Banco Santander SA (SAN) 2010 Q2 法說會逐字稿

(Audio in progress)

... Group's results and we'll examine the business areas in more detail. I will, finally, sum up and give you our outlook for the second half of the year.

And the first point is that Santander has, once again, had an excellent quarter and thus, also an excellent first half. This table summarizes the key aspects of the Group's management, which I will discuss and review in the next slides. I have divided it into four major sections.

First, the Group's ability to continue to generate high recurring results in a difficult market environment.

Second, the focus during the second quarter has been strengthening our balance sheet. We maintain limited credit and market risks; we have improved our liquidity position; and we maintain good capital ratios with Tier 1, at over 10% which, according to the stress tests for European banks even in the most adverse scenario, would suffer no impact and would continue paying dividend.

Thirdly, we continue to provide high shareholder return. And fourth, we have continued strengthening our strategic position, taking advantage of opportunities to boost our position in markets where we operate. Let's now look at each of these aspects in more detail.

In the quarter, attributable profit was EUR2.23 billion, which is slightly higher than in the last three quarters. We have closed the semester, therefore, at EUR4.445 billion in profit, which is 1.6% less than in the same period of 2009, but it's 0.5% more than in the second half of 2009. These profits are equivalent to earnings per share of EUR0.26 in the quarter, and EUR0.51 in the semester.

These profits are the result of managing different macroeconomic scenarios in the countries where we operate. We see a dual world, divided into two large blocks. On the one hand, we have those economies in which the private sector needs to save and the public sector needs to contain its deficit. That is, economies which are deleveraging; the US, the UK, Spain and most developed countries. And this is reflected in low or moderate GDP growth.

On the other hand, we have the emerging economies, which do not require significant adjustment. This block includes Latin American economies, with countries such as Mexico, and particularly Brazil, which are growing strongly, after a quick recovery.

Our strategy in this dual world is to adapt our business model to the momentum of each country and each economy. And the strategy is reflected, as you will see, in the next slide, in the Group's results and volumes.

In results, and starting in the right-hand side, emerging markets have shown significant profit increases. Brazil's profit was 27% up on the first half of 2009 in local currency, and before the impact of minority interests; significant growth also in other Latin American countries, 10% up overall in the first semester in local currency, and before minority interests. Units, like Chile, have shown accelerated growth in the second quarter; 17% up on Q1 of 2010.

In the UK and the US, earnings have increased significantly, at rates of 35% year-on-year and 10%, if we compare the second quarter of 2010 with the first. These increases have been possible because, for the Group, these markets are undergoing restructuring. That is, their trends depend, to a larger extent, on our own internal drivers and our management, and on the environment.

As a result, only Continental Europe, more affected by a harsh environment, has shown a year-on-year decline in profits, with respect to the second semester of 2009. So in short, profits in the three of our four larger markets are growing.

And this dual word is also seen in lending trends. Year-on-year growth has been around zero or negative in all cases; in Europe, because of deleveraging; in Latin America, because of the impact of the crisis in the second half of last year, which brought about lower volumes; and in Sovereign because, in previous quarters, we have gotten out of non-strategic segments. This picture, however, is changing in 2010, particularly in this Q2, which has been a lot more dynamic.

And so, on an annualized basis, in this quarter, we have seen a slight recovery in Europe; in the UK and the US, greater increase, because in Sovereign, there are business lines which are beginning to show first signs of growth; and in Latin America, the improvement in fundamentals is reflected by strong growth in lending in all countries. In Brazil, lending is growing at around 20%, and in Mexico, Chile and the other countries, at around 21%.

This acceleration in activity, particularly Latin America, is not yet seen in revenue growth, which is affected by the fall I mentioned in the second half of 2009, but which will be seen in the next quarters.

As for bank savings, deposits plus funds, the trend is the opposite; that is, much greater growth in deleveraging economies. I should mention, particularly, Continental Europe, where Group savings rose 33% year-on-year, mainly in Spain. We have stepped up our campaign to attract deposits, in order to gain market share, by taking advantage of the greater propensity of household and companies to save. In the UK, we've also been very successful with our products.

In Latin America, total savings did not grow, because our strategy there was quite different. There, we were focused more on profitability, with strong rises in demand deposits and mutual funds, but less growth or, in fact, some decrease in some cases, of time deposits.

In these latter deposits, we have seen a reduction of institutional balances in Brazil, which are not very profitable, given that the liquidity position in the unit is so good. We have a loan to deposit ratio of 90%.

The second item in that initial chart was the strength of our balance sheet. And here, I'll refer to four issues; liquidity, risk quality, solvency, and stress tests.

Starting with liquidity; in this quarter, the most important aspect was the campaign to attract deposits, carried out by several of the Group's units, which have enabled us, in four months, to attract EUR32 billion. The success of this campaign is seen in a rise of over 2 percentage points in market share in Spain; or in other words, a market share increase, in relative terms, of 20%. We have also attracted over 100,000 new high-end customers, whose future business potential is very strong.

With this campaign, we've accelerated the growth in customer funds, although from the beginning of the year, the Group had already been very active; taking advantage of opportunities in both retail and wholesale markets.

Since December, the Group's total deposits rose by EUR88.3 billion in the first half. And we've carried out medium and long-term issues for over EUR17 billion, to which we must add an additional EUR6 billion in securitizations. This means that, in the semester, we have attracted a balance which is greater than the total maturities of medium and long-term debt we have for the rest of this year, and for the coming two years.

This twofold strategy has notably improved our financing structure. And so, the ratio connecting deposits and medium and long-term financing to lending has increased up to 111%. And our lending to deposits ratio rose from 150% at the end of 2008 to 122% today.

As for credit risk, the policies were implemented have moderately -- have seen a moderate increase in NPL ratios and stable coverage in the last few quarters. As a result, we continue to compare favorably with our peers. Net NPL entries reached a peak at the end of 2009 and beginning of 2009, and have been declining since.

On our risk premium, the cost of risk has shown a change of trend in the last few quarters, with a widespread improvement in all units, as Jose Antonio Alvarez will explain, which should reduce the demand for provisions in the future.

