Banco Santander SA (SAN) 2013 Q1 法說會逐字稿

Okay, let's begin. Good morning. We're going to start this results presentation.

First, the highlights for the quarter -- for this first quarter 2013. Although with some signs of improvement, the economic context for our business has continued to be complex. There's been continued downturn in the Eurozone's GDP at the beginning of the year, with strong deleveraging continuing in the peripheral countries.

Slightly better trends in the US and the UK, due to their stimuli programs, although growth is still very moderate. In Latin America the year began with a slowdown in Mexico and a weak recovery in Brazil, which is expected to improve throughout the year. And in this low-growth environment, interest rates have remained at record lows in many countries after the cuts in recent quarters.

So in this context, our priority continues to be to strengthen our balance sheet through a triple approach, based on liquidity, capital ratios and risk quality, bolstered by our ability to generate results.

Main developments in the quarter were, first, a change in the trend in profit, which has begun to return to normal after the large provisions made in the last few quarters. This is a process that has been impacted by our strategy of strengthening the balance sheet, and by this very low interest rate environment.

Second, we have maintained our strategy to attract deposits, thus improving our liquidity position, which can be seen in a sharp reduction of our commercial gap and a great improvement in management ratios.

Third, strong organic capital generation in the quarter has enabled us to maintain a comfortable position. Our BIS II core capital ratio was 10.67% at the end of March. And the phase-in estimated for the end of the year under Basel III was close to 12%.

Fourth, the stabilization of NPLs in the first quarter in most of the Group; and fifthly, we are moving forward with our integration processes in Spain and Poland, and on schedule, as we will review later. Let's now look at each of these points in more detail.

The Group posted attributable profit in the first quarter of EUR1.2 billion, clearly higher than that of the previous quarters last year. Specifically in the fourth quarter, attributable profit was only EUR423 million, or EUR1.2 billion before non-recurring provisions. There are three points to note in this trend.

First, there has been some pressure on revenues, mostly net interest income, because of the macroeconomic context, slow growth, deleveraging and low interest rates, together with the temporary impact of the Group's strategy in the last quarters of improving our liquidity position by attracting new deposits, our conservative policy in wholesale issuances and maintaining a large liquidity buffer.

Second, stable costs for the Group overall in the last few quarters, with differing performance by units; a very small impact of the integration process is underway, whose restructuring costs and synergies will be felt in the coming quarters.

And thirdly, a sharp fall in total provisions after the enormous effort made in 2012 for real estate.

As we have said before, liquidity has been one of the Group's priorities in the last quarters, as shown by the improvement by EUR30 billion of our commercial gap. That is a difference between loans and deposits in 2012, mostly from Spain.

In the first quarter of 2013 we have again narrowed the gap by around EUR20 billion for the Group, again mostly through attracting deposits in Spain, together with an improvement in our commercial gap in the UK. This strategy to attract customer funds has not just had a positive impact on the Group's funding, but has also enabled us to improve our market share in markets such as Spain, where market share has increased by over 250 basis points in the last 15 months.

The funding cost for this strategy is higher in the short term than the funding via the ECB, but it puts us in an ideal position to take advantage of the economic recovery. This trend is also seen in the reduced need for recourse to wholesale markets, which has meant a sharp drop in issuances in Q1. We should mention particularly Spain and the UK with much lower needs, and SCF which has continued with its strategy of reducing recourse to the parent Bank.

As a result of our policy to manage our balance sheet and our market share, liquidity ratios have continued to improve. Our loan-to-deposit ratios and our medium and long-term funding ratios are in very comfortable positions. Plus, we have a high liquidity reserve, that is liquid assets which would be the resource of last resort in situations of maximum stress, of EUR217 billion; a figure which is well above 100% of the Group's short, medium and long-term issues.

This comfortable liquidity position has enabled us, on the one hand, to repay EUR31 billion in LTROs borrowed by Santander and Banesto, which we were basically keeping as liquidity insurance. And, on the other hand, to have an LCR of 145%, which is well above the 100% required by the new regulations for the end of 2019.

Third point in the previous slide was capital. We ended March with our BIS II core capital ratio, or rather Basel 2.5 ratio, at 10.67% after generating 34 basis points in capital in the quarter through profit generation, our scrip dividend, and the management of risk-weighted assets and other minor aspects, such as the Polish merger or trends in exchange rates.

And how does this position extrapolate for the future? First, I should say that since we announced our BIS III fully-loaded position there have been changes in the standards that have clearly improved our position.

First of all, DTAs now have a 10-year calendar instead of the five initially envisaged. Secondly, the impact of the IAS 19, is also going to have a calendar starting 2015. So we do not have to fully deduct the impact today. With these changes, our numbers are as follows.

The end of 2013, our Basel III phase-in ratio was 11.95%, or will be 11.95%, after subtracting 40 basis points. If we bring forward to 2013 the total impact envisaged for 2019, the fully-loaded scenario, our ratio would be 9.2%. So in brief, we have a comfortable starting point for BIS III with our phase-in at almost 12%. Plus, we envisage a natural evolution of our business, which will benefit us and which is not reflected in our current, fully-loaded calculations, recurring free capital generation and a low growth environment for risk-weighted assets.

We should also keep in mind that this estimate does not include the likely reduction intangibles nor DTA absorption in 10 years, no less, in a Group which generates positive results continuously; prolonging the timeframe significantly dilutes its impact. In the Q&A, our CFO will be able to give you additional details of these impacts.

Fourth point, credit quality; last -- the first thing I should point is that the Group has a high coverage ratio after the large provisions made in Spain in 2012, and the stability of almost all the units in the quarter.

As for our NPL ratio, up 22 basis points in the quarter, up to 4.76%, and we have seen, in general, a stabilization of NPL entries with constant perimeter and exchange rates, versus the fourth quarter, which means below the quarterly average for last two years.

Additionally, there's been a moderate impact through the integration of the Kredyt Bank, which has higher ratios than our Group's standards.

Looking at the major units, we can see a clear stabilization of NPLs, in most of them, which account for 70% of our portfolio. Increases were concentrated in Spain and Portugal, where trends have remained at the same level as in the previous quarters; the Real Estate unit in run-off; and in Poland, due to incorporation of the Kredyt Bank, as I've said.

