Banco Santander SA (SAN) 2011 Q1 法說會逐字稿

Good morning; we are going to begin our results presentation. I'll be reviewing the general main features of the quarter and the Group's results and then, Jose Antonio Alvarez will look in more detail at the results of the business areas. Finally, I will conclude with our view of the coming quarters.

I'll focus on the five main aspects of the quarter, which I will cover in detail in the following slides. First, the Santander Group's capacity to keep on generating strong recurring results in a market which remains very difficult. We've once again surpassed EUR2.1 billion in quarterly profits, and this was very much bolstered by our commercial retail revenues.

Second, we ended the first quarter with very solid capital ratio. Our BIS ratio was at 13.7%, and our core capital rose to 9.66%, after rising 86 basis points in the quarter.

Thirdly, the Group's NPL ratio remained almost the same as in December, as all large units, except for Spain and Portugal, further improved their NPL ratios in the quarter.

Fourth, we've once again improved our liquidity position. Deposits captured and a very active issues policy have enabled us to exceed, by EUR20 billion, the business needs and the maturities of the quarter.

Fifth, we've continued to diversify and improve our business portfolio.

Let's look at each of these points in more detail. Results, beginning with profit in the first year, we have remained on target with EUR2.1 billion which, although is still slightly below that of Q1 of last year, it is slightly larger than the figure for the third quarter, and significantly larger than the figure for the fourth quarter.

Business model, positioning, and diversification are still the key drivers that have enabled us to weather the crisis, while maintaining a high degree of recurrence in our results. I'd like to emphasize diversification. In the central chart in this slide, you have the best example of that. Brazil is contributing 25% of the profits of the operating areas, the rest of Latin America, 18%, Santander UK, 17%, and Santander Consumer Finance has increased to 12%, while the retail networks in Spain bring in 13%, and Sovereign is now 4%.

Emerging markets have shown significant profit growth. Brazil rose by 16% year on year in local currency and before minority interests. After that, attributable profit after minority interest increased by 12%. The rest of Latin America has also performed very well, with 14% growth rates before minority interests. Attributable profit, taking into account our increased ownership in Mexico, rose to 27%.

Santander UK and Sovereign have increased their combined profit by 8%. Strong growth in Sovereign and the UK, while the year-on-year comparison is affected by regulatory changes.

Finally, Continental Europe, in a very complicated macroeconomic environment, was down 14%, very much due to Spain and Portugal, since Santander Consumer Finance had an excellent performance. Jose Antonio Alvarez will discuss in more detail the results of the different business units.

The most positive aspect of the results of the quarter is the change of trend in our basic revenues. Business growth rates were higher than in the first part of 2010, plus there was an improvement in our regional spreads for the whole of the Group in the last few months, particularly in lending. Also in the quarter, we see better performance of fee income from services, and also our insurance revenues.

The net effect is an improvement of gross income, very much bolstered by the change in trend observed in Spain, which we expect to continue in the next few quarters, given the loan and deposit spread management policies of recent months, and the current interest rate environment, as well as due to the excellent evolution of Brazil, which reflects a faster growth in volumes.

The second point to be emphasized is the improvement in our solvency ratios. We ended the quarter with core capital at 9.66%, rising over 86 basis points versus the end of December. The main three factors behind this strong increase are 21 basis points from organic capital generation; 38 basis points from the additional steps taken in the optimization planned for risk weighted assets, lower trading positions, and not recording a subsidiary's capital as risk weighted assets when the assets are in the same currency; 28 basis points from the incorporation as capital of the convertible bonds issue in Brazil in Q4 2010, after obtaining authorization from the Bank of Spain.

Finally, there have been some small positive and negative impacts with the incorporation of SEB, the disposal of our minority interest in Santander Chile, which pretty much offset one another. This increase has reinforced our capital position and gives us a very solid ratio, in accordance with our business model and our risk profile. And we start from a very comfortable position in order to meet regulators' requirements.

Finally, I'd like to remind you that in April, the Zachodni Bank was incorporated to the Group, with an estimated impact on our capital of 58 basis points.

The third item in that first slide was about risk quality. Our [strategy of] risk management is enabling a good evolution of NPL entries in the Group. We closed the quarter at EUR3.1 billion, as compared to an average of about EUR4 billion in the last two years. This improvement has been seen in the major units whose entries have continued on a downward trend and, in all cases, much lower than those of 2009.

As for our risk premium, it has also improved significantly, and is now clearly below 2% for the Group, and all the main units have improved versus last year.

This trend has meant a significant reduction in the pace of increase of the Group's NPL ratio. It rose by over 100 basis points in 2008, 31 basis points in 2009, and only 6 basis points in the first quarter of 2011. This, because almost all the large units have been improving their ratios in the last quarter. Of note, were the drops in Santander Consumer Finance, Sovereign and Latin America.

This has enabled us to offset the rise in the NPL ratio in Spain and Portugal which, as we pointed out in previous results presentations, we expect to continue for a few more months.

Finally, our NPL coverage for the Group has remained stable in the last months, at over 70%.

Coverage by geographical area has evolved in a very similar way to our NPL ratio; strong improvement in Q1 in Sovereign and Latin America, both in Brazil and all the other countries, it has stayed well above 100%.

Santander Consumer Finance has an excellent 122%, and the UK, which has a lower coverage rate because of the larger proportion of mortgages in its portfolio, has remained stable. On the other hand, Spain's coverage continues to reflect the phase of the cycle.

In summary, we have controlled our non-performing loans, have them well provisioned, and we do not expect any significant deterioration.

I move on to point 4 in my presentation, liquidity. As we emphasized in our last results presentation, in the last years we've improved the Group's financing structure and liquidity ratios, putting us, at the beginning of 2011, in a very comfortable position, with needs that are much lower than the maturities envisaged.

We've begun the quarter with the same strategy, deleveraging in mature markets, with strong activity in issues enabling us to, once again, generate this quarter EUR20 billion more funds than needed, with the following breakdown.

We've reduced our commercial gap by EUR14.7 billion, we've issued EUR5 billion more than the amount maturing in the quarter for medium and long term issues, and we've additionally placed EUR4.2 billion in securitizations.

As a result, we have continued to reduce our loan to deposit ratio, which is now at 115%, to compare with the end of 2008 when it was 150%.

Lastly, and over and above these figures, we have immediate discounting capacity in central banks for some EUR100 billion.

And finally the last point in my initial slide, business portfolio management. In the start of the year we've completed two operations that were underway. In Germany we've integrated SEB's Retail business, that's the Skandinaviska Enskilda Banken, which has increased our base for growth in retail banking beyond consumer finance in the largest market in Europe.

In Germany we have almost EUR30 billion in loans already, and EUR28 billion in deposits, and a distribution network with 400 points of sale, serving 7 million customers.

In Poland we have successfully completed the Zachodni Bank takeover, which will enable us to consolidate its results by Q2. With the Zachodni Bank, which is Poland's third largest bank in branches and profits, and with our Consumer Finance Unit, which is the second largest specialized finance institution, the Santander has a very solid position in the largest economy in Eastern Europe, and the one with the most potential, with a market share of between 7% and 8%.