In this context, the Group continues to provision. Our provisions have continued to rise in the second quarter and are already at almost EUR20 billion; of which EUR6.679 billion are generic provisions for loan losses. Of this number, that is of the EUR6.679 billion, EUR1.849 billion are generic provisions for Spain.

And as you can see from this chart, on the upper right-hand side, quarterly provision consumption is between EUR400 million and EUR500 million.

The third item I'll refer to, when speaking about the strength of our balance sheet, is solvency. We ended June with core capital at 8.6%, the same as in December 2009, basically due to two impacts; [a] positive one through the generation of free capital, 21 basis points in the semester. The negative impact in Q2 of EUR709 million; that's down 12 basis points from the marked to market value of our portfolio available for sale, which in our case is charged directly against core capital.

I remind you that we do not have investment portfolios held to maturity. These are all very solid risk ratios -- capital ratios, well adjusted to our risk profile as the stress tests have shown. The results of these tests are well known, so I'll not go into too much detail. But I will emphasize a few aspects.

The adverse scenario includes more negative projections for Spain and for other countries, with GDP dropping 2.6% cumulative; high unemployment rates, at 21%; and strong write-downs in real estate prices, down 28% in finished residential property, down 50% in residential property under construction, and down 61% in land.

In this scenario, Banco Santander would continue to generate net operating income of EUR43.59 billion in 2010/2011, which together, would be almost EUR21 billion in existing loan loss provisions, and foreclosed asset provisions, would give us EUR64.38 billion to face a potential crisis.

Deducting the estimated impairment for these two years, the Group would have a surplus of EUR10.97 billion after tax. That is, the Group would continue to obtain profit; pay dividends, with payout at around 50%; and again, I say pay dividend, rebuild generic provisions, and even so, would still be creating over EUR2.2 billion in capital.

As a result, we'd be able to absorb an impact in -- of the increase in risk-weighted assets, and leave our Tier 1 ratio intact at 10%; that is EUR23 billion above the 6% requirement.

If we compare ourselves with the 25 major banks analyzed, using like-for-like information from the CEBS, we can see that, in the most adverse scenario, Santander would be the bank that would generate the largest results, defined as the difference between net operating income and provisions needed to cover impairments. And in relative terms, in terms of capital, it would be the most profitable of all the major banks analyzed.

And this profit would enable us, in this adverse scenario, to pay out EUR4.4 billion in dividends, rebuild EUR1.8 billion in on-balance sheet generic provisions and maintain our Tier 1 ratio in tact at 10%. If we did not include our voluntary dividend payout and the impact of generic provisions, our Tier 1 would actually have grown up to 11.1%; that is 107 basis points.

The third point I refer to in that initial chart was shareholder return. Total shareholder return for the Bank in the last 12 months is at 14%, above reference banking indexes and at the top of our list of peers.

Strong profits and solvency, together with our payout policy have enabled us to maintain higher remuneration via dividends during the crisis. Our last four dividends represent a yield of around 6% at current exchange rates, and the average return of the last three years was 5.9%.

In 2010, we will maintain our scrip dividend program or Santander Dividendo Eleccion which we started in 2009, which was accepted by over 80% of the shareholders for the second interim dividend, which can be paid in cash or shares. And depending on market conditions, we might also offer it for the third dividend in February 2011.

Lastly, I will spend the new few minutes describing the fourth basic pillar of this semester; that is management of our business portfolio. We are constantly adapting our business portfolio in order to keep investing where we see growth potential and adequate return on capital.

As a result, during the crisis, we have managed to improve our strategic position in some of the economies with more potential in the world. In Europe, for example, we've reached an agreement to acquire the retail branches of the Swedish bank, Skandinaviska Enskilda Banken or SEB, in Germany. With these 173 branches, we almost double the number of SCF branches in Germany.

It's a good operation, because it fits well with our presence in that market. And it's a growth opportunity, which will enable us to begin developing a retail banking model and not just a consumer finance model in Germany, which I remind you is the second largest banking market in Europe.

In Mexico, we have acquired the 24.9% stake in our unit which was in the hands of Bank of America. This was also a good opportunity as the Bank is growing and it will have a positive impact on earnings per share from the first year.

In the US, our consumer unit is taking advantage of opportunities to acquire, at significant discount, near prime portfolios which enable us to access a larger and better quality market.

Lastly, we're still awaiting the outcome of our bid to acquire 300 branches of the Royal Bank of Scotland, which we expect to be resolved in a few weeks.

And now Jose Antonio Alvarez, our CFO will review the Group's results and the results by business area.

Good morning. As we usually do now that our CEO has explained the highlights of the quarter and of the first semester, I will first review the Group's results and then briefly each business area. I remind you that on our website you have all the details of the presentations for all our main units in Spain, with a lot more detail than I have time to present here.

On the screen, you can see our income statement with two columns as usual. In the first column, we have the accounting data and that reflects the perimeter effects which are small and the exchange rate effects. And since exchange rate effects are somewhat significant, not very large but somewhat significant, in order to make understanding these accounts and comparing them with previous quarters more easily, we have included the third -- the second column without these impacts.

The accounts shows basic revenues which have grown less than in previous quarters and this was due to an environment in which inter-annual comparisons, not so much quarterly comparisons, growth in lending are low and where interest rates are at record lows in developing markets.

Plus, there is the financial effect of the campaign to attract customer funds our CEO has mentioned, which has been a great success in terms of volume growth, but which has had a financial cost which you can see in the different units that were involved in this campaign.

The second point, we've had strong costs discipline; costs are flat for the Group except for an apparent 9.4% growth in our accounts, but if you subtract the exchange rate and the perimeter effects, costs are basically flat.

Provisions are finally showing a change of trend. We will see when we review the different business units that one of the most significant changes in this first semester is the growth in volumes in some units and the change in the trend of provisions. And the impact is not yet fully felt, because you will see that in the quarter ROS has been substantially lower than other quarters and minority interests in Brazil are also absorbing 4 points in the lower lines of our income statement.