Of the rest, Santander's Consumer Finance ratio has remained in the last year, at around 4%, which is an excellent ratio, given its business. And Sovereign's fell again in the first quarter, to record lows. Brazil's trend continued to improve, with stabilizing ratio, and good figures in early NPLs, below 90 days, whose impact should be felt in the coming quarters.

Santander/Banesto/Banif merger; in the previous presentation, we announced that one of our main priorities in the year was going to be the merger and then the integration of Santander, Banesto and Banif. The plan is underway, and on schedule. The AGMs of Santander and Banesto approved the merger in March; by May the legal merger should be completed. And in the following quarters we will rebrand the branches, continue integrating operations and begin the plan to optimize branches and staff.

In the first quarter, we've already carried out some steps in order to facilitate the integration, including the launch and deployment of our new commercial structure and central services; the labor agreement we've reached with trade unions, to optimize our headcount, in the least traumatic way possible. We've identified branch overlaps. And we're launching various actions to give our customers the best service and maximum amount of information, during the changeover.

As part of the integration process, our greatest efforts will take place during the first 12 months after the completion of the legal merger, in May.

As for branches, we plan to close 250 this year, and 450 in 2014. This calendar of branch closures, together with our plans to optimize central structures, means that most of the headcount reductions will take place during these first 12 months. As a result, most of the EUR600 million, before tax and restructuring costs, will be charged to the year 2013 results.

As for cost synergies, when we announced the merger, we said that there would be a total of EUR420 million up to the third year after the merger; that is May 2016. Currently, and with the plans I've just described, we believe we can bring forward this date to the end of 2015.

Synergies will be less in 2013, because the legal merger is not until May, which limits the impact of the measures taken to the second half of the year, and so will not be fully reflected until the beginning of 2014.

I can say pretty much the same about the BZ WBK and Kredyt Bank merger in Poland. Here the legal merger took effect in January. The new operating structure has been deployed. We have measures underway to increase commercial productivity at KB, with very good results in our first measurement. And we're getting ready to complete the rebranding, over the next few quarters, as well as the migration of customers.

With that, we see cost synergies by the third year, of PLN340 million, more than what we announced at the beginning of 2012, when we announced the transaction.

Also, in March, we have carried out a successful IPO, which has enabled us to restructure the Bank's shareholder base, and meet the commitment reached with the regulator, to increase the free float to a minimum of 30%. After this IPO, Banco Santander has retained a 70% stake.

In summary, in two years, Banco Santander has built a subsidiary in Poland, with almost 900 branches, which is the third largest bank by market share, in deposits and loans. Moreover, the price at which the shares were placed puts the value of 100% of BZ WBK at EUR5.8 billion. That's in two years, an increase of 18%, considering the initial investments, plus dividends.

Moving on to the Group results now. On the screen you can see, as usual, the accounting variation and the trends subtracting exchange rate and perimeter effects. I'll go into more detail in the next slides, but let me just emphasize the main conclusions, based on this first slide.

First, year-on-year trends; exchange rates have had a significant impact on gross income and profit trends, coupled with some perimeter impact; a take-away between 5 and 7 percentage points, throughout the income statement, which increased to 13% at the profit level.

Gross income was slightly lower, 3.8% down, a fall which was not offset by costs and provisions. However, the comparison is more favorable with Q4 2012, with stable revenues and costs and a sharp fall in provisions, which have increased ordinary profit by 21%, quarter-on-quarter.

Starting with revenues and deducting the impact of exchange rate and perimeter changes, the trend is the net result of various changes. First, net interest income was under pressure, partly due to the economy, but partly also to the Group's own strategy. Low interest rates put pressure on revenues from lending, mainly in Brazil, where spreads have fallen after a cut in the Selic rate, of 300 basis points in the last 15 months, and in Spain, because of mortgage re-pricing.

The Group's strategy of strengthening liquidity and the higher cost of wholesale issues have impacted the figures for Spain and the Corporate Center; plus, our improved risk profile has impacted our loan portfolios' average yield, which, however, will mean a lower cost of credit in the future.

Fee income showed a more favorable trend, although still weak in some markets, because of regulatory changes.

Finally, trading gains grew, basically due to some seasonal revenues from Wholesale Banking, and also the management of our ALCO portfolios in view of the decline in interest rates.

As for costs, they have remained very stable in the last quarters, for the Group as a whole, although have performed differently in different markets. As for comparison with Q4, we can see a fall in Latin America, particularly in Brazil and Mexico; an increase in Poland, due to the perimeter effect with Kredyt Bank; plus the first restructuring costs. And in Spain, the UK and the Corporate Center, costs have been going back to normal, after the release in Q4 of the costs related to variable remunerations that were not paid.

Finally, and speaking about provisions, in this slide, we can see a slower growth in provisions in Q1, after the efforts made by the Group in 2012, through loan-loss provisions, and also provisions for real estate exposure.

Loan-loss provisions in the last quarter, we see a fall EUR224 million, due to the trends in Spain, Santander Consumer Finance, the UK and the US. As for the rest, Latin Americas have remained practically stable; and Poland's increased because of the perimeter effect.

Additionally, you should remember that the huge provisioning effort we made in Spain to cover our real estate risk with over EUR6 billion will not be repeated this year, given the high coverage level we've already achieved.

Let me now hand it over to Jose Antonio Alvarez, who will review the results of the difference business units.

Good morning. As our CEO has said, I will be reviewing the Group's business areas. I will begin, as usual, with this slide, which shows one of the Group's great strengths, which is the geographic diversification of profit generation, which has changed little since Q4.

55% of our profit comes from emerging markets; Brazil contributes 26%; Mexico 12% (sic - see slide 21 "13%"); and Poland 4%. Spain, the UK and the US, the mature markets, contribute similar percentages each, around 11%/12%. And Santander Consumer Finance in Europe overall brings in 9%.

Starting with Spain; and I'd like to remind you that, due to the merger, we've included a new geography, which is the Spain unit. This unit, as we announced a month ago, includes the Retail businesses of Santander, what we used to call the Santander Network, Banesto, Banif; plus Global businesses in Spain, Wholesale Banking, Asset Management, Insurance and Cards; as well as the ALCO portfolio assigned to this unit, based on stable low cost or no cost deposits in the unit.