In Latin America, we've entered into a strategic alliance with insurance Group, Zurich, in the five main markets in which we operate. The goal is to drive additional synergies, and take advantage of the full potential of the bancassurance business in the region, combining the Santander's retail capabilities with Zurich's product development.

This operation, also adds value to one of our global businesses, which is usually less visible. The value of 100% of the business is $4.1 billion, which will bring in around $1.2 billion in capital gains for the Group once the operation is complete.

With these transactions, the Santander Group continues to build an ever more diversified business portfolio, and one with greater potential than our competitors, which will mean greater capacity to generate recurring profits, medium term.

Moving on to the Groups results; on the slide you can see the usual format of our P&L account. First column is the accounting figures, with a small perimeter effect, and with the exchange rate impact.

In the second column we've subtracted these impacts. The underlying aspects show that the same trends that I mentioned in the previous slides; solid, consistent basic revenues, improving within an environment of low growth in lending, with interest rates still low in developed markets, and with a sharp rise in funding costs in the year-on-year comparison.

The growth in gross income came almost completely from our most commercial revenues, since our ROFs have gone down. Differentiated cost management, depending on the situation in each unit, as we will see, very stable, costs in our retail networks in Europe, and larger growth in the expansion area.

Double-digit drops in provisions, and with growing improved risk quality in most of the Group, and the net of these three items in our P&L account, have resulted in an 8% rise in net operating income, which is not reflected in our final profit, because of higher tax pressure which takes up six percentage points of our growth, and because of higher provisions.

Let's look in more detail at the different items in the account. As for total gross income, we've already seen the trend in our most basic revenues, and a recovery in this quarter. For the future, net interest income will benefit from the faster pace of lending in Latin America, from a pricing policy that is improving our spreads, and taking advantage of rising interest rates in Europe.

Our fee income is also beginning to improve in a more favorable economic environment. As for costs, subtracting the perimeter and exchange rate effect, they've risen 6.5% year on year, and 1% in comparison with Q4.

By units, you can see that there's a very different trend, as I've mentioned. All the European and UK retail units show around zero increases in real terms, or even falls, while reflecting a sharp decline over the last quarter of 2010, particularly in Portugal which was down 6%.

Latin America costs have risen because of new branches being opened, we've opened 138 branches in 12 months, and the signing of wage agreements in an inflationary environment in some countries.

In Brazil wages have risen by 7%, and they have risen over 20% in Argentina. And in this environment, we've had a particularly excellent performance of Mexico.

Finally, Sovereign's year-on-year increase reflect the impact of investment in IT and systems, began in the second half of 2010, as well as the increase in our sales staff, which have not increased since Q4.

The third point I mentioned, provisions. We have seen a year-on-year reduction of 8% in specific provisions versus the first quarter last year, and a similar consumption of generics provisions. Combined net specific and generic provisions have dropped by 10% year on year, a drop that would be 15% subtracting the exchange rate and perimeter effect.

This drop reflects a strong decline of NPL ratios in Santander Consumer, Sovereign, the UK and Latin America, excluding Brazil, which confirm the trends in non-performing loans.

And now, Jose Antonio Alvarez, our CFO, will discuss the different business areas.

Good morning. Continuing with this presentation, let me review in more detail the different business units. There's some additional information that you can find in the website if you want more details than I'm now going to present by unit.

Beginning, as usual, with Continental Europe, the income statement basically reflects the difficult environment in these markets. Gross income was still 2% lower year on year, although the good news is that it was better than in the three previous quarters.

The operating expenses of our retail networks were basically flat; the increase in global businesses because of the investments we've been making, particularly in some areas to distribute fixed income products, and they have also risen in Santander Consumer Finance, mostly due to changes in the perimeter.

Provisions have improved due to specifics, and as a result, attributable profit in the quarter was EUR1.054 billion, which was 14% less than in Q1 2010, but clearly better than in Q4 2010.

These trends as regards Q1 of 2010, and the improvement over our Q3 and Q4, have been observed in all three retail networks, and also in GBM Europe. On the other hand, Santander Consumer Finance has had an excellent performance, which I will discuss in more detail in a moment.

Looking at the different units, first looking at the Santander Branch Network, what we see is the strong deleveraging of the Spanish economy; deposits growing at 7.5% (sic - see slide 21) year on year, and lending has continued to decline, in this case by 3%.

If we look at the results, there's been a significant change of trend in gross income basically with an improvement in our financial net interest margin, which is already higher than that of previous quarters. This improvement in net interest margin is due exclusively to the larger spreads for lending and deposits and new production.

There's also a favorable impact of rising rates in re-pricing of mortgages when they talked about minimum rates for mortgages. However, that book has no minimum rate, and so any drop or rise in rates is applied immediately.

It's also been a good quarter for fee income. Costs have continued to register negative growth. Provisions were lower than in Q3 and Q4, due to specific provisions which were the lowest in the last seven quarters, and which will continue to drop in the coming quarters.

The underlying business is, therefore, doing well, pointing to higher gross income in the coming quarters, with flat or slightly dropping costs, and with specific provisions continuing on the downward path that we've observed in the previous quarters.

I'm not going to go into too much detail about Banesto, since they've already presented their results. I would say that their trends are very similar to those of the Santander Branch Network with improved spreads, costs under control, provisions dropping after the large efforts made in the previous quarters.

I will now discuss in a bit more detail the loan portfolio in Spain. First, as mentioned about Banesto and the Santander branches already, portfolio loans has continued to drop by 2.5% this quarter in all segments. As for the structure of the portfolio, you can see it on this slide.

And we want to refer in detail to our exposure to the construction and real estate sectors. Volume has dropped by 4% in the quarter, and its percentage is now only 11% of our total portfolio in Spain, and 3.6% of the Group's total portfolio.

Looking at credit quality, we can see that total NPL ratio was at 4.57%. As you see in the slide, almost 90% of the portfolio has excellent NPL ratios of 3.3% or less. Of note are residential mortgages, with NPL rates this quarter still of only 2.4%. Loans with a real estate purpose are the only ones with a higher NPL ratio.

Non-performing loans of this portfolio, which you see in this slide, were EUR4.9 billion, 50% of which are actually up to date with payments, and the substandard ones which, by definition, are all up to date with payments, were EUR4.6 billion with a coverage overall of 25%, which is very reasonable, considering that they are all up to date with payments.

Moving on to the foreclosed real estate assets. First, entries in the quarter were moderate, EUR156 million net. Sales and rentals were of EUR250 million. Coverage increased to 32%. We think that the coverage each quarter reflects reasonable sale value for the assets.

If we look at the structure, the coverage is different depending on the type of asset; 25% for finished buildings and buildings under construction, and 40%, or slightly higher, for buildings in design and land. So the coverage we believe reflects a prudent sale value of these assets.

Moving on to Portugal, I will spend a few minutes on Portugal, given the difficult economic circumstances of the country. To start, three points.

First, Santander Totta is in a very good position, comparatively. It is at the top of the list of its peers in efficiency, profitability, credit quality and solvency.

Second, we have continued to implement our deleveraging policy backed by attracting deposits and lower lending, and we will see the details of that in a moment.

And the third point is that Santander Totta's performance, in terms of business and profits in Q1, is similar to those of the networks in Spain. Continued deleveraging, better trends in revenues than in previous quarters with improving spreads again, costs going down strongly, and higher provisions to manage prudently the expected worsening in credit quality ratios.