But forgetting about the gains on financial transactions and focusing on retail revenues, the picture is the one you see on this slide; lower growth in basic revenues, flat costs and a significant drop in loan loss provisions, which are beginning to decelerate strongly. And, as a result, basic revenues minus costs and minus provisions are growing at double-digit rate and accelerating quarter-on-quarter and semester-on-semester.

If we review our most commercial revenues, if we look at net interest income plus fee income, the evolution has been very consistent. Net interest income basic revenues of our ATMs -- ATAs are still showing a strong resilience. In some lines, the environment has had a bit of an impact, but in most cases, our strategy has been one that has had biggest impact. Lending has hardly grown for the Group as a whole, whilst deposits have grown 18%.

If we look at the different areas on the bottom of the slide you can see Continental Europe showing decreasing trend in revenues, but the other areas are accelerating their growth and showing a very positive trend. And Continental Europe, in spite of that deceleration, is still quite stable.

As for costs, there's not much to add. In Europe, the UK and Sovereign, zero growth or slightly negative. Mexico and Brazil are being paced below the inflation rate and Chile rose a little more, because of the earthquake and also the new collective bargaining agreement which has been signed. But without the perimeter and the exchange rate effect, costs have basically remained flat, growing only 0.7%.

Third point I mentioned earlier is the slowing down in provision growth. Excluding the perimeter and exchange rate impact, total costs fell 4%, so the details. Specific provisions have remained quite stable at EUR2.8 billion/EUR2.9 billion in the last quarters and generic consumption has been basically EUR400 million a quarter for the Group.

Going now into the different business areas, I'm going to go into the different geographies, starting first with Europe, then the UK, then Brazil and the rest of Latin America, and finally Sovereign.

In Europe, starting with Continental Europe, we see that in Q1 our income statement reflects the difficult environment for our business. Gross income down 1% in an environment of low growth in lending, interest rates at record lows and our campaigns to attract deposits, which we carried out at the end of the second semester and during the first, have had an impact.

Costs have declined by around 1% to 2%. Provisions have remained stable consuming generic at the rate I've mentioned. And net profit was EUR2.55 billion; that's 6% less than in the same period of 2009, but 10% up on the second half of last year.

By units, there's been a slight drop in the profits of our commercial networks, 2% increase in GBM Europe, Global Banking and Markets. I wanted to emphasize this, because it's a very positive trend since in the first half of 2009 results were exceptionally good in this unit and an excellent performance of Santander Consumer Finance, as we will see later, whose profits have increased by 30%.

Looking at the different units, the Santander Branch Network, the numbers show the effort that has been made to attract deposits. Savings rose by 32%. You can see the trend; the rise in deposits by EUR15 billion in four months. Growth also accompanied by significant gain in market share; annualized growth, 4%. Inter-annual drop of 4% in lending, but in the quarter I have to say that there's been more activity than in Q1.

The results show pressure on revenues from lower activity, some impact on spreads from prioritizing deposit recruitment and fee income still affected by low volumes of business. Growth in costs still negative and as a result, our income statement is as I mentioned.

As for Banesto, I'm not going to go into too much detail. The underlying trends are basically the same. They've attracted deposits EUR8 billion through their deposit campaign; flat lending, although trend looks better than in Q1 in results, moderate fall in gross income, declining costs, flat provisions, so a slight fall in profit, but clearly better evolution than the sector.

I'll dwell a little bit on credit quality in Spain, that's an important point. I want to point out that in the annex we've included all the details about the property sector in detail, which we provided other quarters too, but it's not in the main part of the presentation.

As for credit quality in Spain, we've seen a deceleration in NPL ratio rises in Spain ending June at 3.71%, better than the sector's average. As usual, coverage well above 60%. Additions or entries remain at a level clearly below those of previous quarters. The risk premium is declining. And so it seems that, as I said, we will need less provisions in the future.

As for the new letter from the Bank of Spain on provisions, and although this is only a preliminary estimate, the impact on the Group would be EUR400 million in Spain, for the Group as a whole.

As for property risk in Spain, we have sold property for EUR200 million, coverage is 33%, with losses of 26% in the real estate sold. In foreclosed assets, our stock is at EUR1.8 billion, coverage is 28% and we're selling at a loss of the same level, 26%. We've given you this information quarter-on-quarter. And as I've mentioned, what the Bank of Spain has called problematic assets are all listed in the annex, in the appendix on the property sector.

Moving onto Portugal, the context in the Portuguese market is fairly similar to Spain's. We see pressure on margins, which basically comes from dropping spread in deposits. Fee income and gains from financial transactions have clearly improved thanks to mutual funds and GBM activity. Cost discipline continues. Provisions remain at reasonable levels and there's been a very selective growth in lending, up 3%. And a strong focus on attracting customer funds which has grown strongly over the last months.

Finally as for Continental Europe, Santander Consumer Finance has shown excellent performance in the last few quarters. There have basically been four drivers.

Basically, volumes are growing differently in different countries. Lending growing 5% especially in the Nordic countries and the US with significant growth figures; weaker growth in Germany, because of the fall in the sale of new cars in Germany, although we've gained market share and grown in second hand cars. Sustained improvement in spreads; costs declining, especially if we exclude the perimeter effect in the US, in fact in the European Union it's costs down 4%, and a lower demand for loan loss provisions due to improvements in credit quality.

And all of that has meant that Q2 was the best of the last eight quarters and we believe that this trend is consistent and will continue in the coming quarters.

With regards to credit quality, most probably this business, because of its nature, is the one that reflects the changes in the market trends sooner than in other sectors. We see that NPL is contained. Our coverage is going up. Provisions are below 60%. And the risk premium is falling also, which means that the trends that we saw in the income statement will continue in the next few quarters.

If we talk about the United Kingdom now, the first point is that it has had a very good quarter. Growth of profits are very much based on Retail Banking, which increases by 10 percentage profit over the first quarter of 2010 and because of this better credit quality.

I would say that in the income statement, we see a sustainable income, more than 6% in local currency with flat costs. The cost to income is 39%, better than our peers. We are market leaders in this regard; in cost to income, better trends in provision and attributable profit was 11% higher.