Remember that this does not include the specialized Santander Consumer Finance unit in Spain, which is in the Santander Consumer Finance Europe unit; nor, the discontinued Real Estate business, which I will explain separately later.

In volumes, I would say that we have maintained the same excellent pace of deposit, recruitment, with a moderate drop on loans, which we will review in the next slide.

Gross income reflects the impact on net interest income of low interest rates, and the re-pricing of our mortgage portfolio, and the rise in the cost of deposits we've seen in the second half of 2012.

In 2013, both trends will gradually reverse. We will finish mortgage re-pricing towards the end of Q3, beginning of Q4; a re-pricing which began in September/October last year. And the cost of deposits has been falling significantly so far in the year. The more expensive deposits, term deposits, are down from about 3% to levels well below 2%, closer to 1.5% in our latest contracts.

As for Q4 2012, the comparison shows higher gross income, because of stable fee income, and the higher trading gains of wholesale clients; a seasonal effect that we always see in Q1; which, combined with lower loan-loss provisions, increased profit to EUR216 million, which is 7% higher than in Q1 2012, and 79% higher than in Q4 2012.

Looking at volumes, as our CEO has told you, we've continued to see a strong growth in deposits, with over EUR8 billion achieved in the quarter, added to the EUR22 billion raised in 2012. We have continued to gain market share; we estimate more than 50 basis points in Q1 and over 250 basis points in the last 15 months.

Lending shows the continued deleveraging of households and companies. The slow demand from individual borrowers was reflected both in consumer lending and mortgages. We've continued to lend to businesses, however, with a relatively stable level. And we're making every effort to increase lending to the business sector. And we've, in fact, launched a plan, the 10,000 Plan, in order to bring in new loans, mostly with SMEs, who will receive around half the volume envisaged for this plan.

Moving on to credit quality; here, we're looking at NPL without including the discontinued Real Estate activities. They have continued to rise. Mostly this is due to businesses, a one-off operation from GBM, a company that has declared bankruptcy. But mostly, it's because of the SMEs, which have had an increased NPL ratio. Also, there's been, of course, a reduction in volumes. That brings down the denominator and has a significant effect on the ratio.

If we look at NPL entries, I'd say the trends are as we had announced in previous quarters; good behavior, or relatively good behavior, of NPL ratios with individual customers, including mortgages, where volumes have continued to fall -- entries. And in businesses, fairly stable and at a similar level to -- compared to the first half of 2008; still high, but stable.

Talking about discontinued Real Estate activity in Spain, the first time we post as a separate division, this is a business which is in runoff. Here, we include basically three concepts; foreclosures; customer loans with mainly real estate development purposes; and equity estates related to the Real Estate business, and the more relevant or the more significant Metrovacesa and our stake in the SAREB.

The end of March, net balance was under EUR12 billion; down EUR10 billion -- EUR10.6 billion in the last six months (sic - see slide 25). The beginning of 2013, we, once again, reduced the net lending by EUR450 million, and foreclosures down EUR20 million. But, on the other hand, there has been a slight increase because of the investment in the SAREB in the first semester of the year. These loans and foreclosed assets have coverage levels of over 50%.

This division has had losses of EUR175 million in the quarter, which are due to a cost base for this unit of around EUR40 million per quarter; plus a certain volume for further asset impairment, which will be at around 2% in foreclosed assets, and for loans allocated to this unit. These foreclosed assets and customer loans we expect will fall by 25% yearly, until the end of business for this unit.

Continue with Portugal; activity follows the same trends as in previous quarters; lending down; deposits up, but much less than in Spain. Nevertheless, we have been able to reduce our commercial gap by EUR2.7 billion in the year, and we have continued to improve our loan-to-deposit ratio, which is now close to 100%; it's 108%. So with that, we've gained market share in both lending and deposits; and again, significant improvement in our loan-to-deposit ratio.

Result, profit in the quarter was EUR21 million; in line very similar to previous quarters. Gross income was up versus Q4, partly due to trading gains and fee income, which have performed reasonably well.

Gross income was way below that of Q1 2012, where there was a tender offer recorded, which makes it a rather unfair comparison.

Net interest income trends have continued to fall in the last quarters. We think that, however, this has now touched bottom because 100% of the mortgage book has been re-priced. In Portugal, mortgages are re-priced every six months and so, unless interest rates fall further, the mortgage has been re-priced. And the cost of time deposits is still high, although falling. And so a significant fall in net interest income, but we expect it to stabilize in the coming quarters and then recover.

Operating costs fell in the country. We've closed a few branches and costs are down 2%. And so, in a complex economic context, deleveraging continues; revenue will begin to recover gradually; costs, well under control; and although provisions are still high, they will begin to stabilize in the next quarters.

Poland now; country's economy still growing although much less than in previous years, around 1%; significantly better than the Eurozone, but not as good as in previous years.

In the quarterly figures, however, we've got a significant perimeter change, with the integration of Kredyt Bank's deposits and loans have grown by around 80%. Deducting this perimeter effect, BZ's growth in loans was 6%; 11% in deposits.

Moving to results, the KB integration, of course, distorts the comparisons with previous quarters; particularly in NPLs, because their NPL was significantly higher than BZ's.

Also, as for results, profit before minority interest, was EUR91 million. First, consolidation has significant effect. KB has profitability below BZ and much higher NPLs. Coverage for the new Bank is the same as for BZ before the integration. Their contribution to results in this first quarter was negligible, since they have higher costs, similar revenues and a restructuring cost of PLN26 million in the quarter.

There are seasonal factors and, especially, there's been a significant fall in the quarter of interest rates in the country, 125 basis points and that has impacted net interest income since last November.

Our priority in Poland right now is to continue with the integration process and we think -- or we can confirm our guidance with respect to profit, volumes and synergies, as our CEO announced.

In Consumer Finance, the unit is being managed in a very unfavorable business environment, because in 2013, further foreign car sales in the Eurozone of up to 13%. In this market environment, the unit has a high recurring profit based in gaining market share. There is a 5% fall in new lending when the sector is falling by 10%. But this is strongly driven by Central and Northern Europe, Poland, Nordic countries and Germany, which increased their lending after taking into account seasonal effects.