Since there's a lot of interest in the Portuguese market right now, let me go into a bit more detail about the left-hand side of this slide. It just lists the latest events which have brought Portugal to a position in which it has an interim Government until the elections in July and awaiting a bailout package from the EU.

I'd just like to mention a couple of things about the Portuguese economy which I think are relevant for our sector.

First, Portugal did not grow very significantly in the last 10 years. In fact, even during fast growth periods in Europe, it only grew by 1.5% between 2000 and 2007. And since then, on average, it's been in recession, so there's not been any sort of bubble in the Portuguese economy.

Second, this is shown clearly in unemployment rates, which have risen 3 points, but have remained at relatively moderate rates, especially if we compare them with, for instance, Spain.

Moving down to Santander Totta balance sheet, it represents 4% of the Group's balance sheet and 3% of the profit. It has a credit portfolio of EUR30 billion; 54% of that are individual mortgages. And our exposure to sovereign risk is of EUR1.6 billion.

All of this is available for sale since, following the Group policy, there is no portfolio held to maturity.

And finally, as far as liquidity, as I said, we've been deleveraging our balance sheet significantly. The loan to deposit ratio has dropped significantly. Our financing position has improved significantly, and the process continues. In fact, this year, we expect deposits to grow EUR2 billion more than loans. In Q1, they grew by EUR600 million more, so we are on target with our end of year objectives. And our maturities are for EUR1.5 billion in 2011.

If we look at the credit portfolio, or lending portfolio, we see that it has decreased 6.4% drop in 2010, then 1.3%. The debt is quite contained; it's significantly below the system. Residential home mortgages 93% of loans are for the first home is 2.7%, the ratio. The ratio for companies is 1.3%, very, very low. Our exposure to the real estate sector in Portugal is lower than the average for the system. Mortgage loans had a high ratio, but they take up very little of the portfolio, it's EUR1.2 billion.

So although it's logical to think that the economic situation will have an impact on the ratio and on the income of the Group, the lending portfolio, etc., we are reasonably optimistic in the sense that it will allow the Bank to continue to make a profit, and the solvency of the Bank won't be affected. The impact on the whole Group will be quite low.

If we go to the last part of Continental Europe, Santander Consumer Finance, well, this is a radically different perspective, very strong growth in deposits in other areas. There are some changes, but the elements that are behind this excellent evolution are, a faster pace in new loans and volumes, we're entering new businesses, the sustained improvement in spreads in this area, flat costs, excluding the perimeter effect, a reduced demand for loan loss provisions, in line with a fall in the risk premium and the improvement in credit quality. The whole business of consumption has a coverage of 122%.

All this produced profit growth in general, particularly in Germany, Spain, the Nordic countries, the US, and Poland, which have allowed us to reach EUR359 million in the first quarter. Although this quarter, I would say, cannot be extrapolated to the future, mainly because of the big improvement in the credit risk of the US portfolios, which has enabled us to make provisions. But we won't get growth levels of 80%, 90%, but we do believe that we'll be at around 20% to 30% growth rates.

Now if we go to the UK; the UK we've got, on the one hand, what you see here on the slide, are two accounts. One has no regulatory impact, and the other one does include that. The difference, basically, is GBP419 million as regards the net profit.

The most important part is new FSCS requirements, and the increase of the financial servicing scheme, which is about GBP10 million, GBP15 million, and the bank levy which is about GBP20 million, GBP25 million on the P&L account. So we're talking about GBP100 million after taxes.

If we do away with those effects, we've got a P&L account where operating expenses are quite flat, which is more or less in line with inflation, and there are going to be much lower provisions. This would give us a margin, after provisions and profits, of around 20%, minus 2% as regards to the quarter. That's the worst-case scenario.

None of these three regulatory aspects were present in the first quarter of 2010. It's true that, as the year moves forward, we'll have a better comparison with 2010, and we expect a positive dynamic in the UK over the next few quarters.

Now the business trend, well, I would say we know the GDP value in the UK is very low after the last quarter of last year, which was still in recession with a negative growth. The mortgages, the stock, was 2% higher than in the first quarter of 2010, and our market share of gross lending in the quarter remained at 14%.

In a property market that is still weak, the loans to companies are growing well, 13% growth in the part aligned with the commercial strategy. Also a 29% rise year on year in SMEs, that's an improvement in market share from 3% to 3.7%. Deposits are growing plus 4% year on year in a very competitive market in terms of prices.

As regards results, gross income was lower than in the first quarter of 2010 because of the higher cost of wholesale funding, and the FSA has increased liquidity requirements. This can be clearly seen in the decline in the net interest margin, which has hardly changed in the last few quarters, excluding these requirements. On the other hand, very positive impact of lower needs for provisions, which have been declining in recent quarters.

In short, a good evolution of profits in a complicated environment which is not reflected, in year-on-year terms, because of higher regulatory requirements.

Let's now go to Brazil. I would say that Brazil and Latin America, in general, have a growth trend as regards commercial pace, loans, deposits, etc. They're growing quarter on quarter. Brazil, the last quarter was a good trend in profits, business growth, and credit quality.

We see an acceleration net interest income plus free income growth by 13%. There's a cost increase. There is a rise in inflation in the country, 6.3% retail, more than 10% wholesale. The collective bargaining agreement in the country was 7.5%. General expenses, which have to do more with wholesale inflation, are growing above 10%.

In addition to that, we've opened 116 branches in the last 12 months, 3% of the network, and we've incorporated more business managers. So we've got a good trend; there are pressures in the country because of the expansion, more than the situation with the inflation.

Provisions only increased 1% year on year, and there's been an improvement in the risk premium, and in the NPL ratio. That leads to a net operating income, after provisions, that rose to 18%, and profit before minority interests to 16%.

I would say that we are very strong in Brazil with a margin that is going up quarter on quarter, very much supported by the commercial side of the business.

As I said, the rhythm of loans, we're growing at 18% lending; last year we were growing negatively; this year we're growing 18%, so that's a tremendous growth. That is taking place in businesses 18%, private individuals 22%. Growth was also faster than in 2010 with a greater focus on demand deposits. This is positive, bearing in mind that there's an environment of rises in interest rates.

In addition, Santander Brazil has been very active in placing bonds in the domestic market, which helped to maintain a comfortable liquidity. The faster pace of activity, the stable spreads, led to a growing upward trend in basic revenues, doubling 2010 growth. These higher revenues absorbed the rising costs, and a very moderate growth in provisions.

So net operating income, after provisions, rose from about $1.7 billion in the first and second quarters of 2010 to $2 billion in the first quarter of the present year.

Let's now go to the rest of Latin America, South America. Attributable profit for the rest of the region was 27% higher, benefiting from lower minority interests in Mexico. The performance was similar to the trends seen in Brazil, faster growth in gross income and lower provisions, especially in retail banking. By countries, good evolution in Mexico and Chile, which we will see in greater detail. Also Argentina, whose profit increased by 10%.

As regards to the business, we see a better loan profile in all segments, except cards in Mexico, where we still see a drop in the inter-annual like-for-like comparison, although in the last two quarters, it's relatively stable.