If we look at the different activities in the UK unit, we see that our stock of mortgages is growing 6% and lending to companies are also growing at a very good rate, 11%. Spreads still have a trend to go up, not as much as we saw a few quarters ago. But we do see a sustainable trend and this is reflected very clearly in the results.

We're earning a market share in mortgages as well as in deposits and in lending to companies where activity in the UK is weak, it's falling, so we are gaining market share.

With regards to credit quality, I already said that the mortgage portfolio is one of very high quality. The stock as well as new mortgages, the quality standards are very high.

With the securities portfolio we're still managing it. When we acquired it, it was EUR11.5 billion and we said that by the end of 2011, we would have no portfolio. We have brought that down and we're on the way of complying with what we said, reducing this portfolio.

The NPL rate is basically stable. We don't see any situation to be worried about and the risk premium has fallen significantly in the quarter. Therefore, in the UK, we continue with the sustainable trend.

Brazil; in the case of Brazil, we had attributable profit of EUR1.294 billion, 10% more in the first half at constant exchange rates after deducting the higher minority interest from the last October's IPO. Before that, the unit is growing 27%.

The profit is growing 27% and this is based on revenues. In lending, it's almost 3% more than a year ago; fees are growing better at 7% and the trading gains remain flat as compared to last year. Costs are under control. We're growing our costs 2.5% as compared to 4.8% inflation rate, and provisions, which have declined for three straight quarters. All of this produced sustained growth in net profits, as you can see in the chart.

In terms of activity, there were some doubts in the market on the growth potential -- the lending growth potential. Well, lending is growing at annualized rates of 20%, so we're more or less doing as we expected. The year-on-year growth was still weak though, 3%; selective growth in savings adjusted to the current process of rises in Brazil's interest rate. So lending is growing, but if we compare to last year's figures, then our stock only grew by 3%.

In savings, we're being much more selective. Margins are very low in Brazil and we're being very selective. In time deposits, it's a matter of liquidity, because a significant part of the term is with money market debt rate.

With regards to results, two key drivers; the year-on-year rise in the net interest margin is [for] 10 percentage of assets and the sustained decline net provisions.

With regards to credit quality, we have good news. Credit quality is improving. We have a coverage for NPLs of about 100%. The absorptions of provisions over net interest income is also improving. We think that this will continue to fall in future quarters. New entries into NPLs remain stable.

Therefore, we could say that in Brazil, after a few quarters where we didn't see any growth on the side of lending, we have started to see a better quarter, so the figures will be much more positive in terms of fees and net operating income in the future.

Latin America, without taking into account Brazil, the rest of the region, the profit was $1.145 billion. Mexico is growing at 15% in local currency. Chile is growing at 4%, improving commercial revenues trend and lower provisions. There is a certain impact, as I mentioned earlier, from the earthquake in provisions as well as in expenses.

Argentina is growing at 36%. We are taking advantage of the strength of the franchise. Uruguay we have increased our profit by 27% and Puerto Rico where profit has increased 5%.

I'm going to say a few words now on Mexico and Chile. In the case of Mexico, we see that in the second quarter, lending has grown 21% in annualized terms. It doesn't compare very well with last year's figures, because of the credit card business which fell by 25%. There you see the performance, a solid 35%.

There's also a good dynamic in savings and the interest margin still shows good trend. Flat -- costs remains flat. Provisions declined. So after the problem we had with the fall in volume of credit cards, we have now left that behind and are improving.

In risks all indicators are in the right direction. The NPL ratio declining and the coverage is going up; a decline in new NPL entries and an improved risk premium, so also very positive in the trends.

In the case of Chile, I would say it's very similar than in Mexico. The business performance was similar, better growth in lending, 8% year-on-year depending on the segment that varies -- the different percentages. Interest rates were low, but now they're going up. And in resources we also have more growth, particularly in time deposits.

And in results a solid management of balances and spreads is reflected in net interest income and the improvement in credit quality resulted in reduced needs for provisions, pushing up growth and net operating income after provisions and the profit.

With regards to risks, well, we have stability in the NPL rate. The coverage is stable. The risk premium is going down. New entries into NPLs are also going down. There is a trend -- very homogenous trend in all countries with activities improving in the quarter and less provisions are required, which reflects the situation of these economies where the GDP is growing throughout the region.

With regards to Sovereign I would say that the performance has been very good. This is due to the restructuring carried out in this unit. There's a certain pickup in lending, very small, only 2%. Taking into account that part of the portfolio has been discontinued, we see that there is growth in the core segments for the first time, ever since we acquired the franchise in February of last year.

The -- deposits, site deposits are growing well, 6%. And retail deposits we still continue with our policy of bringing that down. In 2009 it had expensive (inaudible) so that we have not, we haven't been that aggressive in our pricing and because of that, other deposits have fallen.

The business margin is going up. There is a new improvement in cost and provisions. All in all, the profits are $132 million, 40% more than the previous quarter. Therefore, a good revenue; the volume is growing a bit. The costs are under control. And in terms of risks, there has been a change in the trend, a clear change. Now coverage is going up. The NPL rate is going down and the risk premium is falling in a sustainable fashion. Therefore, I would say that the trend is solid and points to -- in the direction for the coming quarters.

In Corporate Activities there is a variation of minus EUR595 million, which basically comes from three effects; the most relevant is the exchange rate effect. In the income statement there was a positive impact of the exchange rate here for the first -- for this quarter we have losses for exchange rate because of the coverages. There is a trading gain -- trading gains less than in 2009, because of the selling of some portfolio and some additional contingencies for an amount of EUR70 million. These are the three impacts; that of the exchange rate, less trading gains and EUR70 million of -- in provisions for future contingencies.

The capital gains from the sale of Cielo, the credit card operation in Brazil which is EUR233 million, were not recorded in this quarter.

With regards to secondary segments, I'll go over this very quickly. In Retail Banking there has been a change in the trend -- a sustainability of results and a change in the trend. And the weight of Latin American units and the -- and Sovereign which show very good trends, is reflected in this increase of 7%.