Three factors are behind the different evolution, a business model designed to gain market share and manage spreads; diversification by countries with critical mass; diversification by products combined with cross-selling; and brand agreements with manufacturers.

There's a good evolution in risk. The provisions made at the start of the crisis and the tougher admission criteria are today reflected in lower provisions, a stable NPL ratio of around 4% and coverage of around 110% and their high sale financing capacity. The appetite of investors for SCF's risks is enabling it to continue to issue securitizations.

Attributable profit was EUR176 million, 9% more than in the fourth quarter of last year, maintaining a return that is certainly higher than the average of its peers.

The Consumer business continues to perform very well compared to the competition. And we hope that they will profit from a better market environment, better than the one we had in the first quarter.

The UK, we focus on activity. We have focused on selective growth, reflecting the priorities of the Bank. In terms of lending, mortgages declined 7%. As we said earlier, our policy with regard to mortgages -- well, we're much more restrictive in lending.

On the contrary in the SME business, which is a priority for the Bank, our loans to SMEs increased 15%. We're taking different initiatives; opening regional centers, developing products and we have different programs to try to gain market share in SMEs.

On the side of deposits, there is a global growth of 1% and retail deposits are growing 4%, but we're very satisfied with the success of the current account strategy. The so-called 123 strategy, which has raised EUR6 billion in current accounts ever since it was rolled out in March 2012; this has increased the balances of current accounts by 55%. This growth in the last quarter was 18%. And this is one of the foundations of the Bank to gain more current accounts, together with gaining more SME customers; that is what we want to continue to do in the future.

In terms of results, the profit was GBP191 million. There has been an improvement in the net interest income. Also, better spreads, with a fall of funding costs on the side of deposits, but also through wholesale funding. Less provisions, NPLs remain stable, coverage is good and costs remain stable.

In summary, we can say that we began the year with a very good trend, good evolution of the 123 product; more current accounts to lock in customers; an improvement in the net interest margin; and controlled provisions and cost, [and] buying with or below inflation.

Brazil, in 2012, the country grew much less than what the market consensus expected; it only grew 0.9%. In 2013, growth is estimated to be 3% and lower interest rates. Well, now that is changing we hope. Well, they started to go up, interest rates, and we believe that they can reach 8.5% by the end of the year.

Our lending activity hasn't grown very much, only 5%; and deposits, including Letras Financieras, 1%. Lending slowed down in the country in line with other private sector banks. We hope that the situation will improve with an improvement of the GDP.

In terms of results, the attributable profit was $658 million. The main trends are net interest income that fell because of a sector-wide fall in the spread on loans, because of lower interest rates and because there is more competition in some products since last summer.

There is a mixed effect on the composition of our portfolio, which is changing towards lower risk products, more secure products, and lower growth in volumes, which we believe is temporary, whilst the other two effects that, we think, are more structural in nature.

Good evolution of costs, minus 7%; a fall of 7%. We have made some adjustments in the unit after the integration; lower year-on-year growth in provisions with NPLs tending to stabilize.

In terms of NPLs, entries are stabilizing. In individual customers it remains stable, the NPL rate. We think we have reached the peak and, from now, on the NPLs in individual borrowers will fall. So in the future, stable early NPLs, and bad debt declining.

We see continued pressure on spreads for another quarter at least; volumes that will rise to end of the year with a double-digit growth. Personnel and general costs rising, clearly, below the inflation rate; and a cost of credit that will tend to improve as the economy recovers.

Mexico, good prospects for the rest of the year; GDP expected to grow more than 3%. But, of course, there has been a change in Government; there's been lower investment and spending, and reduced exports to the US. Interest rate's stable at 4% and inflation of 4.25%.

In terms of activity, double-digit growth in lending and deposits in the first quarter, mainly in our target segment which is SMEs, companies, cards and demand and time deposits.

We've opened 16 branches in this first quarter. And we're going to open 75 in the whole of 2013, and 110 in 2014.

In terms of results, a net profit of $417 million in the quarter, which is a record for a quarter. Gross income rose 12%, year on year, and 3% in the quarter. The net interest income fell slightly because of several impacts, because there's been a transfer within margin and fees. So there's a very good performance of fees for Wholesale Banking, Insurance and Cards; more trading gains from customers.

Higher cost as a result of new commercial projects; new provisions fell 11%; and the risk premium remained low with very a good NPL and coverage ratios. In short, a good underlying trend, with business still growing at double-digit rate, and feeding through to results in the coming quarters.

Chile, in a very good macro environment with economy growing by more than 5% and interest rates of about 5%; here, the main effect is the low inflation in the quarter, and year on year, compared to 2.4% estimated for the whole year. And this affects the revenue, because the portfolios are indexed to the inflation rate. We are still growing well in deposits; retail deposits are growing [12%]; selective growth in lending.

In terms of results, I already mentioned the impact of the inflation rate. The impact of the lower inflation is quite significant. In terms of fees there's been regulatory changes; now, there is mandatory bidding for insurance contracts linked to mortgages. Costs were basically flat in the last four quarters. And provisions continue to slow down, and were slightly lower than in the last two quarters with the risk premium stabilizing.

We are maintaining our view for the coming quarters; higher inflation; some recovery in volumes; stable costs; and provisions are not expected to increase.

The rest of the countries in the region performed very well, more than $200 million in profit, an increase of 22% over the first quarter of 2012. Half of this profit comes from Argentina, which is a quarterly profit of $114 million. Puerto Rico almost doubled last year's profit. And Uruguay profit grew 12% (sic - see press release "10.5%"), and Peru, 6%.

Apart from the countries in the area, we also have International Private Banking with a profit of $42 million.

We don't expect any changes in these countries, or at least significant changes.

In the United States the Group made $307 million, an increase of 5% -- 5% more than in the fourth quarter; both units, because we have both units in the United States; Sovereign and Santander Consumer USA.

In terms of revenue, Sovereign less revenue because of the net interest income. There has been a restructuring of the portfolio, also some portfolios in run-off; sales of ALCO portfolios. And the strategy we're following with the market just is to sell these mortgages.

