Banco Santander SA (SAN) 2010 Q3 法說會逐字稿

(Spoken in Spanish).the crucial aspect of management in the quarter and then Jose Antonio Alvarez will review the Group's result and will talk in more detail about the various business areas. Finally, I will close with some conclusions on the year and our vision for the coming quarters.

And the first point I'll make is to say that in a very complex environment we've once again had an excellent quarter. We've improved some of our key management variables. Very generally, in this slide you can see a summary of the Group's fundamentals, which I'll review in the next few slides.

And I've divided this into four major areas; the first is the Santander's ability to continue to generate solid profit in a difficult market environment. As a result, we've been able to be very conservative in the criteria we've used to apply the new Bank of Spain recommendations on provision, and also to transfer the impact directly against the quarter's profit without having to free up any generic provisions to offset that.

The second major aspect in the quarter has been the strengthening of our balance sheet. Our credit and market risks are still well under control. We've continued to improve our liquidity position and our capital ratios are still extremely solid.

Third point is that we continue to provide a high shareholder return with a total expected remuneration for the whole of the year of EUR0.60 per share.

And fourth, we continued to bolster our strategic position in the markets where we operate, both through acquisitions and also by gaining market share organically in target products and segments in the different countries. Let us now review each of these points in more detail.

In Q3 we generated recurrent earnings of EUR1.6 -- attributable profit of EUR1.6 billion, so that accumulated up to September was EUR6.08 billion, which is 9.8% lower than in the same period of 2009. This profit was impacted by a one-off provision of EUR472 million as a result of applying the Bank of Spain's new letter on provisions. This is a one-off impact, it's a non-recurrent impact, which has been offset entirely by a profit. I will elaborate on this point later.

Excluding this impact the ordinary return profit this quarter would be more in line with the Group's run rate and would be up to EUR2.107 billion, which would bring the total in the first nine months of the year to September of EUR6.5 billion, which is only 2.8% below that of 2009.

The business model positioning and diversification were our major drivers to maintain recurrent profit. The best example of diversification can be seen on the screen looking at results and starting on the right-hand side.

Emerging markets show significant profit growth, Brazil up 15% versus the previous quarter and 26% versus 2009, both percentages in local currency and without minority interest impact. The other Latin American countries are also experiencing significant growth rates. The large companies in the region are registering double-digit growth.

The UK and the US profit rose by a combined 38% and the UK grew by [30%] in pounds sterling and Sovereign broke even and has generated profit in the last [four] quarters. That is three of the four major business areas where we do business have shown significant profit growth. It's only Continental Europe that -- where profits have fallen due to a worsening macro economic environment and the one-off impact on provisions, which I will now explain.

On the screen you can see the details by unit of the provisioning in the quarter for the application of the Bank of Spain's new letter, EUR693 million as well as the impact on attributable profit of EUR472 million, which is slightly higher than the one announced in the results presentation in July.

The new regulations, which came to force on September 30, have an impact for Spanish banks, mostly for the Santander Branch Network and Banesto. It does not affect those banks where IFRS are applied, for instance, the UK nor on those in Latin America where the more rigorous criteria is applied between the Bank of Spain's local criteria and the internal auditing risk models. And the new recommendations are very similar to the Group's internal rules, the strictest, which we had already been using.

Over the next few minutes I'll explain briefly the content of this new regulation, the general impact and I will specify the impact for our Group. The first impact is the establishment of a more demanding coverage calendar. Before 100% coverage was reached between year two and six, depending on the type of loan.

With the new letter the calendar has moved forward and 100% coverage has to be reached in 12 months in all cases. And that means bringing forward future provisions at the time of their first application with a subsequent negative impact on earning.

The second impact is positive for results since the new letter increases the percentages of credit guarantees related to housing and real estate. This reduces the percentage of non-performing loans to be covered by provisions, enabling funds already established above the new guarantees to be released. This positive effect is mainly obtained in the land and real estate promotion area, since in the previous rule no value was assigned to the guarantee at all and in the new letter it's 50%.

And finally, there is a third impact through the establishment of a new calendar for provisions on foreclosed property. These assets will have to have a coverage of 30% within 24 months of foreclosure or of 20% when justified by updated valuations. This impact will be negative or positive for a bank depending on the percentage of coverage at the time of first application of the regulation, and the decision whether to release or not any possible excess or potential excess coverage.

In the Santander's case the effects are shown on the left-hand side of this slide. The first affect to bring the calendar forward means provisioning by EUR965 million, the second impact release due to guarantees releases EUR272 million. This figure is relatively small due to the lower weight in our case of developer loans and land on the NPL portfolio, which are the most favorably effected by the current regulations.

And the third effect on real estate assets will be very positive for our Group, with a strict application of the new calendar we'll be able to release over EUR700 million. So the total impact of the regulations would have been EUR32 million positive.

However, since in the Group we are traditionally extremely prudent we've opted not to release any provisioning in real estate. When we provisioned 30% at the end of 2009 we did so on the basis of a realistic appraisal or valuation of the real estate, which we believe has not changed. And consequently, and since we have not made this release, total provisions made amount to EUR693 million.

Additionally, and as I've mentioned, we have decided not to offset these provisions by releasing generic provisions, but rather to charge it fully to profit.

The second area in that initial slide was the strength of our balance sheet, and here I'll mention three issues; risk quality, liquidity and solvency. With regards to credit risk our management is shown in a good evolution of net entries of NPLs and on the risk premium, both for the whole Group and for our larger business units, as you can see in the lower part of the slide, with particularly notable improvements in the UK and in Latin America as a whole.

Both indicators have been improving consistently since mid 2009, which is beginning to lead to a lower demand for provisions in some units. And also a better evolution of our NPL ratio, which is now more stable in the Group in the last quarters as a consequence of improving ratios in units like Santander Consumer Finance, the UK, Brazil and Sovereign, which offset the rises in Spain and Portugal, which, as we mentioned in the last results presentation, will continue to grow for a few more quarters.

Also, coverage ratios are improving in most of the Group's units. We should emphasize the UK Sovereign or Santander Consumer Finance, which is already at 122%. Brazil and the rest of the Latin American countries are still at very comfortable coverage levels of around 100% or higher.

In summary, we have excellent coverage ratios at the Group level, 75%, which is higher than what we had 12 months ago and which enables us to continue to compare favorably with our competitors in risk quality.

As for liquidity the business dynamics and the Group's ability to capture funds has produced a further improvement in the quarter, so we are in an extremely comfortable position. We have improved retail and wholesale funds by EUR123 billion in the year, which is double the maturities of wholesale issues envisaged until the end of 2012.

Also, in -- by September we had already covered all -- the full program of issues foreseen for the whole year. Our high rating and decentralized but coordinated access to wholesale markets via the parent bank and the eight subsidiaries gives us great flexibility to attract funds through different instruments, maturities and currencies.

And this two-fold strategy has enabled us to significantly improve our financing structure, that's the deposits and medium and long-term financing, which already cover 113% of our loans. And also to narrow the lending deposits gap from 150% at the end of 2008 to an excellent 119% today.