Wholesale Banking with minus 22%, I would like say that the quarter is a normal one. The second quarter of 2010 was exceptionally good. This is a normal one, EUR649 million (sic - see presentation) in results. Now the revenue from customers increased at 16% -- sorry, 6%. There is a fall in trading gains -- trading gains fall. I think came in Wholesale Banking. We are consolidating positions in market -- consolidating the gains in market shares that we obtained in 2009.

In Asset Management and Insurance the second quarter was much better than the previous three quarters for both items. Volumes and revenues continued to recover. Beyond the profits obtained in the second quarter of EUR120 million, I'd like to emphasize that total revenues amounted to EUR1 billion.

And now I'd like to hand over to the CEO, so that he can draw the conclusions of the presentation.

We have looked at the Group's strategy and evolution and the business areas summarized in the slide. I will finish with six ideas and a reflection, which sums up my view of the first half.

Number one, we have a structural strategy which has not changed with the crisis, but we have adapted to the demand of a dual world and provided different responses to different environments.

Point number two, this adjustment, combined with our geographical and product diversifications, has maintained our capacity to generate profit in tact, EUR4.445 billion in the first half.

Point number three, the distribution as the base of Santander's banking model has shown all its value in this period. Only if you have a strong network can you have a campaign to attract deposits. Two additions, very few banks in the world have muscle to increase by 20% its share of its natural market in four months. And having 14,000 branches is a life insurance in the face of global liquidity tensions, such as those experienced in recent years.

Number four, a solid balance sheet and prudence in risks have always been a hallmark of Santander and a priority. We passed the stress test with top marks.

Five, we continue to review our portfolio of businesses in order to invest where we see opportunities and sell when we no longer see them. This provides our strategic position quarter-after-quarter, laying the foundation for the income statement for years from now.

Six, lastly as a result of these policies, we have kept up our dividend policy despite the crisis. For years we have been one of the Banks with the best shareholder remuneration.

Now a final reflection which shows what makes Santander different, because many of our peers can also fulfill some of these points; profits, strength, dividend, diversification. But few or none can attain all of them at once like Santander.

And looking ahead, first, we will continue to watch very closely the trends of each market and adapt to the new liquidity and capital regulations from our already very good situation. We will have four drivers which are not very different from those of previous quarters.

First, consolidate the increase in lending registered in the first half and which is still not reflected in the revenues of many units. Particularly in Latin America lower revenues because of the fall in volumes in the second half of 2009, and the change of trend in the quarter should reflect in greater revenues in coming quarters. It will also be important to extract value from the linkage of new customers captured by deposit campaigns.

Second, we will have to manage the pressure on revenues in Spain and on GBM business, Global Banking and Markets, given the increased cost of liquidity and of lending, which must be passed on to loans. Third, we will strengthen control of costs. Lastly, management of risks and recoveries should reduce pressure on provisions.

All of this makes me confident in the Group's future performance within the difficult environment.

Good morning. As usual we're going to begin the Q&A session, starting with the questions that we have received over the web. And we will try as usual to answer all the questions that we have received. And then if there is time for it, we will take questions over the phone, otherwise we will be answering your questions after the meeting.

So we're going to organize the questions by subject, first of all strategy and regulation. And there's a first question from Britta Schmidt from Autonomous. Although it seems that Santander is the only Bank that is presenting an offer in the RBS deal, there has -- there is no announcement yet. Can we expect something and when will that be?

And linked to that, what is our approach regarding a possible growth of Santander in the UK?

Well, we are in the last phases of the negotiation to acquire the branch offices of the Royal Bank of Scotland. We still have things that we are negotiating. But my personal opinion is that these are points that I don't think will be a problem. I do think that we will find an agreement. And most probably in August we will have the final result.

With regards to the listing of --

(Operator Instructions).

There's a question from Andrea Filtri from Mediobanca, which is related to the listing of the UK. With all the M&A transactions that we read about in the press, I have two questions. How do you see the possible discount for the Santander Holding? What is your policy in the listing of subsidiaries? And how do you see the stability of the capital position of the Group?

The Santander model is a model where the configuration of our Group is done through subsidiaries, and this comes from its origins and we don't grow through branches. So based on the reflections of the regulators, we see that this is a model that they prefer. And so, regulators prefer this subsidiary model than, over the branch model. And I think this favors the entry into the minority shareholdings in the subsidiaries.

We think this is positive. We think it's positive first of all in terms of management for our management teams of the local units, and it's also very positive for the local franchise itself, for the consolidation of that franchise. And these are, amongst other reasons, the reasons why we like to have minority interests. Of course, this also favors our capital position, because our capital is distributed among the different subsidiaries.

There's a question from David Vaamonde from M&T on a possible update of the M&T deal, but you know that we cannot answer questions on deals that have not yet been announced.

And there's a question on the Bank of Spain's provisions regulation. What is the impact since Banesto already mentioned an amount how that would affect their income statement, if you're going to offset the EUR400 million with generic provision? Or what is our policies when it comes to accounting for that impact? And do you have any further details on those -- that impact of EUR400 million?

Well, the only thing I can do is confirm this, then I will hand over to Jose Antonio Alvarez. But I can confirm to you that the impact after taxes is EUR400 million. Obviously, in the income statement there are EUR400 million of more cost. Well, obviously the daily running of the business [we'll] try to obtain other revenues or cost reductions so that we can maintain our goal in terms of profit. We will try to offset that.

The year is full of this type of thing, but it's also full of opportunities, things that -- where we do better than we expected. So this is just another item that we have to take into account when obtaining our results and within our budget.

I don't know whether you'd like to say anything else, Jose Antonio?

Well, this does not change our view for the remaining of the year.

There is a question from Neil Smith on the stress tests. What are the hypothesis for the growth of lending and net interest income in 2010 and 2011, and the adverse scenario?

It's 2% growth in risk weight assets per year and the net risk -- the net interest income will respond to the different cases that we announced in the conference call and that we can share with you later.

If we look at the financial area there are two questions on the deposit campaign from Britta Smith from Autonomous and Antonio Ramirez from Keefe, ask about the impact of this deposit campaign? And how we have invested the liquidity that we have raised in Spain, were these deposits, and linked to that, with the cost of funding and the cost of lending?