On the contrary, Santander Consumer USA has grown very strongly, based on higher volumes, significant growth of volumes, and gross lending, and particularly new production.

Flat costs in the first quarter; credit quality remained excellent, NPLs at minimum levels; attributable profit is $160 million in the first quarter, whilst Santander Consumer USA was $147 million, a new quarterly record.

Over the next few quarters we see recurring revenues tending to stabilize on the foundations of a balance sheet more evenly distributed by businesses in a fuller range of products and service, in accordance with the investments we are making. Asset quality we believe will remain good.

With regards to the Corporate Center, to finish; we see results similar to those of previous quarters, although with some differences. The net interest income is associated to the cost of liquidity, which has had a negative impact on the net interest income. There's also higher costs of issues, which are offset, in part, because their volume is falling.

Costs very similar to those in the first quarter of 2012; the rise over the fourth quarter was not due to that quarter incorporating a release, because of the unpaid variable remuneration.

In other income and provisions, the figures were very similar to the first quarter of 2012, but not with the fourth quarter which included write-downs of goodwill and equity stake. So the trend should be better revenue.

Let me now hand you over to the CEO, who will talk about the outlook for the next few quarters.

Let me conclude with a few comments on the current situation and my outlook for the future.

The first quarter saw a radical change in the Group's profit trend, after the exceptional provisions made for real estate in 2012. Today, we are in a different profit dimension, after going from levels of EUR100 million and EUR400 million in the last three quarters, to more than EUR1 billion in the first quarter of this year. This level of profit, however, is far from our potential, and there are several factors today that exert pressure on the Group's results.

First of all, low macroeconomic growth which, coupled with regulatory effects, is limiting the growth of the business, or the volumes of the business. Number 2; a global environment of very low interest rates and historic levels in many countries, which have an impact on the spreads on loans; and, thirdly, and very important, management's focus, in a very complex environment, has given priority to managing liquidity and risk over profit. We made effort to attract deposits. We were conservative in issuances and, now, we are back to more usual funding.

We also improved the risk profile. We reduced the relative share in profitable products, but of greater risk, for example, interest-only mortgages in the UK or consumer credit in Brazil. And we are deleveraging on some non-core businesses.

As one would expect, all this is having an impact on our results, but it is positioning us better to take advantage of the economic recovery when it happens. And for the next few months I don't see drastic changes, although I do see a gradual improvement as the year progresses, especially after the year 2013.

I expect a recovery in revenue in our larger unit in Spain, due to the end of the re-pricing of mortgages and the lower cost of deposits. Although this is already seen in recent loans and deposits, it is yet to be transferred to the cost of the stock.

The UK, another large unit for us, already reflects improvement in net interest income. And these improvements will continue, because of a lower pressure of liquidity.

Another unit, Brazil, a large unit, is also going to see revenue recovering because of higher volumes and increase in interest rates, which began in April; whilst, in the US, we will continue to focus on companies. Lastly, and at the Group level, we see reduced wholesale funding needs, which will lower our financial cost. That is with regards to revenue.

And with regards to costs, well, it will vary by units. In other words, Spain and Poland, undergoing merger processes, their recurrent costs will fall, of course excluding restructuring cost, via synergies, as the mergers proceed. It will be faster in Poland than in Spain though. Therefore, we see stable costs in mature markets and some rises in those countries where we are expanding, for example, Mexico.

And lastly, with regards to provisions, we expect the risk cost to stabilize in 2013, and they will begin to fall in 2014. Spain will be the main driver. Here we see that the NPL evolution linked to GDP and risk cost falling to the levels of 150 basis points, including real estate, and normalizing as of the next year to 100 basis points or even less than that. In Brazil, we see a stabilized cost of risk.

In short, revenues will rise as of the second half of the year, and the cost of credit will remain stable and, of course, far from the effort made in 2012. And this year will be consolidated as the one when profits when began to return to their normal path.

Thank you very much.

Good morning. We will start with the questions that we received over the Internet, and then if we have any questions from the conference call, we'll take those later.

We're going to organize questions by subjects. Let's start with strategy and regulation, there's the first question from Jaime Becerril from JP, and Britta Schmidt from Autonomous and Mario Lodos from Sabadell Bolsa with regards to OPBs, IPOs. What about the IPOs in the US? And what is the intention of our partners?

All the IPO that we're considering now, although we still haven't made a final decision on the price or the time -- or the timing, is placing part of our US subsidiary, SCUSA, ex-Drive, the consumer lending unit, but we don't have any plans for 2013 for any other IPO end markets.

Antonio Ramirez from Keefe would like to ask about our dividend payout policy, on the EUR0.60 and the continuity of the scrip dividend; if we have a dividend and cash policy, or if we're thinking about reducing the dividends?

The only decision that we've made is that in the year 2014 -- sorry, I'm getting it wrong. In the year 2013, this year, 2013, the dividend is going to be paid out in four scrip dividends.

With regards to the dividend policy for 2014, we haven't decided yet, and when -- we will decide that when the time comes. So we cannot say anything about that.

There are several questions on deposit strategy in Spain, David Vaamonde from Fidentiis; Daragh Quinn from Nomura; Benjie Creelan from Macquarie; Juan Pablo Lopez from Espirito Santo; and Ronit Ghose from Citi.

The question is with regards to your deposit strategy in Spain. Are you making an effort and why in term deposits? Is that related to the funding from wholesale markets; if there's a flight to quality -- if we're witnessing a flight to quality? What is our pricing policy for deposits, despite the recommendation from the Bank of Spain?

And can we say something about deposit flows in April in Spain?

Everything is related to pricing policy, strategy and flight to quality. Well, our deposit policy, I think we mentioned this several times, it's based on the following concept.

First of all, we want to take advantage of the opportunities that arise in the national market. The national market is distorted at present, because of the restructuring processes, and we think that it is an excellent opportunity to attract customers and to take part of that market and gain market share.

The second concept, which is related to the first, is that in the market we are witnessing a certain flight to quality that we want to take advantage of; precisely, to increase our position among customers in the retail market.