As regards saving, there's a two-digit growth. And as regards results, there's higher volumes, management of spreads, which seeks to counter the change of mix toward lower risk products in the new scenario of interest rates in Mexico, and in Chile. Mexico more, because of the lower weight of cards, and the lower cost of credit. And this is reflected in growth in net operating income, after provisions, that has gone from $900 million to around $1 billion in the quarter.

If we go to Mexico, I would say that the most relevant thing has been the change of trend in gross income. We've had negative income for quite a few quarters in the P&L account, and the positive effect of this has spread all through the account.

We are increasing by [3.7%] our income over the previous period. The lending spree is speeding up, and we are gaining market share in all segments, except for cards, that continued to fall. This growth offset the fall in the spread of credits, the relative weight, due to the larger proportion of low risk products, especially cards replaced with other products.

In the Corporate segment, deposits also rose strongly, particularly demand ones. Operating expenses remained controlled, and they've grown slower than that of inflation. Provisions declined substantially, in line with improvement of the NPL ratio, from 1.9% in March 2010, to 1.6% a year later. And above all, the risk premium was reduced almost by half in 12 months.

As a result, net operating income, after provisions, increased 30% year on year, and then goes up to 68% in attributable profit from lower minority interests, and the operation with the Bank of America in September last year. So there was good performance in Mexico, with very good trends, which will get even better in the next few quarters.

Chile; now Chile is, I would say, a very similar scenario to Mexico, with a very big difference. There's an increase of rates in Chile; they've gone from 0.5% to 4.5% currently. And we think that they will still go up before the end of the year. The growth of the country is very high, and there is some tension with inflation, and the national Bank is reacting against that.

So similar trends to Mexico in activity and provisions. Net operating income, after provisions and attributable profit rose 13%, 14%, after only 5% in 2010.

Key aspects were faster growth in lending, with gains in market share; sharp rise in the spreads on deposits in the quarter, which partially offset the fall in spreads on some products, especially active products, because regulations have been applied to those products.

Activity in spreads pushed up gross income by 3%, offset by the lower gains on financial transactions in the first quarter. Operating costs were higher year on year, but were flat, compared to the three previous quarters. Lower provisions, as I've said.

So after the initial negative impact of the interest rate increase, we think that growth in income will continue to accelerate, and will be at about 15%, 20% by the end of the year, which are clearly higher than the rates we have currently.

Now if we go to Sovereign, I would say that they're doing a very good job. They started very well, and we've got significantly better activity. We've got positive growth rates. You must remember that, when we bought this, 20% of the lending portfolio was discontinued. It went down to [$3,000 million], and that drop in that portfolio has been made up for with a sound evolution of business in multi-family, residential home loans, 13% growth, and loans to SMEs, which are growing at a rate of 7%, which makes up for the drop in the portfolio that I've just mentioned.

A very good improvement of spreads, 22 basis points improvement, as regards the previous quarters. This leads us to a P&L account which grows by 8.4% year on year. Costs, after the big adjustments in 2009 and '10, increased because of investments in IT. And there's been also a rise of 200 in headcount, mainly business staff.

It is a fact that there's been very much a great improvement in credit quality, minus 100 basis points in 12 months, and coverage has gone from 65% to 82% in 12 months, and we are narrowing the gap in both, with our competitors. Attributable profit in the first quarter was $176 million, almost double that of a year earlier.

In short, we are doing our homework in order to become a true retail banking franchise in the style of Santander, as we set our objectives two years ago.

Corporate activities; well, we have to look at the differences. The net interest income is minus EUR118 million, because of two things. One was the increase of interest rates. EURIBOR, basically, which is the reference rate, went up 33 basis points, coupled with the rising spreads on issues. For example, in Santander Group, it almost doubled from 70 basis points in Q1 of 2010, to 135 basis points in Q1 of 2011.

Also, Santander's very prudent policy for the Group's liquidity position. And there's a greater buffer of liquidity in the corporate center, which has a cost, which also led to a drop in -- or as regards this part of the P&L account.

The second factor was higher provisions made in the quarter; EUR127 million more than Q1 in 2010, basically due to increased coverage of foreclosed assets that I pointed out in the presentation, mainly land.

The rest were less significant movements. Gains on financial transactions were similar to those in 2010, due to the net difference between a positive impact from hedging of exchange rates, and a negative effect in dividends and valuation of portfolios. So this quarterly net interest income has undergone a very slight variation.

Now I will pass the floor to our CEO, who will tell us about the trends for this year.

We have reviewed the Group's strategy and performance, and of the Group's main business units. I will end with my view of the business trends for the coming quarters.

Beginning with the units that face a more complex environment. Spain will continue to improve its commercial revenues, taking advantage of the upward trend in interest rates, and the management of prices underway. We already see NPLs close to the peak, as specific provisions point to a downward trend.

In Portugal, the greater adjustments resulting from the EU's aid mechanism, together with those already set out, paint a picture of stagnation, which will impact on commercial revenues, and on non-performing loans.

But anyway, Santander Totta, however, is very well prepared. Its NPL ratio is half that of the sector, it has higher coverage, and much more capital. Its core capital is 2 percentage points more than the average of its competitors. More importantly, its income statement is solid, giving it a greater capacity to absorb provisions, and deliver an acceptable profit.

Santander Consumer Finance will continue to perform the best, with higher profits in coming quarters. And although we cannot extrapolate the first quarter results, we continue to see profit growth up between 20% and 30% for the whole year.

The United Kingdom will maintain a solid performance in recurring profits, in an environment that is still weak and very competitive. Comparison of profits, on an accounting basis with 2010, will continue to reflect, in the coming quarters, the impact of regulatory requirements on liquidity, the deposit guarantee fund and taxes, which are much higher than at the beginning of last year.

All our units in Latin America are gathering speed. Good evolution in deposits and faster growth in lending, with good quality of risk, which is reducing the cost of credit. All of this is beginning to be reflected in basic revenues, and to a greater extent, in net operating income after provisions.

Meanwhile, we will have to manage greater pressure on costs, due to the environment of strong growth and high inflation in some countries, which is already affecting wage bargaining agreements, and our suppliers. And also the impact of the expansion of business and branches that Santander is developing in its main countries.

Lastly, Sovereign will continue to deliver well, at the same time as it takes further steps to build up its commercial franchise, and invests in company account managers, technology and global businesses, with contribution from the good evolution of NPLs in an environment of low credit demand and good performance of deposits, both by volume and structure, which is contributing to sharply reduce the cost of funds.

Thus I expect Sovereign's profit to continue to be backed by the top part of the income statement, with larger revenues, leveraged by lower provisions. This growth in revenues is a differential feature against most US banks, which have published results so far.

In short, I think we face the coming quarters with most of the units improving their underlying profit, and I feel confident and positive about the Group's performance throughout the year.

Thank you very much.

Good morning. We're going to start with the questions we've got through the web. We'll organize these questions divided into topics, and we'll try to cover all the questions that have been arriving since we started the webcast. First series of questions is on strategy, capital and regulation.

We start with a question from Antonio Ramirez, Keefe on NMER in Spain. If we would consider to buy any of the savings banks, the cajas, and what's our vision as regards the restructuring of the sector in general.