Well, we already gave the figures of this campaign, EUR32 billion in Spain and I even broke it down into the different units. In fact, it depends on the unit. It's replacing wholesale funding, therefore we are replacing market funding. It's a mix between short and long-term. It's not all inter-banking. It's wholesale funding with an average term of two to three years. Therefore, the impact between what we pay, the cost might be 3.5% or 3.75% as compared to wholesale funding in a year whose costs you know about.

And that impact in the quarter, well, we have the different units in the Santander network and Banesto and other units like Direct Banking, in Banif and the other units as well. And we will see what that impact is in the future, but there haven't been any specific [circuit] of investments to match deposits, if that is what the question was suggesting. We have not changed our outgo policy. We didn't do this to match the yield on deposits, if that was what the question was about.

There is a question linked to this last point from ALCO from Antonio Ramirez. Can we update the composition of the ALCO portfolio's volume and duration in Spain and in the different geographical areas? And what is the contribution to the net interest income?

Well, here we don't usually see significant changes. In Spain we have portfolios available for sale of about EUR23 billion or EUR24 billion, or EUR25 billion, out of which EUR21 billion are in the banks and EUR3 billion more or less in the insurance company.

In Portugal there is a portfolio of EUR3 billion or EUR4 billion; in Mexico $6 billion; in Europe we're talking about euros; in Brazil $12 billion and in the US $2 billion.

The spread is -- well, short duration, 100 basis points or 150 basis points in Europe. In Mexico it's probably 250 basis points and in Brazil it's changing, because interest rates are going up but the portfolio has a yield of 12 or 30 or 12/40 in Brazil as compared to the current rate.

I don't know what the global figure is by, but I know it by unit. But there you have all the different elements to see what the contribution of these portfolios are to the net interest income. They don't change very much these portfolios, they remain relatively stable.

Okay, there's a question from Jaime Becerril from Redburn about the use of balances in Central Banks. Can we explain how much have we used of the lines from the Central European Bank, and the whole thing about cash and Central Banks?

And then Antonio Ramirez is asking too about ForEx coverage, or hedging levels, book value by major geographies, and what have been the losses obtained through these hedges in Q2?

I explained that. I mentioned there was EUR200 million the loss incurred with those hedges in the quarter.

As for cash in Central Banks, I can tell that since the crisis began, and I'm referring to 2007, we have seen a consistent increase in the balance of Central Bank deposits in the Bank, basically because we've done some retail activity there and also -- or some marketing there, and also because of our rating. There's very few banks in the world really, which have an AA rating with all three agencies, and so that's why the Central Banks consider us to deposit their balances.

As for the ECB, the position has not changed in the last eight/nine months, there's not been any increase really or any variation there.

There's a question from Andrea Filtri from Mediobanca about Basel III, basically asking that one of the major beneficiaries have been the investment banks, and might this require that we increase the kind of risk and extend our business focus towards this sort of banking business. Or do we expect to see any penalty for non-investment banking activities?

No, our Investment Banking or Wholesale Banking, as we prefer to call it, business has not changed nor will it change its focus. Our Wholesale Banking is focused on providing service for our major customers in products, transactions, basically credit products and transactions, which are basically what we always do in our Commercial Banking business, and that's not going to change. That's as far as our basic strategy.

And as far as the specific question about the impact of the new Basel III regulations. I'll just take advantage of this opportunity to say that although in general these new regulations are stricter, and require stricter solvency ratios, liquidity ratios and so on, nevertheless there's a long adaptation period.

And second, it's not quite detailed yet, most of those measures. There are some criteria or principles that have been defined, but the details are still to be worked out, so we'll have to wait until that happens. However, again, on whether this might benefit particular banking business over another, there would be no reason for us to change our strategic focus or our DNA, which is what it is.

And there's a question from Matteo Ramenghi from UBS about the stress test, the adverse scenario. Could we say something about impairment in the net operating income and the assumptions about emerging market. Is the impairment sufficient given the business performance; and about our exposure to sovereign risk? We can give your the details to Investor Relations, sovereign exposure outside Europe. Unless you want to talk about our exposure to sovereign risk outside Europe.

Well, as I said, all the ALCO portfolios I mentioned are sovereign debt. Mexico, the EUR5 billion is sovereign risk. In Brazil, so local currency is sovereign risk. And in Chile it's a smaller amount, but the majority is also sovereign risk. So that's the sovereign exposure we have.

As for the assumptions for emerging markets, I can't remember off the top of my head, but I think that in Brazil the growth that was planned for 2010 was 0.4%, and the mix was 1%, and it was kind of the same for Mexico.

And given where the central base line scenario is, it has to be somewhat similar to market consensus, the distance is huge. In Brazil 0.4% when the economy is actually growing at 9%, it seems pretty adverse a scenario given where the economy really is, although, of course, it's all relative, always.

There is a question from Antonio Ramirez about core capital and Tier 1 capital, and valuation adjustments and exchange rates, but I think we've answered that. I think it was in slide 14 where we talked about the impact on capital.

Raoul Leonard from RBS is asking about the evolution of our cost income ratio, he says that it's risen from 42% to 47% in the quarter. And does this include a perimeter effect, or is there some kind of short-term impact?

Our cost income ratio is 42% in the semester, not 47%, and actually the costs have risen more or less by EUR300 million and about EUR400 million to the income. But the income's grown less because of less of an ROS contribution in this quarter, and that's what the cost income ratios gone down very slightly. But the underlying operating business is growing, as is cost income ratio.

A question from Jaime Becerril about evolution of risk weighted assets in Brazil and the US, why they are growing so much?

That's an exchange rate effect, I don't need to go into further detail I think.

Britta Schmidt from Autonomous is asking about our funding strategy for the remainder of the year, and how stable do we think will the deposits we've attracted be?

Well, as for the deposits we've attracted, they are of course very diverse, we've given you total customer numbers, and you can estimate the mean volume per customer, diverse or not. The funds are large enough to take that stability will be high, of course it's never 100%, but in any case it's up to our branch network to achieve that stability. But mean volume makes us feel quite optimistic about this.