The third concept is that we are carrying out a pricing policy that, although the rest of the market was quite aggressive until the end of 2012, because there was a low competition based on prices.

After the recommendation from the Bank of Spain and based on the real situation of the interest rates, all of us, of course there are exceptions -- we know that there are exceptions, but in general terms, we are raising deposits at much lower prices with a significant reduction on prices in 2012, particularly the fourth quarter of 2012. And this trend is going to continue because interest rates are falling, because there might be even -- because interest rates might lower -- might fall even further.

We have reduced the price of deposits, but nevertheless, we continued to increase our market share in deposits, because of that flight to quality that you mentioned. 50.19

If we go into financial management now, there are several questions. The first question from Mario Lodos from Sabadell Bolsa and Rohith Chandra from [Citi] are asking if we have any mitigating measures to offset the negative impact of Basel III, like selling assets or deleveraging?

And if we can elaborate on the main drivers of the evolution of core capital of Basel III?

Yes, we could elaborate on many things when we talk about capital, but we feel very comfortable with the capital situation we're in right now.

On the other hand, recently Oliver Wyman issued a report that some Spanish banks commissioned on the comparability of the risk-weight assets among the main European geographies; in other words, comparing Spain with Italy, France, the UK, Germany, etc.

The main conclusion of this report, and we have been talking about this frequently in the market, is that capital consumption is greater in the cases of banks domiciled in Spain than banks in other countries. This report that we will publish on our web page, bases this fact on two things; the more conservative nature of the models approved in Spain by the supervisor; and, secondly, because there is a lower percentage of models approved outside of Spain than for banks in Spain.

If we were to apply the risk-weight assets criteria and percentages under the advanced model of the less conservative practices in Europe, in other words of the most aggressive ones, let's call them that way, if we were to apply these criteria and these percentages, our core capital ratio would improve from 90 to 150 basis points. In other words, it will go from 10.7%, that we publish this morning, to 11.6% or 12.2% that for Basel 2.5.

But if we talk about Basel III fully loaded, which is 9.2% for us, it would be 10.1% to 10.7%, within that range. So that range would mean that we would be the highest that we can see in Europe right now.

So this is something that we've been insisting on for a long time. This is something that regulators of the Basel committee and the EBA are already working on. They are aware that there are these differences between European countries. And these differences will make it very difficult to compare, because a 10% in Spain is quite different to 10% in any of these other countries. So that's as far as the things that are difficult to compare and various cushions.

But, on the other hand, I said at the beginning that we feel very comfortable with the capital ratios we have. We currently generate capital every quarter. Plus, we have a balance sheet risk profile which is medium to low, because of the nature of our Retail Banking business.

And in fact, when we had the stress tests a few months ago, the Oliver Wyman stress tests, the fact is that Santander has not destroyed any capital since 2007, and that stress test demonstrated our strength and our solidity. And we've continued to generate capital organically throughout this downturn.

And of course, capital ratios and profit are a balance which you have to strike, and there I would include business models too. So with these three pillars; capital ratios, business model and profit, we feel very comfortable with our capital ratios.

Moving on with more capital ratio related questions, Sergio Gamez is asking about the 77 points in that slide, together with the organic growth this year. Benjie Creelan from Macquarie is asking the same thing.

Remember that we showed this already at the Morgan Stanley conference. It's netted of the new accounting standards. But basically, just over half is due to the alternative standard in Brazil. And the other is due to other internal local models of less importance, which we will be applying throughout the year.

There's another question about could we explain the changes in core capital in the quarter; Antonio Ramirez from Keefe, Carlos Peixoto from BPI, Carlos Garcia from Societe Generale.

And connected to that they're also asking about trends in minorities; Britta Smith from Autonomous and someone from Natixis; so core ratio trends in the quarter, why up EUR3 billion?

Can we explain the EUR1.9 billion or EUR2 billion increase in minority interests?

It's all connected to the same thing. Apart from the profit there's an increase in minority stakes, basically, because of Poland; we have about EUR1.3 billion/EUR1.4 billion from Poland. And the rest is exchange rate effect.

As far as minorities and the rest of the capital increase, I think we mentioned in the presentation. It's profit; it's the scrip -- well, profit/scrip dividend, plus Poland exchange rate effects and so on.

There is another question about capital and that is what do we expect for risk-weighted asset trends? Britta Smith and Ignacio Cerezo are asking whether we expect to obtain any sort of savings with risk-weighted assets? And what do we expect from risk-weighted assets in the Group and in the different units? I wonder if you'd like to elaborate.

Well, obviously, here there are two effects; one, clearly, the business effect, where we think risk-weighted assets will continue. In those geographies where there is deleveraging they will remain stable or fall, Spain and Portugal as has been the case in the last quarters. The UK will remain relatively stable too. And in Latin America naturally we expect them to grow, but that's purely due to business parameters.

There's two additional factors that are important, excluding the perimeter effect; two additional factors that are significant. One is exchange rate evolution, very important in this quarter, most -- well, the euro has appreciated mostly versus most of those other currencies. And as a result -- sorry, those currencies have appreciated versus the euro, and there are significant variations in the quarter.

Brazil appreciated 5%; Mexico, 8%; Chile, 4.5%; and that, of course, changes the risk-weighted assets. And quarter-on-quarter this has an effect on both sides on the amount of capital, as Angel mentioned earlier, and on risk-weighted assets, so reasonably it should be offset.

And then the third element, which I mentioned globally, is the 67 points that is the capital we expect to generate. Angel said that 33 of those points come from the application of the alternatives and that model to operational risk in Brazil.

So, in Brazil, we expect a fall in risk-weighted assets as a result, and also the rest is the application of advanced models and as they get approved in the different countries. And of course, it's very granular.

And in some countries it's by country, in others it's by business segment. But those are the keys; the business parameters, exchange rate effects, risk-weighted assets and the application of internal models. And Brazil's a special case, because of its size.

And then there's the Polish impact, have you mentioned that? Poland in risk-weighted assets. Yes, Poland, of course, in the quarter, risk-weighted assets up EUR7 billion because of the KB integration; also, EUR1.3 billion up core capital for minority interests in Poland.