And the last area I'll discuss when talking about the strength of our balance sheet is solvency. We ended September with a core capital ratio of 8.5%. The main changes in the ratio in the third quarter were the generation of ordinary free capital, 13 basis points; a drop of 8 basis points because of that one-off provisioning; negative impact of 34 basis points from the minority interests in Mexico; and a net rise of 15 basis points after the sale of 2% of Brazil partially offset by the entry of consumer portfolios.

We have a very solid capital ratio, especially bearing in mind our business model and our risk profile. And we have a lot of flexibility in our capital management. A good example of this is the active portfolio turnover we've carried out in the last three years, which today gives us a more diversified and a better quality portfolio.

This improved quality has meant that the Group has practically financed itself since capital consumption for the acquisitions, 200 basis points, has been almost completely covered by sales, 156 basis points, to which we should add our usual capital generation. [And] to this, we add an estimated impact of the new Basel requirements of only 70 basis points, 37 basis points through intangibles, 25 basis points for minority interests and 12 basis points for counter party risk. We are in an excellent position that makes us feel very comfortable with the implementation of Basel III.

A strong profit generation and capital structures, combined with a stable payout policy, are enabling the Santander to maintain a higher remuneration by a dividend throughout this crisis and recession. For the year our payout will be EUR0.6 per share, which is the same number as in 2009.

Therefore, the Santander is consistently offering high shareholder return. Dividend yield has been over 6% in the last few years, which puts us at the top of the ranking of our peers, almost tripling their average return. In total shareholder return we're also above the average and the benchmark index for both short, medium and long-term.

Finally, I'd like to explain the fourth major pillar in the year, the management of our business portfolio in the last few quarters. I'll bring you up-to-date on the main operations.

In Germany we've integrated the retail business of the Skandinaviska Enskilda Banken, SEB. We intend to close this operation at the beginning of 2011 once we've finished installing Partenon in Germany, Parthenon will be the basic operating platform for SEB and the migration process will take 18 months.

In the UK we will -- we have integrated over 300 Royal Bank of Scotland branches and their retail and corporate business. The European Commission has already approved the operation. We expect to complete the transaction by the end of 2011 after sorting out the assets of the business acquired and then we will begin the migration to the Santander UK platform.

I'll remind you that this operation like the one in Germany is a carve-out; that is we're extracting part of the business from an entity which continues to operate independently. As a consequence, we require strong technological and management capabilities in order to succeed, something that could be done by very few banks and amongst them, of course, the Santander.

And finally Poland and the acquisition of the BZ WBK Bank, we are still awaiting approval by the Polish regulator. That's a process that usually takes a rather long time. It's an operation which we feel has enormous potential, because of the country and for our brands.

Poland is a growing, stable, and well managed economy; a population of almost 40 million and a development level which is similar to that of Spain 20 years ago. Its economy represents 40% of Eastern Europe's GDP. And as a member of the European Union, it will be the largest recipient of development funds in the coming decade.

Also the BZ WBK is a large and very well managed bank, the third largest by branches and profits, with a business that fits very well with our own model and with room to keep growing and improving its efficiency. Also, it has a good management team which will stay on. Therefore, our brand in Poland, including the Consumer business, is expected to bring in close to EUR500 million in profit in 2013.

I'd also like to point out that Santander has continued to strengthen its position in the markets where it operates, with growth initiatives in both -- in products and target -- in product and segment targets. This slide and the following comments will describe our different initiatives.

In Spain, the deposits campaign has brought in over 2 percentage points in markets share and 100,000 new customers. It has had a very dynamic impact on our branch network, as can be seen from the notable improvement in market share by number of transactions.

In the UK, as you know, we're focusing on strengthening our SME and Card businesses, and in both of them, we have had significant growth.

In Brazil, we're accelerating our growth in key products, as Mr. Jose Antonio Alvarez will explain later; amongst these, payroll, loans, mortgages and cards, where we're already operating as issuers and acquirers. The agreement in the acquisition part is beginning to be felt in transaction levels and market share gains.

In Mexico, we're focused on loans linked to payrolls, mortgages and SMEs, and in all of these segments we're gaining market share.

Finally, Chile started with the highest market share amongst the countries where we operate with over 20% and, nevertheless, we're still gaining market share in some segments.

And now Jose Antonio Alvarez, our CFO, will discuss the Group's results by the different business areas.

Good morning. As usual, now that our CEO has discussed the main aspects in the year, I will review the Group's overall results and the business areas.

As you know, we usually post on our website very detailed country-by-country information. What you see on this screen is the P&L account. We generally show you two columns; in the first, the variation on the first nine months of the year in accounting terms. And in the second, so you can draw comparisons more easily, we subtract the exchange rate effect, which is very small.

I think we can say that the underlying trends are consistent and solid. Basic revenues in emerging markets we have very positive trends. And in our case, as our CEO has pointed out, there are two different trends. In mature markets we have restructuring going on, business generation has been very good; and other markets where we have very consolidated brands, growth has been lower and profits are weaker.

Cost management is still, I would say, as usual very good overall. There's a strong drop in recurring provisions. We have seen a drop in recurring provisions of over 10%. And net, we have had new growth without the exchange rate and perimeter effect of 7.6%, which is not seen in the final profit, because for one-off I mentioned. [ROSs] have been low in the quarter. I'll talk about the effect of impact -- the impact of interest rates on our headquarters and the impact of higher minority interests in Brazil.

Looking at basic revenues for each peak is at the more commercial revenues, the quarterly evolution is very consistent given the current stage in the cycle. Of course, underlying that, we have some units that are growing very strongly and others with weaker earnings, as we will see later when we review the different geographies.

This is the result of consistent growth in deposits. As you can see, deposits are growing very strongly, and that continues. And we have seen a change in the trend for lending where we had had negative rates in the last quarters of 2009, still negative in the first quarter of this year, but now positive.

As for spreads, we have two different trends. On the one hand, in deposits, low interest rates in mature markets together with the customer deposit campaigns in Spain have brought down our margins for deposits, but the margins for loans are still evolving very positively. There's a higher cost of wholesale financing, and a particular impact in the UK with the greater regulatory liquidity needs which imply higher financial costs.

On the right-hand side of the slide you can see that there is a -- that we are still significantly closing our lending deposits gap, as our CEO pointed out before. As for costs, I'd say that it's business as usual. Our retail units in Europe, in the UK are all with negative costs. We continue with the restructuring costs.

And overall, in Sovereign costs are down 11%. Mexico and Brazil costs increased below inflation. Chile, we have a plan to open new branches. We've signed a new collective bargaining agreement with slight upfront salary raises, and that's why in Chile costs are growing above inflation.

As for provisioning, ordinary provisions, we have an increase at the Group level of 9%, because of the impact of the Bank of Spain's new regulations. Excluding that, we would be seeing a drop of 10.5%. That's a pretty stable trend in generics in comparison with previous quarters.

If we look in detail, we see that provisions have been falling almost constantly in the last five quarters, both in Brazil and in the UK and Sovereign, as well as in Latin America except for Brazil. The only exception is Spain and Portugal because of the economic circumstances, which indicates the underlying businesses in both countries. In general, the emerging markets and restructuring markets are doing very well, and Spain and Portugal weaker.