As for our funding strategy, in general if you analyze trends in the last quarter -- well, actually for the last five or six quarters now, we've seen a clear underlying trend where markets are still called mature or deleveraging growth has been significantly higher for deposits than for lending, and therefore the need for wholesale funding in these markets are tending to decrease. And we think that in this economic scenario this will continue to be the case.

In emerging markets, volumes are beginning to grow significantly on the lending side. Last year they didn't, but now they're growing significantly again.

As for our funding strategy, we are still on budget. Our funding budget follows our retail budget. And our refinancing volumes tend to be lower, in some cases significantly lower than our maturities. But we adapt to the markets from there. Currently markets -- after the volatility we saw with sovereign debt, the markets have become relatively expensive. We are trying to issue today and we will issue to prudent liquidity management, so that we can be in a position where we can have a surplus of a certain size.

We're always usually at EUR10 billion or EUR15 billion borrowed from the market as a policy. And our short-term programs are really small, both for Europe and for the US. So our strategy is still not to focus very much on the short-term, and to match the development of the business with medium and long-term financing.

It's a question from Raoul Leonard from RBS. He's saying that growth in deposits is excellent in the first semester. Do we expect it to continue in the future? And do we have a loan to deposit target ratio?

And Rohith Chandra from Barclays is asking about net interest income, which in Spain has dropped significantly, but for the Group not so much. And can we discuss more about that at the Group level?

Well, the first part of the question I can answer. The campaign to attract customer funds has now ended, so we're on a business as usual strategy now. But my impression is that in that context we will continue to gain market share. Of course not as quickly as we have done when the campaign was on the way, but we will continue to grow market share, simply because of tensions in the (inaudible), and the weakness of some of our competitors.

We are stronger than most of the rest of the sector in Spain, and that's been clearly demonstrated recently. So I think we'll continue to gain market share. Plus, we have a very positive acceleration in our network, because the campaigns and with the business volumes, the customer volumes that have come in, it's 120,000 new customers. And so, of course, now we can start cross-selling.

And so for all of these reasons I think we'll continue to grow our market share in the coming months, even though we're not implementing any campaigns right now.

There were some questions about whether we have a loan to deposit target. We don't, but we do think that given market conditions -- I think two years ago it was 150 and it's now maybe 220 or something, and we think we'll finish the year between 150 and 120. But it will depend on the circumstances in a different unit. Basically, the units that really make a difference here are those in developed markets.

And then there was something about net interest income, there are pressures on margins in Spain and Portugal, reflected in the numbers we've shown. I wouldn't say that's not as for the Group level, because at the Group level we have very different trends. We have some with low stable rates in mature markets, but also rising rates in Chile and Brazil in -- not yet in Mexico. And we have different volume trends too.

So I think it's going to be as I explained when I talked about the units. There are some units where net interest income will grow at a good rate in the coming quarters, basically Latin America.

And we feel that as -- if interest rates continue to stay low, although of course it's due, that write-downs of mortgages in Spain are ended at 1.2 or 1.25, has now been a rate at which our mortgage portfolio has been repriced. But maybe in the next months we might have slight rises, but I guess it all depends on what happens with the rate.

But with low rates there is a pressure on deposits and in lending, of course, we could see some improvement through mortgage repricing. Also, because the spreads for certain market segments are improving, spreads for the SME business and for the Consumer Finance business are improving.

Okay, there are several questions about Basel III. Sergio Gamez from Merrill Lynch is asking what do we think might be potential impacts? I think we've talked about this already.

Jernej Omahen from Goldman Sachs is asking, what is going to be our leverage ratio under the new Basel III proposal? What will be the treatment given to minority interests, the impact on Santander? Does this change our focus on subsidiaries?

Marco Troiano from S&P is asking about the rationale in Brazil and buying minority stakes in Mexico. Is this due to Basel III indications? So it's all about Basel III really. And you've, I think, answered already, maybe about minority interests.

Daragh Quinn from Nomura is asking about capital ratios; are we comfortable given potential acquisitions, and are we generating enough capital organically?

Capital ratio is 8.6% core capital again, of course core capital is not the same as Tier 1, as has been amply demonstrated by a crisis. 8.6% for our kind of business profile is more than comfortable for Tier 1 capital ratio. And we are generating capital. Although, as we said Mexico will be consuming -- the acquisition of the Bank of America stake will consume 30 basis points; the German operation 9 basis points. That's true, but we will be generating significant capital organically. And we start out with a very comfortable position again. You only have to look at the stress tests.

Javier Panizo from Orbis Capital is asking for an update of the banking book and the trading book in the different geographies. I think we've already talked about our exposure to sovereign risk in the second quarter.

Matteo Ramenghi from UBS is asking whether the EUR400 million will be one-off or whether it will come in again in 2011. And no, it's a one off for 2010.

Francisco Riquel from [M Plus One] is asking about interest rate hedging, that's already been answered. The cost of the campaign, already answered. It's a corporate headquarter a business area? It's a business area, so I think we've answered that already.

Santiago Lopez from Credit Suisse is asking about financial revenues from ALCO, and the structure of wholesale funding in the coming two companies. I think you've answered that too already.

Well, for ALCO I mentioned what the portfolios were and the mean spread, I think I've answered that. As for wholesale funding, I think we've already elaborated on that, our monitoring of that. And I just want to make sure that wholesale financing will have a mean maturity of 3.5 years/four years, which is generally our target internally.

On talking about risk, and credit quality, Carlos Berastain from Deutsche Bank is asking about coverage levels in Spain going down even though NPL ratios are not rising much, and you're provisioning more.

Well, the trend is very similar if you look at the different quarters. NPL ratio is rising more or less the same per quarter, around 15, 18, 12 basis points although, of course, coverage is down 4 percentage points, but we're also provisioning around EUR25 million. So we're more or less at the levels of impairment of risk quality that we mentioned, reasonably stable.

Irma Garrido from Ahorro, new regulations, already answered. Details of LTD and NPL portfolios with real collateral, we can answer that later since you need more details.