Well, the answer cannot be very accurate because it's a speculative question. We don't have a clear scenario of what's going to happen, as regards possibilities of savings banks coming on the market or being auctioned. And we don't really have the information that we need, so I can't answer the question accurately.

Now there's a series of questions on capital. Sergio Gamez from Merrill Lynch and [Francisco Enriquez] of N+1 ask about the internal generation of capital for the next quarters. Do we think that we're going to talk about 15 basis points, 20 basis points per quarter? We're going to continue to talk about that figure.

Let's deal with this first. Well, the answer logically is, yes. We expect the same rate of profits and generation of capital will be more or less the same as it has been.

Several questions on the definition of capital under the Bank of Spain. What would our levels, as defined by the Bank of Spain be?

The reasons for getting ahead of the convertibles in Brazil. Francisco Ramirez, Antonio Ramirez, [Carlos Conforto], BPI, they're all asking this question. What's the reason? Is there are a decrease of profits as a result of this advancement? What's the accounts as regards minority products, and whether these convertible products are eligible?

That's the series of questions on that area.

I'm going to pass this on to Jose Antonio Alvarez. But I think that there will be more questions like that. Maybe it would be a good idea to answer them at the same time; Bank of Spain, Basel, convertibles in Brazil and minorities in Brazil.

Are there more questions about that? Maybe we could answer them all together.

Well, yes. Capital; first of all, the definition of the Bank of Spain that was applied for the stress test exercise that was done by the Bank of Spain in January, is a definition that includes the Basel III agreements. I'll clarify this because I've seen that sometimes people add Basel III to the definition of the Bank of Spain. Bank of Spain definition includes Basel III.

Now, as regards capital in the next few quarters -- in the quarter, well, there were three elements. An organic element that we mentioned and said that we were talking about 10 to 15 basis points per quarter, a bit higher this quarter, but that depends more or less on the evolution of credit and loans, but we're still more or less at the same level; that's the normal level.

The second part, which is the reduction of the risk assets, this part includes three elements. One element, which is the drop in credits, in loans, there's been a drop of EUR10 billion in the quarter in loans; that has an impact one to one -- almost impact as regards risk assets.

Second element, which you'll have seen in the P&L account, which is a decrease in trading positions, EUR6 billion, EUR8 billion, and all these elements are scattered through different units. And the third element, which results from the consideration of the exchange risk of the associated companies.

Until now, as regards the exchange rate, what we considered exchange risk, included conversions in these associated companies and trading funds. But now, since we've got asset risks in those same currencies, and capital in the same currency, we consider that that doesn't generate exchange risk. And that's led to a reduction, which is in the corporate center in the risk assets. So this is a one-off thing, if you like.

Lending, the other two elements, lending and trading positions. It will depend on the business trends. Foreseeably, the growth in lending won't be very significant. We do expect significant growth in lending in Latin America. We still expect deleveraging to continue in Europe. So overall, we do not expect a lot of capital consumption. So that's the second impact to reduce risk weighted assets.

The third, convertibles, that's an accountability request. We asked the Bank of Spain, and it's now authorized us to account it as capital, where there is accounted for the costs on the top part of the income statement as interest, because they are paying interest and, therefore, profit. But they [do not] dilute the last line in the income statement until they are converted. The financial cost is at the top part.

About capital, there are some additional questions about the impact of Basel III, which you've already mentioned in the past. It's 75 basis points in January 2013, a significant part are intangibles, plus an additional 3 or 4 basis points a year, due to minority interests between 2013 and 2018. But there's been no change in that, in terms of what we've been saying over the last quarters.

There's also some questions about the impact of the scrip dividend on capital. I just mentioned that we're estimating an impact of about 7 basis points a quarter. That's the only possible change that you will see in the way we account for the scrip dividend in 2011 and beyond, with an average of one or two scrip dividends a year.

I think that concludes the questions about capital. There's some questions about IPOs for subsidiaries. Sergio Gamez, Rohith Chandra and Daragh Quinn from Merrill Lynch, Barclays and Nomura, respectively, are asking about IPOs in the UK and in Argentina, whether our current strong capital position means that we may change the calendar, and do we have any plans to report?

I'll just say that, since the IPO in Argentina is an operation which is underway, for legal reasons, we are unable to make any comments at this point.

And so all I can say, really, is about the UK, then. No, Mexico they're asking about too, and in general. Well, the Group's policy is, I think, well known. However, at this point, apart from Argentina, well [Angel] has already explained is underway, and so we are not authorized to comment, we have the UK's IPO. The plan is still to do that in the second semester of 2011.

And then about regulation, Britta Schmidt is asking whether we have any views on the regulation proposed for the process guarantee, and could it affect our business in Spain? Could you elaborate?

Well, that's a discussion which has been going on for a long time, and there's very different positions held in different countries. In general, I think this is something that, in Spain, is actually not very controversial. It doesn't really raise much concern among the sector or the customers, and so that question about what kind of impact it could have if these regulations were to come are not very significant, in any case.

As for capital gains from the sale of insurance, Luis Pena from [JB], Rohith Chandra from Barclays, Francisco Riquel from N+1 are asking whether those capital gains are there or not, and when will they be, and what calendar do you have to finalize that operation?

Those capital gains are not yet there. They will be accounted for throughout the year as they are received.

And then a question about generic provisions in Spain. And these are about EUR400 million, but they're asking if we're going to use these generic provisions for any increase in our generic funds in Spain, or our generic reserves in Spain?

Well, as [Angel] said, initially, the capital gains will be reflected as they appear, as the transactions are formalized, sales are formalized. Right now, they're just pending some regulatory authorizations and permits in each of the countries. As these happen, the capital gains will be reflected, and we will, of course, at the time, report how we are going to apply them.

The basic idea, without being too specific about where we will be using those, the plan generally is to use them to reinforce the balance sheet overall.

Okay, there's some questions, a bit more detail; Matteo Ramenghi from UBS is asking about the capital gains from the divestment of 1.9% of Santander Chile. Is that in the trading income or the corporate center?

Well, accounting standards changed a year ago, and now these kinds of capital gains have to be accounted directly into capital and not in the income statement.

And then he's asking, also Matteo, about the driver for the rise in EUR2 billion of intangible assets?

That's the same thing that's happened in other quarters. It's the effect of the exchange rate on our goodwill, which we've explained at other times, too.

And there's some questions about the stress tests for [EBA], and what is our position, opinion, how do we think it's going to impact, and what do we expect in general?

Well, as you know, there is a process of stress tests underway. It's the EBA which are leading the process, but we interact with the Bank of Spain, and we're just finalizing the process of the stress test. As a general comment about the stress test, I'd say that the parameters are all predefined, both the macroeconomic scenarios and the scenarios for losses, and the evolution of the different variables, interest rates, asset prices, and so on, and so we're just applying those scenarios to the Bank.

Basically, I think the Bank will show the same results as in the previous stress tests last year. Our profit, our operating margin before provisions, is very strong. Usually in stress tests, the main effect is a strong rise in the cost of lending, and so that, of course, affects profit generation. But I'd say that, in general terms, our business doesn't change significantly with respect to the results of the stress tests last year.