As for the quarter, there hasn't been much growth, basically because of a significant impact of exchange rates. The generic provisions fund amounts to almost EUR6.5 billion, of which about EUR1.4 billion are for Spain, which this quarter has used up around EUR450 million.

If we look at an underlying aspect of the business, financial revenues plus commissions minus loan provisioning, we see that the business is solid and consistent with growth of around 8%, without considering the exchange rate and perimeter effects. So overall, the underlying businesses are growing significantly with the differences between them I have mentioned. And when we look at the different units, you will see this more clearly.

This trend -- you can see as we saw in the previous slides that we have the same trends. Brazil still has very solid dynamics. Continental Europe is decreasing; the UK and Sovereign also very good trends, and Latin America, except for Brazil, very similar to what we see also in Brazil.

Moving on now to the different business geographies, starting with Continental Europe, as usual. The income statement for the first nine months shows the difficult business environment.

Gross income down 2% in the area overall against a backdrop of low growth in lending, interest rates at record lows and strong competition for deposits. Costs are flat, slightly decreasing. As we saw earlier, they only rose in SCF because of the increased perimeter with AIG Poland and the US portfolios. It's not so much the portfolios but the servicing of those portfolios in the UK.

Provisioning has also remained fairly stable after excluding the one-off impact of the Bank of Spain's new regulations. And the net of all this was attributable profit in the first nine months of EUR3.175 billion; it's 8% down in the same period of 2009, but without the one-off.

We have had a very good performance in Consumer Finance, growing at 30%. We will see later that business dynamics are really good. Global Banking and Markets have produced slightly less profit than last year, which was extraordinarily good, and this year it's around minus 7%, but still very solid profit generation.

Analyzing the different units, included in Continental Europe. The Santander Branch Network, we can see the trends that we have mentioned in previous quarters; strong growth in deposits as a result, of course, of our campaign with 34% inter-annual growth. Lending still weak; slight drop in lending overall, down 3%, particularly for mortgages.

And as a result of that, our results reflect this tough environment; pressure on revenues from less activity, lower spreads on deposit, and fee income's still weak because of low volumes; costs continue to register negative growth and provisioning, with or without this one-off, reflect the impact of the new regulations. Without them, provisions have remained pretty stable with limited use of generic provision.

Although Banesto has already shown their balance, they are staying in focus with the volumes of deposits captured, [competitors] going down; relatively flat costs. And as part of the objective they have had set by their [lending] team, they're fulfilling their plans and credit quality and stability.

As we have seen in the financial balance, of what the Bank of Spain calls troubled assets, these are the data we have. We have already supplied these data in the past and trends have remained the same so far. We have a lower exposure in the sector in general. Our exposure is lower. We have less troubled assets. Our credit portfolio in Spain is around 14% or 15%. And in the area, our troubled assets are 8%, clearly below our market share proportion. And our weight in exposure to the real estate and construction industries is below 30% versus 30% as an average in the industry, as we have already seen in prior occasions. And this lower weight is reflected in all sectors.

As for coverage, our coverage is higher in all areas, both specific and specific plus generic, as well as acquired assets. So our most generic coverage is 8 points above the industry. And if we add the capacity to generate earnings, our coverage would be 80%, well above the 67% industry average.

But this is just an update of figures we have already provided during the first quarter this year, when the Bank of Spain [point] this denomination of troubled assets and called for a greater need to be more transparent in this area.

Moving over to Portugal now. The situation is quite similar to that of Spain also. Credit is slightly better. Mix, the evolution is very similar to that of the Spanish Network. We're growing healthily in deposits, and similarly in credit. NPL has been slow due to a drop in spreads. There is intense competition for liabilities in a system that has had a difficult environment in the last few months. Costs keep driving down. And although spreads are below those of 2009, a change in trend has been detected in the last month. So perhaps this trend of lower preferability of deposits remains.

As for Santander Consumer Finance, they have had a good, positive and growing evolution. More production has gained momentum in the last few months. In terms of countries, we're growing a lot in the US, Nordic countries and Italy; relatively stable in Germany where the drop of stocks not production in Spain, because actually, production is Spain is growing significantly compared to last year.

Deposits have gone very well and they're doing very well, particularly due to new deposits in Germany, around EUR20 billion, so healthy growth. And this good [pickup] in environment and increasing spreads is generating better results leading to a growth around 30%.

There is a slight effect on Santander Consumer Finance, as our CEO was pointing out, and according to the change in the letter of the Bank of Spain, but even in these conditions, our earnings are growing soundly, and we believe (technical difficulty).

The Company is increasing in market share. The [wholesale] are growing by 4%, but if we go to the SME world, our growth is already 23%. And in the core business, we're growing at 14% above [this]. We're also growing at an interesting rate, 7%.

And in terms of results, we're witnessing spreads on assets following a positive trend. And liabilities there is a compression. Costs are higher due to wholesale financing and due to higher liquidity requirements from the regulator that has led, or that has had a significant impact on the quarter.

On the sales side, we're improving costs, but there is some restriction in the spreads. Lower need for provisions; a clear improvement of credit or loans, and a positive growth. The continuation of these trends in the next few months, combined with the controlled costs, point to a highly positive profit growth.

Brazil; even though I'm talking about Brazil, I believe that the situation and that of the rest of the countries in Latin America are very similar. The attributable profit from Brazil has been EUR2.079 billion, 8% more than the same period in 2009 after deducting the larger minority interest from October. Growth before minority interest has been 26%, which is the best example of the business run rate. This 26% is very positive.

Growth is based on growing revenues and -- which continue to grow quarter-after-quarter through an improvement in activities. We will later see how these activities lead to greater revenues, and also due to higher net interest income, although regulatory changes have been introduced. Particularly, there is an IFS rate that used to go to commissions and now doesn't. Without that impact, our commissions would be growing at a rate of 8%.

Costs are controlled and below inflation, and provisions, along with the economic improvement of the country, have declined for the fourth consecutive quarter.

With all this, the attributable profit to the Group coming from Brazil every quarter is approximately $1 billion per quarter.

In terms of activities, we noted that in the third quarter, lending has grown at an annualized rate of 20% [inter-annual comparisons]. Remember that late last year our rates were negative and these have improved throughout the year.

In certain products, as our CEO mentioned a while ago, we are growing at very interesting rate and we're improving our growth rates in the area of SMEs. And savings, we're becoming a lot more selective. We're capturing figures that depend on the need for liquidity rather than on the client policy and so we're growing at a rate of about 15%. We've had a greater revenue due to higher volume and well-managed costs lead to a solid profit growth in coming quarters.

And lately, the most important milestone is the integration of the brand that will take place in November.

The rest of Latin America, excluding Brazil, as I was saying the situation is pretty similar to that of Brazil. The evolution of credit risk (inaudible) 2009 inter-annual 15% compared to minus 3%, plus 2% in June and was 7% in September.

In detail, all of the countries have a significant growth, except in Mexico which significantly affects the overall growth based on our decision to change the retail strategy in Mexico, due to the low quality of the credit portfolio that has actually been cured since then.