And to finish with capital related questions, there's one from Carlos Garcia which is whether there's any impact on CR4 in the change -- in the treatment given to SMEs.

Of course, it will have an impact. It's one of the ones that's included in that phase-in scenario when the new regulations come to force, which we expect will be at the beginning of next year.

There's also a question from Alvaro Serrano about that increase in the fully loaded from 8% to 9%.

Remember that we said in the presentation that DTAs have now changed, the calendar is 10 years. And so we're talking fully-loaded 2019 instead of 2014.

And finally there is a question from Santiago Lopez from Exane. Given the impact of Basel III, the 380 basis points, do we think that the Bank needs a capital increase? I imagine the answer is very short.

I already said what we felt about our capital ratio; so the answer, clearly, is no, we don't need a capital increase.

And as far as the P&L of the Corporate Center, Alvaro Serrano from Morgan Stanley, is asking in Spain what's behind the fall in spreads in Spain? And for the Corporate Center, he's asking could we elaborate a little bit around the evolution of net interest income, for Spain and for the Corporate Center? There are several questions about this. Sergio Gamez from Merrill Lynch is asking this too. And others are asking specifically about the net interest income in Spain and in the Corporate Center.

Well, trends, net interest income, I think I've explained in the presentation there are two main effects here.

The first is mortgage re-pricing. Mortgages, throughout -- well, since the beginning of 2011 and until September 2012 were re-priced with the one-year EURIBOR which, at that point, was between 1.5% and 2% more or less. And now we're re-pricing since September/October 2012 until September/October 2013 with EURIBOR at 0.5%/0.6%. So there, obviously, there is a fall due to this mortgage re-pricing, which will be completed around September. So gradually it will have less of an effect. This is a significant negative effect.

Depending on the mix, as we saw in our book, mortgages represent about 25%/27%. And so that is showing a significant fall in yield, because of that re-pricing. This is somewhat offset, but only partially, by other loans, which -- whose spreads are improving, generally.

And as for deposits, it's true that the cost of deposits is falling strongly, as I mentioned in the talk. At some point, term deposits were at 3% and now they're at 1.5% more or less; so there has been a fall. But the mix and the sequence has meant that the overall cost of deposits hasn't fallen yet. But it will start to fall very quickly. So these two trends, as I tried to explain. Spreads were weak, as I've said, in Q1.

Will price still be weak in Q2 but will gradually improve if there's no significant variation in exchange rates? Although it's been said that the ECB might lower rates even further. But the relevant rate in this case is the 12-month EURIBOR and, of course, that is having a negative impact, because of mortgages. And the 3-month EURIBOR, because we pay part of our funding with 3-month EURIBOR, that would be favorable.

So if you run the models you will see that, gradually, there will be an improvement, which will be very consistent beginning Q3/Q4. And so that's as far as net interest income for Spain.

And in volumes assuming that things will, we believe, fall slightly in lending, we expect that 2%/3% will probably be the fall in Spain. And deposits will continue, perhaps, not to grow as much as they have, but will continue to grow over the next quarters, and will continue to gain market share.

As for the Corporate Center, it's quite a lot more to do with liquidity and the LTRO. As I said, we have maintained the same LTRO with the ECB, the same amount, for a while. We have now returned the first LTRO at the beginning of January, and the second half in February. And so we've brought down this liquidity cushion that we had established. And so that cost is charged to the Corporate Center.

In addition to that, and given the trends in deposits, we have been holding high liquidity levels which, in some cases, we've invested very short term, so we have a negative carrier trade. And, in other cases, also short term, but in higher yield instruments, like public debt, which, in the quarter, went up EUR5 billion/EUR6 billion.

So in the Corporate Center, once we've repaid the LTRO, and depending on how we invest the liquidity surpluses, I believe the net interest income should improve. But the fall in the quarter is due to the factors I've just reviewed.

Okay. There are several questions about our ALCO portfolio, and our bond portfolio. Alvaro Serrano from Morgan Stanley, and Andrea Filtri from Mediobanca, and [Sau Jung Kai] from Vanguard Asset Management, and Carlos Berastain from Deutsche; and connected to that, Sergio Gamez from Merrill Lynch.

And, basically, they're asking what is the contribution of ALCO on the increasing trading assets in the quarter; why is that? And how much do we have? Can we update them on what we have? And how much in the ALCO portfolio? How much is Spanish? So it's all about the make-up of our ALCO portfolio.

And finally, if we're replacing [Trabi] repo, LTRO by repo?

Well, as far as our ALCO portfolio, what we have right now are about [EUR35 million investment]. As I said, we've invested about EUR5 billion or EUR6 billion in the quarter. And that's, basically we're investing certain liquidity surplus given deposit growth in short-term, public-debt, assets. And that's why there's been this EUR5 billion/EUR6 billion increase. Mix is, basically, public debt, mostly sovereign debt in the amount that I've mentioned.

As for repo, the numbers are substantial. Public debt without repo it's part of our liquidity buffer. The number, I think, is about half the ALCO portfolio, or just over that, is funded directly with liquidity from the rest of the balance sheet. So, no, we are not doing repo to replace the LTRO.

The LTRO, as I said, we had deposited with the ECB, and so now what we've done is to net that position. And we still have -- as you can see in the loan-to-deposit ratio that we have liquidity surplus, which we're investing sometimes in very short-term public debt assets with a negative carry trade, and sometimes other instruments which are slightly higher yield.

Okay. There's a question from Javier Bernat about the reserve for public debt impairment required, and have we done anything with this provision as it has been charged?

It was an EBA requirement. But, Javier, if you like we'll give you the details after, because I'm not sure whether I get the point of your question. We can discuss it after.

There's a question from Daragh Quinn about the impact of any additional rate cuts by the ECB. Can we give an outlook of how we are positioned? I think that's it for this area.

Well, I think I said it before, the main impact, of course, is on our mortgage book. If the EURIBOR falls below 0.5% there will be an additional impact.

And then there's another thing which I believe is less significant; deposits, which, based on ECB rates -- going rates, are hard to predict. I would expect that the price of deposits will [pay] far more than in ECB rate cuts, not just because of elasticity but because of competition in the market.

