 1 ratio; one of the highest in Europe. I think that the part IPO in Brazil would increase that ratio even further. Do you think Santander in that case would be in a position of capital surplus? Or how would you view your capital position in that scenario?

And just the second question and my final question would be on the net interest dynamics in your Spanish business. I think there's been zero loan growth over the past year, but net interest income is up 21% in your network and 10% in Banesto. Can you just please explain how much of the increase in net interest income in your Spanish business is due to your actions taken in your ALCO strategy? And how much is it due to spread expansion? Thanks a lot.

Well, Jernej, repeat in English what I said in -- about the IPO in Brazil. I said we intend to sell part and to make an ideal of 15%. It is not a sale. It's new shares; issuing new shares.

(Interpreted). With regards to your question, and I think I already mentioned this, the business sustained the performance of the net interest income. Banesto growing at 20 -- the networks are going up 20-odd-% and Banesto 10%.

And how do we see looking forward? We already mentioned this during the presentation. This will become weaker. It will become weaker because of the reasons I mentioned. The only positive driver right now -- well, there are two; a very intensive one, which is a spread of the new lending, which has an impact on the book that is renovated, which is the non-mortgage part of it. And there we continue to work and the spread has increased significantly, and we continue to work along those lines.

And then a second part, which is that deposits continue to grow, although deposits gives us low spreads. So there's going to be a gradual reduction in these growth rates.

The ALCO policy I already explained. We have been very conservative I would say, in the coverage of ALCO, because the book doesn't have the size of our core deposits and securitization isn't too high. So the impact on the results is in line with the book. And we don't see we have excess capital, we have a very demanding dividend policy. We will continue to have that policy with a high payout ratio and, therefore, we don't see that we will have capital surplus.

(Interpreted). Well, that is the end of all the questions. If there are any questions that have not been answered in our department of relations with investors we will be glad to answer them.

Thank you for coming and we will see you next quarter.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.