In terms of result, the net interest income is pressured by lower interest rates than in 2009 and the [trend is] mix towards lower risk products. For instance, the reduction of the Card business in Mexico has had a strong impact on the total results.

However, there's a lower cost of risk, which is reflected in the reduction in provisions. This makes it necessary to give the combined (inaudible) of basic revenues minus provision to have a clearer idea of the area of evolution and this shows a sustained quarterly growth over the past two years. This evolution is spreading through to net operating income and showing a strong improvement during the quarter and the profit of the region is EUR1.84 billion, in other words 14% higher than last year.

Mexico's profit has grown by 22%; Chile by 10%. Argentina has risen right into 35% with lendings and savings growing by more than 30%, quality of risk improving, NPL ratio below 2% and coverage nearly 140%. Naturally we have wide levels of liquidity in all units. Uruguay's profits have increased by 26%, Puerto Rico recovery remains pretty flat. Colombia is lower, because of the changes in interest rate and the operating income after provisions has grown by 36%.

In general terms, there is a [factor] base of the business cost adjusted to the business depended on policy in each country. In Chile we're broadening our sales capacity and the cost of credit is falling in general terms. And all of the above points to a good performance of earnings in the coming quarters.

Allow me to elaborate a little bit on Mexico and Chile, particularly these two countries do figure quite important in the panorama. In Mexico in the third quarter the growth rate has -- annualized growth rate has been 27% with all sectors growing except cards. Savings are growing interestingly and with a good spread, a dynamic.

In terms of comparing inter-annual comparisons, well, the area of cards has an influence of minus 24%. Costs really below information; provision have declined for the fifth consecutive quarter. And I would say this has to be related to the reduction in income from cards. But all of this is reflected in net operating income after provisions and attributable profits higher than during the previous quarters, particularly compared to 2009.

And I must also point out that from the attributable profit of the third quarter there is an impact of $20 million due to the integration of 25% of the Bank of America in September. So the impact that month is $20 million.

Chile, I would say that qualitatively the trends are really the same; good growth of lending, good growth in funds. As you probably know, Chile has increased their interest rates in an environment of strong economic growth and slightly decreasing inflation.

There the net interest income increased by 14% backed by higher inflation. You know that in Chile we have actual interest rates compared to the State's rates and are not reflected in the net interest income, because there were significant [losses] last year.

We have lower provisions again in this quarter, as in the rest of the region. And there is a good performance of net operating income after provision, which closed the latest quarter with 21% higher than its equivalent last year.

And finally, let's go over the units. Sovereign. Results in sovereign are highly favorable. We're above profit. When we talk about provisions for the next few years we were talking about [$115] million and the accumulative is [$184 million] for the third quarter, which is a very good delivery.

The [credit for] provision continued to improve. We have said that we are discontinuing approximately 20% of the credit portfolio. And, as you can see, there's a drop of approximately 49% good behavior of core deposits. It is true that the rest of deposits, like CDs, we've had a less aggressive pricing policy, because we've been very aggressive with covering for liquidity reasons, and this has driven deposits down a little bit. But this has improved the cost of funds.

In the last quarter it has been driven up, however, because we're beginning to hire agents for retail business and SMEs, lower need for provisions due to improved credit quality and coverage. It's improving . In the first quarter we had already had a positive trend of two quarters and now they add to five.

And credit quality and coverage growth in the first quarter has been $157 million with a cumulative of $384 million.

In Corporate Activities I will refer, as usual, to the differences between this year and last. We have greater losses up to September. The interest rate is due to the higher cost of funds. A lower ROS going from a profit of EUR402 million last year to losses of EUR226 million in 2010. In other words, minus EUR226 million has two components. The highest one is the exchange rate and the counterpart of that is the EUR500 million generated in business loans.

And then last year earnings from sales of our core portfolios were positive. And these results have been obtained this year by selling our Cielo participation. So the net effect comes from interest rate coverage; although a positive in business areas are negative in the Corporate center.

And the secondary segments, I will skim through them quickly; just a few ideas to point out.

Retail Banking has survived consistently with high resistance to the environment and last quarter the impact of the letter has been noticeable, but the generation of profit has been consistent. And the management of assets and insurance the recovery in the second quarter located way above that of last year.

Here we're gathering a single area of profit from Asset Management and Insurance are generating approximately EUR1 billion in the third quarter; approximately 9% of the total Group's income.

And finally, Wholesale Banking remains normalized figures as with the last two quarter, lower than last year though. At least lower than the first quarter 2009, due to an extremely favorable environment back then. Wholesale Banking is lengthening and increasing deposits.

And now I will give the floor back to our CEO for him to elaborate on the final conclusions of this

We have reviewed the Group's strategy and evolution and I would like to finish by pointing out seven ideas that sum up my view of a high complex period, in which Santander has offered a differential performance.

First, once more we have reported solid recurring results backed by diversification and the drive of emerging units to make up for the slowdown in other units.

Second, due to the good efforts we have made in provision by applying the new Bank of Spain's letter in an exercise of the utmost caution. Considering that this has gone entirely [to] profits without using generic provisions and with very strict criteria in order to preventing a release of real estate income, which has favored our P&L balance, thanks to an increase of the net margin in Santander.

Third, because we have improved our credit quality with stable NPLs throughout the Group and a reduction -- a generalized reduction of NPL and risk premiums, high coverage of up to 75%, 2 percentage points, over the period and supported by EUR6.5 billion of generic funds at Group level.

Fourth, due to our excellent liquidity position, which we have further strengthened during this quarter.

Fifth, due to our capital strength with a core capital of 8.5%, which places us in a very comfortable position vis-a-vis Basel III.

Sixth, due to our active business management, which leads to a more diversified portfolio and one of a higher quality.

Seventh, and last, because we're sailing through the crisis while maintaining our dividend policy; for years we have been one of the banks with highest remuneration for its shareholders and we will do the same thing this year.

Considering the oncoming quarters we will continue to actively manage the dual world we have been facing lately. On one side, in developed markets, we witness weak activity with pressure on revenue and provisions that will vary according to different markets.

And on the other side, a better situation in emerging markets fueled by faster business deals that will offset the pressure on spreads coming from a better environment and a gradual change of mix and based on further reductions in the cost of credit.

All of this while we face potential changes in the regulatory framework that are still undefined in many aspects, but which are expected to affect key drivers of our business. Today Santander is sufficiently prepared to meet the new scenario and to make the best out of our high potentiality to create them.

Thank you.

Good morning. As usual, we will start by answering the questions received through the Internet and, if we have time, we will answer telephone questions. As usual, questions will be organized by topics, so that we can cover general questions along with specific and more detailed questions.

First of all going to strategy, regulation and capital we have one first question about Poland from Britta Schmidt of Autonomous. She asks whether we can update the situation of the discussions, or the status of the discussion, with Polish regulators and when could the agreement possibly be signed.

During the presentation I did mention the topic. Poland is a country where bureaucratic operations take a long time. And according to the background we have studied, these usually take a long time. We have already started requesting authorizations and permits.