And someone is asking what do we expect for NPLs in the Group in Spain?

And Francisco Riquel is asking Group about substandard risk in Spain and coverage; so trends and outlook for NPLs in Spain and in the Group, in both.

Right. Our outlook on NPL, of course, it's hard to predict, but we think in the Group we're seeing NPLs reach a peak, we don't think from now on NPL ratios in the Group as a whole will continue to grow. Maybe for one more month, but we think we are reaching close to that peak.

I'm not so sure about Spain. In the case of Spain I said -- I think it was when I reported the results last year in February I said that I expected NPL ratios to reach a peak in Spain around Q2 or Q3 2010. Well we're in Q3 now, and I don't have that impression now, I think that NPL peaks in Spain will not be reached probably until the end of 2010, and so into 2011. That's my outlook.

As for numbers, well, I could get it completely wrong. The numbers for the Group will remain at the current level and will start going down at some point in Spain possibly. We're now at 3.70%, isn't it? 3.71% approximately; and I said some months ago that I thought we wouldn't reach 4%. But I think we will reach 4%, and we might even go slightly above 4% just a couple of decimal points, probably very slightly when we reach that peak, which again we will reach in Q1 or Q2 2011. So that's my best take on NPL ratios for the Group and for Spain.

Okay, looking at business areas in Spain, there's some questions on our net interest income, which have been answered already.

There's a couple of questions from David Vaamonde from Fidentiis, and [Marcel Sanara] from Bernstein about market shares. About where we're gaining market share in Spain with our customer fund campaign. Will this campaign continue?

We've already said that it's done, it's over.

What is the underlying trend in our market share on lending; i.e. in customer funds? Where are we gaining market share?

Well, I think we'd be gaining market share 65% from savings banks, and 35% from other banks. So we're having deposits come in. This is not really measurable accurately, but that's more or less what it is.

And the question about how long are we going to continue with the campaign does not apply, because it ended a few weeks ago. And again, now, we are in business as usual, which again since we're seeing strong acceleration from that previous campaign, it will be bringing in lower growth, of course, but gains in market share will continue. But in Spain -- we have gained 220 basis points in market share in Spain, as I said in the presentation.

Okay. Marco Troiano from S&P is asking whether in Spain we are seeing weaker competitors, especially on the mortgage side, withdrawing or being less active. I don't know if you want to elaborate there.

Also, a question about evolution of spreads in new production; that's Alejandro from Kepler.

We're not actually seeing any competitors withdraw from the mortgage market, although with lower volumes it's still a market where [reactor] is present and producing new operation.

And the answer is clearly, yes, we are seeing and we are promoting ourselves as a major part of the system. And, because of the rise in wholesale funding costs, we are promoting an improvement of spreads in all market segments. Perhaps in the mortgage market it's less visible, because it's the hardest to get spreads to improve, and the most competitive. But in the market segments we do see, very clearly, improving spreads; constant improvement of spreads month-on-month.

Right, going on to -- there's a question before we can move to Brazil, about Portugal. Irma Garrido, from Ahorro Financial Funds is asking; are we being price aggressive to attract customer funds in Portugal, as we have done in Spain?

Well, in Portugal we're not being particularly aggressive with respect to general conditions in the market. In Portugal, traditionally, there's been strong competition for customer funds. It has been a very aggressive market, because structurally it's always been rather tight on liquidity. So every bank has been very active in trying to attract customer funds. So that's my interpretation, I don't know if that's what you're asking really?

Moving on to Brazil. There's a question from David Vaamonde from Fidentiis; says that net interest income has not changed very much in the market, and do we expect financial income to improve, or --?

And Arturo de Frias is asking; how are our lending volumes moving? Are we seeing an impact of competition from publicly owned banks?

I think I said that the Brazilian financial margin was not moving very much, but I also mentioned two facts in Brazil. Net interest income, a very large part of that comes from lending. Inter-annual lending growth in Brazil has only been 3%, although it's true that in the quarter we've seen strong growth. But the impact, in the quarter itself, if you work out the average, is still small.

I did explain in the presentation that we expect to see the growth in lending to consolidate, and, therefore, for its impact to be felt. Of course, in Brazil there's major differences in net interest income from individuals, where net interest income maybe 20% to the Wholesale, where it's only 2%. But, assuming that we might expect growth rates around more or less the kind of level I mentioned, this should be reflected in the coming quarters, and we hope that will mean an improvement in net interest income. So, the best proxy I think for that will be the growth of our lending portfolio.

In Brazil -- there is another question to finish talking about Brazil. Asking for an update on restructuring in Brazil and synergies; how's the process going? It's Sergio Gamez of Merrill Lynch asking this.

And Daragh Quinn from Nomura is asking -- I think you've already talked about this. Volumes in Brazil as compared to our peers, will we be growing more or less than them, and what is our outlook? Do we predict volume to keep growing at 20%? I think you've talked about that sufficiently.

Well, as far as growth I think we've talked about that already. We do still have the same outlook for growth that we've seen this quarter.

And as for restructuring in Brazil, we expect to see the brand switchover at the end of this year, November this year; and in technology integration, systems integration, by about February next year.

Financially, as for the synergies to be obtained, I don't have the number, but I think we're above our target.

And about the plan that we presented when we presented the ABN Amro offer, yes, it was BRL4.5 billion, if you remember that target, and we're at BRL1.4 billion/BRL1.5 billion in Q2.

Last question about Sovereign from David Vaamonde from Fidentiis asking about guidance, since net profit is at $350 million. Sorry, they said $350 million guidance. It wasn't $350 million. It was $250 million for 2010. Given how the year's going, are you changing that guidance? Does that fall short? What do we expect to see there?

Well, Sovereign is exactly on target, and, in fact, you can see it quarter-on-quarter. If you follow the quarterly evolution it's exactly on target.

As Antonio explained earlier, we expect to earn $250 million, and we're exactly on target, and accelerating. It is possible we may exceed that, but we are not going to change our target, or our guidance.

Okay, well that, I think, concludes all the questions we've received. There are no questions over the phones, so that ends here.

Thank you, I'll see you next quarter.

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.