There are some new elements, basically about what you consider, or don't consider, as capital at different points. Last year it was about Tier 1; this year it's about core, with a specific definition. These are still things that are being discussed, and evolving. And I think, until the results of the stress tests are published, the final version, because we're sending the information in now, and until the results are published I suppose will be, I guess, still more requests for information. But ultimately, we don't expect in our underlying fundamentals any significant change from the results of our stress tests last year.

Any part of the question which -- [you maybe] didn't say anything about convertibles? Whether they're in or not?

Well, I referred to that indirectly when I said that the definition of capital, last year, was more about Tier 1, and this year it's more about core capital. There's the debate about what kind of convertibles will be included or not, and that is something that may vary. But the stopping point on the end, not what happens in between, the trend is the same. And in our case, the stopping point might vary if they decide not to consider convertibles as capital, but not the end point, because as you know our convertibles are mandatory convertibles in October 2012, if I'm not mistaken.

And since the stress test is for 2011 and 2012, they're either at the beginning or in the middle. The only thing is that, if they're not in the beginning and they're in the middle, in the stress tests, you'll have capital that will then rise a lot, even in the worst-case scenario, and if you include them at the beginning, then the capital ratio will rise less throughout the stress test.

Okay. And to close this part about regulations and capital and so on, Tania Gold is asking about capital levels under the Bank of Spain's criteria.

We've mentioned this already, but in any case, we expect our capital ratio to remain above 9% this year and the next, including different regulations.

And Arturo De Frias, in connection with the IPOs and so on is asking -- well, there's more questions. He's asking about the risk of discount, do we think that's real or not, and what are the pros and cons of the policy of listing subsidiaries in the market? I don't know if you want to respond to that?

Well, that's an area where there's a discount for a holding, when you're talking about a conglomerate, and so there's a discount, when there's a conglomerate. We are not a conglomerate in any case, because our business is the same everywhere, and that's a significant difference with conglomerates which were traditionally given a holding discount.

So as we're not a conglomerate, and since we manage in the same way with or without minority stakes, we think that the conglomerate discount will not occur in any case. Although in part, of course, the market feels that that risk is there, but we hope to prove with facts.

And I think we have proven with the facts, and there's the Chilean subsidiary with a spectacular performance, which has had minority interest for a long time. So that's really the main con, because as far as management, there's no real difference.

And as for pros, certainly the flexibility with capital and everything else, is significantly greater, since we already operate in an environment which has the same restrictions as if we were a minority interest. We don't have inter unit funding, except for consumer finance.

Each unit owns its own capital, and it finances itself in the market, and so we don't have the cons of working as a group. So we do have the pros of complete flexibility, by having these different listed units, which also bring in -- the management in each unit has a very clear vision of how the market is perceiving their performance.

And so I know there is a concern in the market over any potential discounts, but I have to point out that we are not conglomerate. We still basically operate retail banking businesses, in the different units, under the same model and the same parameters. So I think that's quite different from a traditional conglomerate.

Last question to come in from Carlo Digrandi at HSBC and [Roger Bishop] from Execution. About the [SIFIs], can we elaborate on our interpretation? Do we think there's going to be additional requirements for us and for the sector and what do we expect the regulation to look like in the future?

Well, that is still very much an open question, still being discussed and negotiated, and it's really very hard to predict how it will end. There will be, I think, some additional charge for the SIFIs. But that's not really the important thing. Which banks are going to be considered as SIFIs, or whether there's going to be different extra requirements, or the same for all.

Our position is twofold. First, the concept of SIFI has to be applied to a very large number of banks, not 20 or 30. We believe that it would probably be applicable to at least 100 financial companies in the world, even those which are not international, but which are locally very powerful and, therefore, would have a global impact, because of their local presence.

And the second set of ideas we defend that not all SIFIs, or global or potentially systemic banks are the same. And the characteristics of this [non-homogeneric] are due to, on the one hand, such as the business models, and risk profiles, and therefore, the nature of those risks, and systemic elements. And that's one thing.

But on the other hand, also the legal structure is very important, and in fact Jose Antonio Alvarez was just talking about how we are a Group whose units or subsidiaries are wholly independent in terms of capital and financing. And there is no intercompany funding, only very tiny amounts, which means that we manage our Group with the concept of subsidiaries, and not branches. Our capital is allocated to each of these subsidiaries and funding too is, in each subsidiary, self funding.

As a result, we're very different from entities which are structured globally with single capital unit, and then liquidity travels freely throughout the jurisdictions. And we're talking, of course, about living [wills] basically, which would be quite different in the two cases.

I don't want to go into too much detail because, of course, this is a very controversial issue. It's still being debated, and we hope that, when eventually certain excess capital requirements are set, which we feel will be set, that they will at least distinguish between those banks that are highly systemic, or potentially highly systemic, because their business model and the risk models and their activities and their structures and legal configuration are of a certain type than those which are of a different type.

We think that although we are large, as a Group, our characteristics and the way we're organized and the way we do business make us actually less systemic, amongst the large global groups, in a very long list. So that's our opinion.

Okay, moving onto the second part, financial management and liquidity. There's a couple of questions about the sensitivity of our balance sheet to rising rates. Sergio Gamez from Merrill Lynch, and Raoul Leonard from RBS are asking whether we can talk about the sensitivity of your margins and spreads in Europe to rising rates. And also, if the curve flattens, one month, 12 month -- I suppose he means three months, 12 months, [I don't know, Raoul].

And there's the second part of Sergio's question about the impact of this potential rise in interest rates on credit quality in general, on margins on the one hand, and then credit quality on the other.

As for rising rates, in the Santander branch network, and Banesto and Portugal, all of our networks are petitioned to capture the benefit of rising rates. So in general, if rates go up, perhaps the first quarter, depending on what kind of a rise and whether the markets anticipated it or not. But in general, overall, they will all show a significantly positive impact if rates rise.

The second question about the slope, on the gradient. I guess that depends on the markets. In Spain, which I guess is what you're referring to, we have a long position as you know, over 12 month EURIBOR, funded in our case basically with deposits, or with wholesale finance, normally six months, or a bit at three.

So we are bit long on 12 months, and short on 6 or 3. And so it's true that now this slope, the gradient of the curve is steeper. Traditionally, in these periods it's between 12 and 3 at 40 some basis points, and now we are almost double, 70, 80 basis points.

So it would have a positive effect if the market predicts correctly that the ECB is going to raise rates slowly. If the rates rise faster than the market is expecting, then it would be negative, but in absolute terms a positive impact. In relative terms it will depend on whether the market discounts more or less than will actually happen.

It's not the same exactly in Portugal, because their mortgages are re-priced every six months. So the effect is very minimal in Portugal.

And finally, we have an element in Europe, the Consumer Finance business which, although usually has a fixed interest rate of new production, the elasticity is much lower than the financing costs of that business, which generally, if interest rates rise, is completely or partially offset by improvements in turnover. But overall, if rates rise, it will have a positive impact on the gradient, as I've explained, depending on whether the curve is above or below expectations.

As for credit quality, I guess the question is about mortgages in Spain. I'd like to remind you of one important thing. If we look back, when we look at the Bank's mortgage portfolio in Spain, which is at EUR60 billion or so, this portfolio, in one way or another, 90% or 95% of this portfolio, at some point in time, customers already paid a 5% yield.