We have received a positive outlook from the authorities but it's very difficult to set a specific figure or deadline. We believe it will take months. Months will go by before we get these permits. Of course, we'll try to speed them up as much as we can. And we seem to have an open and full co-operation from the Polish authorities. But it will be very difficult to establish a specific deadline today.

About capital, Marcello Zanardo from Sandford Bernstein asks, considering the situation in Europe about capital enlargement and/or activity in M&A, do you think capital enlargement is likely? And can you make any comments about possible evolutions in this area?

That's a definite no. We have said this three times already. The Bank is not considering any capital enlargements whatsoever. There is no need for that. We're absolutely comfortable with our capital. We're generating capital organically and we will continue to do so in the next quarters.

We feel fully comfortable facing Basel III. Considering that the risk assets will grow moderately in the full Group and considering that no acquisitions are in the horizon we feel, as I have said, fully comfortable with our capital levels and there's absolutely no need for a capital enlargement today.

There are several questions on Basel III, some about the impact, about DTAs. And Britta Schmidt from Autonomous, Rohith Chandra from Barclays, Carlos Peixoto from BPI, Andrea Filtri from Mediobanca, Antonio Ramirez from Keefe and Neil Smith from WestLB.

We have said in the presentation that the impact of Basel is 70 basis points; basically 37 from intangibles, 25 through minorities and 12 through a counter party risk. Obviously these are figures up to 2013.

As for DTAs, either because they expire or because they're within the 10% of the new regulation, these will not affect those 70 basis points. That's the total impact of Basel III. I'm summarizing it this way because there are several questions about the topic.

And there is a question from Patrick Lee from [Sovereign] and Rohith Chandra from Barclays about capital in the Group. Can we help them understand the difference between local capital requests by regulators and the capital in the headquarters? And what's the possible best way to consider capital allocations per country?

All the figures you're asking about have been calculated -- well, local capital is calculated under local criteria. And the consolidated Group capital is calculated based on the criteria of the Bank of Spain, which is the ultimate or relevant regulator in this case. So obviously these two figures are not the same and cannot be calculated directly. You cannot subtract local ratios from the total and try to estimate the [metric] capital. Well, as you can imagine the Bank of Spain is very close to ours.

I believe the capital [I have prepared] is approximately 11%. That's the figure I have seen in some documents. And people attempting to seek the [Iberian] capital, it's approximately 11%.

There's another question from Daragh Quinn from Nomura about capital. She's asking what the reasonable amount of capital or objective amount of capital will be under Basel III. She does not specify whether it is for the whole industry. I understand this is open for discussion then?

Well, it is; it is a subject open for discussion. There is a whole set of set parameters. Still, some of them have not been set. But today, our expectation is reaching above a 9% core capital by the end of 2011. But we're expecting the definitive standards on (inaudible) and how it affects our different units and our specific area, considering the difference between entities, depending on their risk levels, business profile, connectivity and other factors.

It is under discussion right now, so it's perhaps too early to define absolute comprehensive levels for all elements. But considering what we know so far, we believe that if the Group manages to reach 9% in May 2011, we would feel a lot more comfortable vis-a-vis Basel III.

About our subsidiary in the UK, there are several questions, Carlos Peixoto from BPI, Daragh Quinn from Nomura, (inaudible), and Antonio Ramirez from Keefe, about a possible listing of Santander UK in the UK market. Are we still consider it? Have we dismissed this idea? What's the rationale for this listing? Are we including Mexico in that potential listing? And would we reconsider the idea for next year?

Well, listing Santander UK, the decision has already been made; perhaps we have not decided when. Obviously, it will take place in 2011. And it is highly likely that it will happen early next year, but there's no specific date set yet. I believe the rationale is known to all; no need to repeat that, as we have discussed it a number of time. That's the UK.

And for Mexico, nothing has been decided yet about the matter. These are mere speculations based on a fluffy idea that might or might not come to fruition.

From M&A General we have two questions from Jaime Becerril and Ignacio [Barree]. Have we considered to continue to expand through Europe? Do we have any further expansion strategy? There are also a couple of questions about Asia and other minority participation in European or States -- in European banks, and the strategy for inorganic growth, in general.

Okay, I think I mentioned this earlier when we were talking about capital and about not increasing capital. Right now, we're not planning to acquire anything, neither in Europe nor elsewhere. And so the work we have to do now is more about consolidation and integrating what we've already acquired, and implementing things that are still pending in our integration processes, like those carve-outs in the UK and in Germany, and continuing to integrate the remainder businesses.

So, that's as far as integration and acquisitions; nothing planned; nothing in the horizon in terms of acquisitions or bringing in any new units.

As for minority interests, I think the market knows that in general we are not in favor of taking up minority stakes. Our idea always is to take up a majority stake and have management control. But anyway, that's what we've done traditionally and always. And in principle, that's our basic policy.

About the strategy, Daragh Quinn from Nomura is asking about inorganic growth in the US; so, you've already answered that.

About profit, Pierre-Alexander from Oddo is asking whether we are holding to that guidance of EUR8.8 billion/EUR8.9 billion in net profit for 2010.

I'll talk about risk-weighted assets in a minute; answer the question about profits.

Well, I think we already said in the press release that in fact with the new regulations by the Bank of Spain, which came out after that guidance was issued, we are not maintaining that guidance. I think we explain that clearly in the press release. I suppose they have received that press release, which said what the effect of that one-off provision was going to be, and the impact per quarter, and how profits were going to be growing.

As for risk-weighted assets, [Ben Gicula] from [McGuire] is asking why the drop, or the slight downward variation in risk-weighted assets in Q3 versus Q2; any particular driver? Or is it just business as usual?

Well, it's true that there has been a slight drop in risk-weighted assets in the quarter by areas; I think that reflects the business trends.

We've had growth in risk-weighted assets in Latin America, of course; slight drops in line with new lending activity in our lending portfolios in Spain; basically stable in the UK, because there we have two effects; slight growth in lending activity of 3% to 4% and a slight drop in securities portfolio which offset that. So, basically, risk-weighted assets have remained pretty stable in the UK. And there is a slightly larger drop in Sovereign due to the derisking process we're carrying out. And that's the major trends, I think, for the future.

With respect to Basel III, we expect risk-weighted assets in the US to experience two impacts; one direct from the growth that we expect and we're beginning to see in our retail activity. But also, in the coming years there will be a process as we move from the standard model to the IRB model in all the Latin American countries, and that will probably have some effect in the opposition direct.

But, in general, in the Group, since most of our risk-weighted assets are in mature markets, we don't see that those are going to grow significantly. They will remain at fairly low figures in terms of the growth of risk-weighted assets in general.

As for the new Bank of Spain regulations, Carlos Peixoto and Rohith Chandra are asking whether we expect any particular effect on provisioning that was in the future as a result of this change in the regulations.

No. Well, a slight decrease; not very significant because what really matters here is that there is a change in the rules of the game, and from now on this will mean a slightly reduced need for provisioning. But it's more about the new entries in NPLs than about the effect that bringing forward the calendar will have, although there will be a slight effect.

And there is another question about whether we're going to maintain the dividend. And you've already explained that in the presentation; EUR0.60 is the total pay out for the year. And in 2011, we will let you know as the year goes by.

And Daragh Quinn from Nomura again is asking whether the impact of the new Bank of Spain regulations; if we could explain what that's going to be for Spain and Brazil.

Impact is only for Spain. For Latin America and the remainder of the Group, we made it clear in the presentation the criteria that we use there, which are IFRS or internal models, whatever is most conservative in each case.

And as far as financial management, there's several questions about [the fear] of capital gains. David Vaamonde from Fidentiis and Matteo Ramenghi from UBS, Antonio Ramirez from Keefe, they're asking whether these are in the Corporate Center or in the ROS. Can we confirm the amount and the reason?

There's another question connected to this, which is why the negative ROS; I think you explained that in the presentation too.

And then in connection with this, they're asking about our current hedge strategy -- no, coverage or hedging strategy for exchange rate, both in the quarter and in general.

Well, not really any changes there. We have two kinds of hedges for the exchange rate; one for 8% excess of the book value of our stakes in the different banks. For anything above 8%, we have a hedge, and the positive or negative effect of that is against reserves, not against [actually our] capital. And then we have hedges against the expected profit in the different subsidiaries.

Those other hedges I mentioned in this presentation. I said that together with the Cielo capital gains, these have produced significant losses because currencies in general have appreciated significantly versus the euro. And that, together with the Cielo capital gains is in that ROS of the Corporate Center, as I explained.

Our current hedge strategy is the same, basically. We have in the relevant subsidiaries -- of course, we don't have hedges for the Norwegian krone, because of any -- for any profit generated by our Consumer Finance business in Norway. But the significant subsidies, like Brazil, the UK, and so on, we have hedges for the expected profit in the year.

Okay, there's a question about the tax rate; Antonio Ramirez is asking why it's gone up in the quarter, and what are the main drivers?

This is from profit generation in countries with a higher tax rate; I think we've explained this before. In the past, that's generally the main effect.

Jernej Omahen from Goldman Sachs is asking about changes in the valuation adjustments for equities in the quarter. There's a variation of about EUR2 billion on variable rates versus Q2, and a subsequent impact on core capital, I think perhaps Pepe could give you more details about that, if you like.

Well, the question is actually about the drop that we've experienced in reserves in our core capital calculations, and here's there's two effects. The major one, because as you know our capital ratio is calculated looking at net of all reserves minus goodwill. When exchange rates, which is what's happened this quarter, in some countries, particularly the pound sterling and the Brazilian real, drop reserves drop, but so does the goodwill. So the capital ratio is net. If you only look at reserves, then it looks as if they're going down, but you also have to look at the drop in the goodwill.

And the second impact, as you know, is in the coverage we provide for capital in each country, up to only 8%, which is the capital ratio in the Group. And so in the capital in the subsidiaries, anything above that 8% is not covered and, therefore -- or hedged.

When there's a depreciation in those two countries, in the two I've mentioned, that generates negative reserves in the Group offset, because the risk-weighted assets in those two countries are worth less too. And that's one of the reasons why there was the drop in risk-weighted assets in the quarter too, which was asked before.

Okay, about dividends, Irma Garrido from Ahorro Corporacion is asking about our pay out policy, and whether we can say anything about the next year's shareholder return or remuneration. And do we believe or expect that the scrip dividend might be extended to the third interim dividend in February?

Well, our pay out policy, I think, has been very clearly specified; that's both pay out total dividend. It's going to be EUR0.60 per share. We are planning a second scrip dividend for our third interim dividend; hasn't yet been formerly approved by the Group, but our intention is to do that. That's our intention; to have a second scrip for the third interim dividend. And again, the Bank's policy will remain the same; the same pay out policy; the same total return for the coming years.

There's several questions about capital. About the new regulations not yet defined, we have several questions from Arturo De Frias at Evolution, Javier Bernat from Caja Madrid. They're basically asking how likely do we think is it that there might be special regulations for the larger sized entities? Do we think it will be 100 or 200 basis points?

In general, will banks, and ourselves particularly, have to have a countercyclical counter-buffer, and how large? And don't we think that it might be better to be proactive and make sure our core capital ratio is as high as possible, as soon as possible? These are all basically around the same points.

Well, that is still a very open-ended issue. There's an ongoing debate on how this will be defined in terms of systemic risk banks. There's even some discussion about how to define what's -- which banks will be defined as having systemic risk. And there is certainly a significant debate on the type of treatment. They're talking about more stringent capital requirements, but also about other alternatives, like contingency capital, or bail-in, or things of that type.

I think it's too early really now to say anything in terms of how this debate and these discussions will end, because even the regulators are yet to come to some agreement. There are different positions, different regulators, and the dialog with the industry continues. And so this is something that changes practically every week, and so let's wait a little.

I think there will be a decision fairly soon. Probably in the first semester next year we will have a clearer idea, and so then we will have a chance to discuss it and to see what the impact might be. I think now it would be rather difficult to predict what the regulators will ultimately decide on this. It's still very early days.

Right, about capital, Luis Pena from JB is asking the breakdown of the 15 basis points capital growth in the quarter from the sales in the Brazil and USA portfolios. You mentioned in passing that the portfolios in the US take up 2 basis points/3 basis points, and the other part of course is the positive contribution of Brazil.

Breakdown of the impacts of acquisitions and sales, 200 and 256 basis points, if you agree, we can give you the details after this conference call.

Santiago Lopez is asking whether we believe that there will be a capital increase in 2011. That's already been answered by our CEO; no, we won't.

And Javier Bernat is asking about the weight that hybrids may have in the Bank's -- potentially I guess, in the new environment. Do we have any idea about where we're going with hybrids?

Well, what we know so far about hybrids, that the traditional hybrids, that is the old upper Tier 2 and lower Tier 2 preferred shares, since none of the ones we have fulfill the requirements that are currently going to be set in the future in terms of absolute or almost absolute discretionality in the coupon payments, there's a calendar established where on first call or on maturities that will gradually disappear.

But we don't know about the new capital hybrids because they haven't been defined yet. But it's connected again with the previous question about the countercyclical buffers, and the [IFIs], and so on. And we think that hybrids might play some role there, whether it's going to be instruments, or whether hair cut, or core cut, or the different instruments that are being discussed, and also the possibility of part of this going to pillar II. That is to a model that will take into account a different business model of the different banks.

But these are things that are still under discussion. All we know is that current hybrids have limited lifespan and the new will be different, and are still undefined.

A question from Ignacio Cerezo from JP. What do you we think will be the evolution of risk premium in 2010? It doesn't say whether it's by geographies or in general.

I think we have explained that. Risk premium has been going down consistently, and we expect it to continue to go down in the main emerging markets, and whole of Latin America, but also in the UK and in Sovereign. These premiums are also going down, although [all there], of course, you have to discuss whether it's generics or not. But we don't think that, for the Group, the risk premium is going to do anything but continue to go down.

I'm told that the Cielo capital gains, it seems that the amount was not clear. We announced it was a [bit of] effect. It's EUR233 million. We announced it as a relevant fact back then. And that's in the ROS of the Corporate Center.