I remind you that, in 2009, one year EURIBOR was between 4-and-some% and 5-and-some% at the time of the crisis; that was in 2008. So in 2009, all of these clients were paying yields of 5-and-some%. Then there was a strong drop, and now it could go up again. But I don't think that the rises the market is discounting today, which are moderate rate rises, what the ECB is talking about, will really imply material change in the NPL rates of our mortgage portfolio which, as we saw in the presentation, is 2.4%.

Additionally, I'd like to remind you that, as time goes by, with mortgages that are paying principal plus interest [from time] zero, the risk of default drops significantly. We are now already four years from the peak prices for homes in Spain, so as time goes by, this probability drops as well. So we really don't feel much concern about this.

Okay, there's two or three additional questions. Antonio Ramirez from Keefe, and Neil from WestLB, about the exposure of our ALCO portfolios. Can we give an update on mix and volume, and contribution to our net interest income, I suppose by geographies?

A question by Santiago Lopez about corporate center and its losses, and whether these can be allocated to business areas or not, connected to the corporate center. Could you elaborate?

Raoul Leonard from RBS is asking, since we've changed the TTI, with respect to the different businesses, particularly in Spain, is this affecting our price policy in some way, or what would be our price policy for the different products? And have we seen any change in the product mix?

Well, the first question about the ALCO portfolios, I don't think there's been any significant change in the quarter. Available for sale EUR68 billion, EUR70 billion, I think. And I think there's been maybe a slight drop, very small, of maybe EUR1 billion or EUR2 billion, I seem to recall.

And the mix has not changed significantly. We still have -- and I'll talk in dollars for Latin America, and euros for Europe -- $5 billion position in Mexico; around $20 billion in sovereign Brazilian debt. All in local currency, of course, in each case, the Mexican's in Mexican pesos; and it's in reals in Brazil; and $2 billion or $3 billion in Chile. So these are our positions in Latin America which are relatively stable. We are under covered in Mexico, but relatively stable, underweighted in Mexico.

In Europe, we still have about EUR20 billion in debt in Spain, EUR20billion, EUR21 billion in the Santander plus Banesto, the Spanish portfolios. We talked about the EUR1.6 billion of Portuguese debt. And I think that's pretty much it.

Their contribution to our net interest income hasn't changed significantly. These are portfolios that are invested at 3-and-some%, 4% in Europe. And, therefore, that's the effect on our net interest income which, in the parent company goes to the corporate center, in Banesto, to its accounts, in Portugal, to its accounts, and in the different countries, to its respective statements. So that's basically the first question.

As for losses in the corporate center, and whether that's allocatable to the unit or not, I'd say, no. Perhaps we could argue about the EUR120 million in real estate asset write-downs. If we were to leave the assets where the loans were originated, that could be the only argument. The rest, clearly not. It's those foreclosed assets, instead of being in the corporate centers were in the originating units, we could maybe have that discussion.

The change in the TTI, we've said everything. But if we hadn't changed the TTI, the absolute numbers would change a little, but the trends are exactly the same. The trends; probably the most relevant trend in terms of your assessment of our results, which is the turning point of our revenues in Spain, is exactly the same with and without the TTI change.

And whether this affects our pricing policy; well, of course, that's the plan. The plan is to apply the right incentives to the different units. We felt that we were providing the wrong incentives, and so the reason for the change is that the new, or the different networks, branches, and territories, and all our sales force will have the right incentives for current market circumstances.

Okay, there's another question from Raoul Leonard from RBS, about costs and income, and the differential. He feels that operating leverage was negative, or seems negative, can we give some additional detail on our growth policies, growth or not for costs? Are they structural?

Well, I can answer that question. At the Group level, the number is as you say. However, I should emphasize the differences between the units. Because the units that are growing faster in terms of revenue and volumes, which are basically the Latin American units, are increasing their costs significantly. Why? Because they're opening new branches; they're growing; they're investing; they're recruiting new people, especially sales; growing their ATM networks, and so on. And that, of course, means higher costs for the Group overall.

But again, those units and businesses which are not growing so fast, Spain, Portugal, Banesto, in the presentation, I think I showed you the breakdown; there was a breakdown by units. And their costs are flat, or even showing negative growth.

So as far as costs go, the Group's cost management is diverse, naturally, depending on the units. And overall, costs have risen. When you look at each unit, you can see that there is consistent cost management, and it's directly proportional to revenue growth. So costs are rising more in those units where revenues and profit are growing more, and costs are growing less, or not growing at all in those units whose profit is not growing. But, of course, if you look at the Group totals, it might seem a little confusing.

Let's go to risk quality, cost, quality of risk. There are several questions on the expected trend of risk cost and the ratios. David Vaamonde from Fidentiis; Carlos Berastain, Deutsche Bank; and [Frederick Turner] from Natixis ask whether the cost of risk is sustainable that we have now in the network, in Consumer Finance, in Mexico and the UK. What our expectations are for risk cost at Group level? Is it going to go down, continue to go down, or not?

And then there's questions about Spain, what's the trend specifically in Spain? At the last conference call we spoke about 4.5%, 4.7% maximum ratio in Spain, we're at a level of 4.57%, what's the trend? What could be the trend this year?

Well, at Group level we see clearly that there's an improvement of the cost of loans; that's in the figures. And in the future it's also going to happen, in some countries very strongly because the causes of the cost of higher credit have been eliminated. In Mexico, for instance, the credit card effect has been done away with which affected these variables last year and the year before that. So the trend in the Group is clear, we're going to reduce the credit cost provisions, specific provisions. So we are reducing the specific provisions, and there's a trend.

The only exception, I think, is Brazil; I'm speaking from memory. But in Brazil, that trend has been broken up, not because of the quality of loans, but because of the growth of investment. Loans are going up a lot, and debt ratios are going up. But the cost of credit loans is going down in the whole Group, and it will continue to do so, because we don't see any change in those trends; we see that they're going to continue.

In Spain, well, we still think what we've already said in the last presentation of results, we think that we are very near the peak of the ratio, but we don't think we've reached it completely. We think that we're still going to have ratio growth in the second and third quarters. We think that the third quarter is when the peak will be reached, and then probably will be flat for one quarter or two and then drop. That's the idea, and that's what we've been saying as the best opinion. We've been telling the market in the last few times that we've spoken about this.

As regards what it might be, or what is our best forecast for the ratio figures in Spain? Well, it's very difficult to put forward a figure, but we said before the previous presentation of results that we expected not to reach 5%. And I insist, I still confirm that forecast. In Spain we'll reach a peak probably in the third quarter, and that peak will not reach 5%.

Good. Carlos Berastain from Deutsche Bank has asked about other results next to income, whether we can tell people anything more. 80% of this comes from three parts, Brazil, UK, the bank levy, that as you know has been introduced, and what Jose Antonio said in the presentation on assets in real estate, assets in the corporate sector. That accounts for 80% of that.

There are two questions on real estate assets from [Nomura] and Arturo De Frias from Evolution, they talk about the increase in that portfolio, whether it's going to change or not, and what the results are in the sales that we're doing of assets. Are we selling above or below the net value, and what's the impact of that?