And as for our costs, Jernej Omahen from Goldman Sachs is asking whether we can say something about the quarterly trend; why costs have risen so much in the quarter. There is some one-off effect there, or is there an exchange rate effect? Do you want to elaborate? There is that AIG thing in Poland?

Well, perimeter effect is just AIG in Poland, and some servicing of the US portfolio; the ones we're naturally acquiring. It's not so much the portfolios themselves, but because they include servicing. And servicing is purely a fee against cost business. So that's the two change of perimeter effects.

But in general, costs in the European unit have gone down. I've mentioned that costs have gone up in Chile, because we've opened new branches. The change of perimeter effects, plus costs have gone up slightly in Wholesale Banking, when you look at the Wholesale Banking P&L, because we are increasing our activities in some markets, where we're providing hedges.

As part of our strategy in the US, Sovereign will have some business in its geography with large corporate. And in the UK, too, we're increasing that business. And also, some IT investment for Wholesale Banking, possibly increased activity. Within those 700 customers/800 customers we have there has been increased activity in plain vanilla products. And we have been doing some IT investments in Global Banking and Markets too, which is why costs have gone up, basically. I don't know whether it's cost growth in the quarter or in the year, but only very slight.

Ignacio Cerezo, Alejandro Ruyra from JP and Kepler are asking do we expect in Q4 to divest anything, or have any extraordinary allocation to provisions for early retirement, or anything else. And Arturo is asking, can we issue some guidance for Corporate Center in 2011, since the numbers in Q3 have been lower than in other quarters.

Well, we don't know. For now, it's too early to say. We'll talk about that three months from now.

And about the Corporate Center, do you want to elaborate?

No, no guidance there either.

Corporate Center for 2011, relative trends?

Well the Corporate Center, in general terms, it's highly volatile, amongst other things, basically, because of the exchange rate effect. There is another element, which will be negative. And that's, that the cost of funding for corporate activities, which is a Wholesale funding, because that's how we finance our Corporate Center activities, will have a negative impact.

And the Corporate Center includes the [Arco's]; the parent company's Arco's, which I don't think are going to show any significant variations. And then, there's the exchange rate, and that's hard to say. We will maintain our hedging policy. At the Corporate Center if there is a profit, it will be because there will be a depreciation of currencies. And if it has losses, it's because currencies will have appreciated. That's the more volatile element.

Cost of funding will be slightly higher, but not much higher, because there's not a lot of funding. And the exchange rate's again a major issue. At some point in the past, we charged here in the Corporate Center some write-downs, like Metrovacesa, maybe. But apart from that kind of thing, those are the elements that can help us make forecasts for the Corporate Center.

Javier Bernat is asking, can we say something about cost of capital for the Group as a whole, and how do we calculate costs of capital? I suppose he means economic capital. That's risk weighted, and we don't disclose. But in general for the Group, can we say something about cost of capital?

I think that's basically it. Well, internally, we do [use] cost of capital level. It's not based on share price; it's based on the risk premium, plus the risk-free bonus. For internal purposes, we change this every year. We're now at around 13% internally; that's the number we use. But if I'm not mistaken, technical elements that's the German two-year bond, the risk premium, plus [EBITA], our market, that's what we've been using. And it changes every year. Of course, we look at the last two years.

Ignacio Cerezo is asking about the cost of term deposits for the EUR81 billion. If you agree, we'll look that up, and let you know later.

Rohith Chandra from Barclays is asking about the evolution of NPLs in Spain, both sector wide and our own; and when do we think the trend will change? And what do we expect for the next quarters?

About NPLs, from now on there are differing opinions. We think, and we still believe, that we haven't reached the highest point yet. We think there will be still a slight growth in the next quarter, certainly in the next three quarters, until we get probably -- although, of course, there's always a certain element of uncertainty here, to a peak by Q2 next year, around then.

It could even be Q1, or it could be Q3, but around then, we think that we will reach that peak. Although, of course, in the next quarters we don't expect major growth in NPLs, but we do expect to see some growth; that's our best guess but, again, it's only a guess. But we do think that NPLs will continue to rise slightly for a couple more quarters, at least.

Right, there's several questions about sub-prime in Spain, about coverage for different assets, allocated and acquired. Several questions from JP, from Iberian, and from MF Global about the -- about real estate assets coverage, about value of collaterals.

You have all the information in slide 76 of the annex of the main presentation. This is what we disclosed, with this EUR4.7 billion, the coverage, foreclosures, acquired, and coverage and losses in each case. So you can check all the details there, because there's lots of very detailed questions there.

Going into business areas; and as for Spain, Daragh Quinn is asking how concerned are we about a double dip Spain? Again, the risk quality, we've already talked about, but a specific question about probability of a double dip, and are we concerned?

Well, not really, no. In fact, we think -- our major concern is about slow growth, more than about the possibility of a double dip. I think the risk of a double dip is not really significant right now.

About financial margins, and net interest income in Spain, there's several questions about that from Mediobanca. Patrick Lee from Soc. Gen too is asking. They have different questions about the financial margin; why is it going down?

Our net interest income, what do we expect for the future cost of funding, cost of deposits? How are we managing our net interest income over assets? Are we gaining market share? I think you heard something about this in the presentation.

And also, comparing our trend, in absolute terms, with the spread published or reported; what do we do, given the drop in spreads, to keep our net interest income up? I think that summarizes four or five questions on this point.

Okay. Well, about net interest income, Spain has been weak; dropping, in fact. and we've talked about this several times. And, of course, what's happening here is volumes on the lending side are going down. Lending is going down in both the Santander Network and Banesto; so that's a negative impact.

Then, deposits are growing, but we have a campaign underway. We're offering high interest rates, so the impact of that is also negative for net interest income. It's a very positive step commercially, and we think it will give us consistent market share gains in the future, but short-term it does have a negative impact on our net interest income.

And as for spreads on the lending side, I'd say slightly positive. We think there's still some way to go. Spreads have risen, in fact, significantly for SME and corporate lending; not so much for mortgages where spreads are still very low. And we expect to see some rises.

And as for funds, there are some customer fund campaigns underway, by many banks. So spreads on the funding -- on the customer fund side are basically dependent on the intensity of the competition from the different players in the market. So lending spreads, we think, are going to rise slightly. Not so much because of the interest rate curve.

Mortgages were appreciating at 120; now it's 150. And it seems that, that could continue, and that would be a positive impact. But the negative impact would be whatever happened with deposits.

Wholesale funding, of course, the turnover of that, in general, there's going to be less being acquired than maturing. But there will be a negative cost impact, because the costs are rising.

And net interest income will be weak. We cannot specify exactly how large it will be, but we expect net interest income to be weak, and highly dependent basically on deposit wars, because that's really the hardest variable to predict.

(Spoken in Spanish) We can provide details when we've finished the presentation. Jaime Becerril and [Benji Green] speak about a deposit war, with two basic questions. Do we believe it will continue? And will there be further deposit wars in Spain? Should the Bank of Spain intervene somehow?

And they're comparing our evolution in deposits. They continue to ask about net interest income, why we're doing better than others, our evolution in deposits, and why both Santander and Banesto have fallen this quarter? Do we intend to launch any further deposit campaigns? And can we provide some guidance?

And since most of these questions have already been answered. Perhaps you would like to say something about price war in Spain?

Not really. I think we have covered deposits. It's a previous data we have already provided. Obviously, the price war was initiated by Santander, but now it's an overall game. And we'll just have to sit back and see how it evolves. I wouldn't want to forecast any -- what the future strategies will be. We will see how things go, depending on competition, and the behavior of other actors in the scene. So we just have to wait and see. We have no specific answer for that question right now.

And to finish with Spain, there's a question about an increase in interest rates, and its possible impact both in net operating income, and on NPL. Do we have any ideas about it?

Well, its influence on net interest income will be clearly positive. This is the position of the balance, unless there's a high annual (inaudible), which is not (inaudible), it will be, frankly, positive for all deposits.

And in terms of NPL, I believe we're -- this aspect is a little bit over-estimated. If we take a look at the mortgage portfolio, which is the most sensitive one to this aspect, we clearly see that most of that portfolio has reached 5.5% or 6% at some point; so it would have some effect on NPLs. But it is also true that at certain points in 2007/2008, the real estate portfolio was -- appreciated and-- as it is now, 1.2%/1.3% minus spreads increasing [in the first rate] would imply a little bit more NPL; a little bit. I don't think it will increase a lot.

We have a question from Britta Schmidt about the increase in interbanking deposits. Have they increased, because we're generating cash? Or is it due to some other reasons? The answer is, basically, yes. As you have seen in the presentation, we're [living] in a sales gap closure and that's generated -- that, obviously, affected upon the assets side in terms of increased balances.

Going into different units, as I was saying, in the United Kingdom, Sergio Gamez asks whether we can say something about the competitive environment in the UK, particularly around retail liability side.

We have seen no significant changes so far in the big numbers. It is true that the spread in that field has grown weaker, particularly on retail, but we have grown noticeably in SME and corporate liabilities. It is true that in retail, we have lower spreads, which have been offset by the increase of the net interest income. But yes, it has been a competitive environment, not just now; I would say for the last year and a half, or two years.

Another question on the United Kingdom; Arturo De Frias and Daragh Quinn from Nomura. Can we classify the new liquidity requirements and their impact? Well, we can actually tell you what those requirements are.

And in the specific presentation about the UK, can you show the impacts on net interest income and spreads of these new liquidity requirements?

And Claire Kane from MF asks about the evolution of spread per clients. Net interest income is somewhat dropping. Is that due to liquidity requirements? And what trends have we observed here for the UK?

I would say, if I remember correctly, this quarter, we had a increase of the commercial spread of 2 basis points; and in respect of net interest income of 8 basis points. But I'm saying this off the top of my head, so the effect is negative. The liquidity effect is not a one-off as you grow the balance, but the process of fulfilling the regulation is a one-off event.

So these considerations cannot be projected in time. We cannot assume that it will cost the same thing in oncoming quarters. But I believe that in the UK spreads, between [price] and deposits are [2] minus [8], or minus the 8 basis points, due to wholesale funding for buying liquid assets to fulfill the [FTA] regulations.

Two questions left from the UK. Can we explain what the restructuring process looks like, about the capital enlargement of the GBP4.5 billion, and our view -- the new view of the Group asked by Raoul Leonard from RBS.

And the second one Arturo De Frias from Evolution, the cost of credit has been decreasing in the last four months, but it's still somewhat how 19 basis points for the area that is predominately real estate, do we expect any further drop?

Well, the cost of risk we have had a positive surplus in the last few months and there is no reason to believe the situation will change. Obviously, you need to consider that we're growing 21% in credit to SMEs and 12% in our core loans to corporates. So the mix will affect the cost of credit in the future and it will also affect spreads, but like-for-like we're still improving in loans.

As for capital enlargement and the businesses to transfer, well, the capital enlargement was done for buying the assets from RBS and the businesses will -- we will be transferring all the ones of the United Kingdom, at least those that were no within the perimeters. Basically Consumer Finance, Credit Card and the small part of big Corporate UK that rested in the London office, these are the perimeters we will integrate to the United Kingdom and besides the acquisition of the RBS branch network.

About Latin America, Patrick Lee asks a general question stating that there is an increasement or an increase in the risk account with a positive improvement. He says that growth at the top of the P&L balance is still single digit in many cases. And could we say something about the possible evolution of the profit and loss balance in Latin America for next year as I understand?

I believe that the trends pretty much show the way. We come from a negative growth of our credit stock, not so much deposits, we were growing around that area, but it points to an acceleration towards a double-digit growth. I don't know if it will be 20%, but at least it will be double-digit.

I don't know if it will be fully translated, it will depend on the mix. But we remain highly positive on the evolution or about the evolution of our income in the oncoming quarters. In certain areas if there are a few penalties, like in Mexico for cards or a rapid growth of interest rates in Chile, and in Brazil we're going towards products with a lower risk premium and, therefore, lower margin. Credit is growing by 41%, but obviously it has a lower spread than the product with those special [tags].

We believe that this will be turned into a better business dynamic and, therefore, a better result. So Brazil has already given their forecasts, and thinking about high or double-digit in Latin America doesn't seem so out of reach.

About Brazil, David Vaamonde from Fidentiis asks whether we can expect a greater acceleration of the quarter-on-quarter net interest income, about -- which you just commented about, a possible future growth and a double-digit growth. He asks about the sale of minority. [With this] he believes we have sold 2% of Santander Brazil and is that something marginal to the transaction with Qatar?

It's an additional 2%, so the default reaches are objective that in 25% when [we did the] IPO.

And Irma Garrido asks about the Qatar operation, she asks about this 23.75 conversion price in these operations. Her question specifically is why this price is set below market? And, can we expect other operations of the same nature in Latin America?

And in the Qatar operations leaving open the issue of all stock and new stock at a three year perspective, she asks the reason for that?

Well, the fact that there are new or old provides flexibility. It's a measure intended to provide flexibility. Pricing and all the financial conditions of this operation are adjusted to market. These are market conditions considering dividend versus liability with a tax effect. So it's actually a part operation.

And one last question from Raoul Leonard from RBS, he said that the area of Wholesale has had -- has not done so well this quarter as it has in the past. And he asks whether this is due to an increased investment in this unit or he asks if we believe we might lose or grow capacity in the mid-term?

I don't think the situation is so bad. We have come from very good quarters due to global market circumstances that make this quarter look un-brilliant, if you wish.

But in absolute terms it has been a good quarter. We have had a positive evolution; a slight cost increase, mainly because we're investing in technology and obviously technology in this business comes at a price, so investments come from technology and a little bit in personnel.

But within our policy and our strategy and our understanding of our Wholesale Banking division this has been a positive order and it doesn't look like the horizon looks very bleak. It looks reasonably optimistic, although in comparison with the same quarter last year this quarter doesn't look so good. It's just because it was extraordinarily good last year. But the perspectives are here ahead are very positive.

With this we close the questions we see via Internet. I don't believe we will have time to answer telephone questions but -- well, thank you very much and see you the 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.