Yes. Real estate assets have gone up this quarter, we haven't practically bought anything like we've done before. But foreclosures and these issues are high, together with work sales flow, which is not the same as the inflow. The outflow is not the same as the inflow, so there's a greater growth in what's going out than what's coming in. I think that this will change in 2011; as quarter by quarter we make progress, we will see that the sales figures will exceed the incoming figures. That's what we can see in the pipeline, and that's an idea that I think I can confirm for 2011.

As regards discounts, well, there's nothing new to be added to what we've said. We've got discounts of about 26%, 28% on prices, and those discount levels have been maintained. We've maintained them for quite some time now; they haven't changed.

There are several questions about Spain, the situation, which have been partially answered. We've got people from JP, from Barclays, from different groups, that would like to know why the generics have gone down, how much generics we've got in Spain left? The drop in the general balance or account of generics is because of the use in Spain, and the exchange rate variations. There's about EUR400 million generics left in Spain. Also, questions about the use of atypical products from Zurich, etc. We've had questions before.

There's a question on sub-standards in Spain; we've given a breakdown of real estate sub-standards in Spain.

Then there's question from Marcello Zanardo from Sanford Bernstein on the restructured assets in Spain and Portugal. We've given data about this before; it's usually below 0.5% of the total portfolio with very little impact on ratio.

I think this is the last question about risk quality. There's a question about the ratio in Portugal. You've spoken about Portugal, but what about the future, what's going to happen in Portugal in the immediate future?

Well, it's a bit premature to discuss. A rescue plan is being discussed, and we still don't know exactly what it's going to be like, and we don't know what the effect will be at a macro level. But any plan will have effects on the economy, and we do expect that the debt ratio goes up, and that will have an effect on the P&L account. But we [don't] think it will be significant at the level in Portugal. But we expect that the Bank to continue generate significant profits, less than in the past. There's not much more to say.

Our starting point is good, debt level is about 3%. The quality of the portfolio, we've seen it. Corporate exposure is very low; we've got a relatively low market share in the corporate world. We do have a high exposure in terms of residential mortgages, but there'll be an increase of the debt ratio, and credit or loans will cost more undoubtedly, but there won't be a significant changes in that regard.

Good. We're going to go to -- we're a bit pressed for time, so I'm going to try and round up most of the questions. I think, in Spain, there are two questions, Deutsche, Merrill Lynch, and N+1. One question is, the reasons for the increase in the financial margin, what do we think, is this going to continue like this or not? Then the deposit campaign, how is this going? Retention and impact of cost on the financial margin.

Well, the improvement of the financial margin is quite obvious. The margin improves either by volume or by spread. By volume, the economic activity is not leading to, or is not propitiating an increase.

Credit or loans are going down, so this is all based, basically, on the recovery of spreads, and this is applicable to the assets and the liabilities for different reasons; on the asset side, because there's a recovery of asset margins, and on the liability side, because there is less competition. In other words, the open war of liabilities has come to an end and that obviously has a direct influence on the margins.

Is this sustainable? It will be, probably at a different rate, but it will be sustainable because we still have effects to integrate. I think that we said that, in the month of February, when we spoke about this and explained this to the market, the campaign probably we would renew 70% to 75%. And, at this time, we haven't yet finished the pace of renewal. But at this time, we are renewing above 75%, so we're losing less than 25%, although I repeat that our forecasts in budget terms were normally to renew about 70% to 75%, so we're doing better than we thought, although there's still some time before this plan is completed.

Good. A question from Spain. The difference in the results published by Banesto and our results, this has been happening in the last few quarters. The 4% campaign, we've explained in other previous quarters.

We've got a question as to whether we're going to do an IPO in Poland to increase the free flow. I think we've mentioned it. Our idea is to reach 25%, but without any specific timeframe.

Santiago Lopez from Exane asks us about consumer finance in Europe and what comes from the US? 15% is what comes from the US.

On Brazil, there's two or three questions on Brazil from Francesca Tondi from Morgan Stanley, and [Axel] from JPMorgan who ask us about -- well, it's a bit of a similar question. What is our expected behavior? Why are we growing less than our competitors? Whether we expect the book to grow or not? Growth expectations in general, individual growth, and compared growth?

In Brazil, it's true that our performance is lower than our competitors, and it's also true that we are undergoing, or going through, a very complex process, and this is requiring a lot of effort and energy.

Technological integration was only achieved last month, and that is not all the problem, but it is a very important conditioning factor. But we don't even have that ready.

That leads to a situation where we've got to recognize and see and accept that Brazil's accelerating its rate of growth in terms of income, and the business is also increasing clearly, the growth of loans is accelerated, is very fast this quarter, and the growth of income too, but we are not catching up, we're not growing like our peers. It's probably going to still take us some time before we catch up with them.

It's going to take a few quarters to get similar growth rates to those of our main competitors in Brazil. But clearly, if you look at the evolution of Brazil at a more micro level, so to speak, we see clearly that we are doing things better, in terms of expenses, than our competitors. And that we are increasing income very quickly and which will, in future, lead -- we've got to recognize that integration is taking a lot of effort, and that is why the Bank is not doing as well as other competing units or competitors are. We're not doing as well as they are, like some of the larger Brazilian banks which are much more in tune with the situation.

There were questions from Arturo De Frias from Evolution, from [Macguire]. There's a question on Mexico as to whether we've consolidated the portfolio there. The answer is yes.

There's a question from Brazil as regards the volume and what we expected to grow, the loan volume in 2011. We continue to say that we think it will grow about 15%, as we've already said.

There's a question about the deleveraging process in Spain and Portugal and what do we expect, will that be done by segments or what?

Well, it's obvious that Spain has to deleverage and that, both at company level and level of private individuals. We've been saying that for some time.

How long should that last? Well, probably quite a long time yet; the whole of this year and probably next year, and that is going to directly influence the volumes of activity. But we must understand that this is good for the economy and for the system as a whole. This will allow the country to develop steady growth, but it's unavoidable.

There's a question about Santander Consumer Finance, as regards whether growth is organic or inorganic. Well, in part it's inorganic, because it includes the consolidation process in Poland that we've spoken about which has an organic and an inorganic part.

To finish with the UK, there are questions from Barclays, from Macguire, and from the Corporation about the evolution of liquidity requirements, whether we believe that that is going to affect the financial margin more or less in the future, and whether we can make up for that impact. I think that that's basically the questions on the UK.

Well, the impact of liquidity, most of it will be absorbed. It's a one-off thing, and it will produce a lower level of results this quarter. But, on the other hand, after now, the normal situation will be for the results to develop in parallel to the development and progress of the business as a whole, both in terms of activity, spreads, and loan quality.

So basically, not arithmetically because these things are not a question of arithmetic, but the impact of regulations as regards liquidity, the bank levy, etc., that impact has been absorbed.

There's a question from Benjie on the UK. When do we think that we're going to finish the RBS operation, first quarter of next year?

Yes, that's the same.

And I think risk quality generics in the balance are about EUR5 billion. I think there's a question about how many we have left and the credit quality, loan quality in Mexico. The improvement comes especially as a result of credit cards.

I think we've finished. There's a question through the conference call system, but we're going to have to postpone that, answer that later.

I think we've answered practically 90% of questions. If we've left any, please address the department and we'll answer you. Thank you very much.

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.