So, overall, there will be a positive effect on the cost of deposits, and a negative effect if rates fall for our mortgages. But we don't expect rates to fall in the US, or the UK, not really in the Eurozone, to an extent that it will have an impact beyond what we've already experienced. And our ALCO portfolios are there to hedge, or mitigate, that effect, at least partly.

Okay, there's a question about tax rates from Javier Bernat. Can we give any guidance on tax rates, since it's now 25% and it's been rising, although there's been some fluctuations?

Remember that the issue here is that as we generate profit it's generated in those geographies where the tax rate was higher. And that's why it's been rising in the last quarters. And it could rise slightly above the current above 25% still in the year.

Moving onto credit quality, there's a general question, although we'll talk about the units later. There's a general question from Carlos Garcia from Societe Generale. Could we explain a bit more about NPL entries by geographies and our outlook, particularly for Spain?

He's saying that the other banks have posted fall in entries, and ours are stable. Is it because of the rest of the world? Could we give a bit more detail about NPLs, in general; although there are a lot of questions about specific units, which will come later?

We have provided information in the presentation about NPL entries, particularly in Spain, by segments. In Spain, what we have seen, it's true that probably in terms of just the quarter, the trend was better than budget.

Is that enough to say that our outlook's going to change? Well, our outlook's more connected with economic trends in Spain than with Q1, where our trend was better than we had expected and budgeted for.

Where do we think new entries will come from? Our main focus now is the SME business, where there are still significant NPL entries. Not so much in real estate where, obviously, the definition is doubtful and defaults, and so on, leave no room for any additional surprises.

We also see a reasonably good performance of individual loans, both for mortgages and consumer finance. That's been falling even in the last quarter. And so that's the outlook for Spain.

We think NPL ratios will continue to rise, we expect for at least two quarters until the economy is no longer in recession. And that is still our prediction for NPLs in Spain, which should mean -- or we expect should mean the cost of lending will be at around 150 basis points in the year. I think we've said too, that after that, we expect that it should go down to about 100 points in 2014. That's as far as Spain.

In other geographies, there are varying trends. There's really no change in the UK, where NPLs are stable; coverage levels are good. And we don't expect any changes.

In the US, performance has been good. A good fall in NPLs, and I think worth mentioning, in Mexico, as we said.

And the other points where we need to focus are Brazil and Chile. And starting with Brazil, in Brazil, we have seen, starting a year ago, a rise in NPL ratios, both in individual mortgages and businesses.

In individual loans, we started to implement some strategies, beginning last June. So now it's under control and we're comfortable that NPLs from individuals have peaked and will fall, or at worst, stabilize, but probably fall, depending on the economy. In businesses, we don't -- we can't say that we have it entirely stabilized or falling yet. So as we said in the talk, we expect that provisions will remain high; higher than we think would be reasonable to expect medium or long term.

And then the mix effect, which we mentioned, has a negative impact on our spreads. We'll gradually change as -- since the cost of risk should go down.

As for Chile, things are better. We had a spike, mostly in 2012, but now that's stabilized. And, as I said in the presentation, NPLs and the cost of lending should stabilize or fall in Chile. So that's basically, I think what you were asking.

There are several questions about possible new provision requirements in Spain. A question from Natixis, N+1, Mirabaud, Juan Pablo Lopez from Espirito Santo; they're all asking whether we expect a new law or new requirement, what they're calling [Ginlo III]. There's lots of rumors about refinancing SMEs and different portfolios. And so what do we expect will happen with provisions? And do we expect any extraordinary provision requirements, if new regulations are approved?

Well, first, of course, we've not received any notification from the Bank of Spain, from our supervisor about this. And so everything that's been said about this is purely speculation.

Second, in our report, which we published a year and a half ago, we included very detailed information of the Group's position in this whole issue; refinancing, restructuring, however you want to call it. And so you can refer to that, if you want to know anything in very great detail. In terms of our position on these issues, you can find it in our report.

Of course, we have made a huge provisioning effort, and we don't believe that we are going to need additional provisions, given a very conservative -- that the Group has been applying.

Everything's properly provisioned, and what our policies are seeking is to make it easier for our customers to meet their payments. And that's why we have the refinancing volume we have. But we've made a significant provisioning effort, and the policies we're following are very strict. And we don't really see the need for any more provisioning, but you can find very detailed information about this in the report -- the Annual Report that we've just published.

Okay. There are several questions about the cost of risk in Spain, which I think Jose Antonio has covered already, about the 150 basis points we'd issued as guidance. I think Jose Antonio has answered that, again.

There's a question from Patrick Lee about how to reconcile this with the cost of risk we currently have in Spain.

In Spain, of course, there is now a real estate division for assets to be under divestment. So we have a cost of risk from both units, but we maintain that guidance of 150 basis points.

Juan Carlos Lopez and David Vaamonde are asking about restructuring in Spain. And our CEO has just referred to the information in our Annual Report. There's not a lot of variation from that.

And Ignacio Cerezo, Credit Suisse, is asking about NPLs in Brazil. And I think you've already answered that. I don't know whether you want to elaborate.

I don't think there's much else to add to what I already said.

Javier Bernat is asking about the reversion of doubtfuls and so on.

So far as we've said, we don't expect any changes in this.

I think I've covered everything to do with credit quality. Moving on to the business areas, starting with Spain. There's a question with Jaime Becerril about our outlook for the Spanish economy in 2013 and '14, and how it might impact the banking business.

Well, today is a difficult day to talk about this, because tomorrow, the Government's own forecast will be announced, and the new reform package, and the -- well, their outlook for the country. And so anything I say today may be contradicted tomorrow by the Government's own forecast.

But anyway, in Spain, we believe that adjustments are moving forward at a good rate. I think we are touching the bottom. Consensus says that this year, 2013, GDP will fall 1.5%. But, of course, that's going to be a clear fall in Q1 and Q2, flat in Q3, and then slight growth in Q4, which means that although in the whole year there might be a fall of 1.5% GDP, which is I think what they're predicting in 2014, we expect growth to be about 0.7%. So that's a good sign and that's good news. And that's why I say that the reforms are making headway and that we've touched bottom.

And in this trend, what's really important, I think, is what has happened with the balanced payments, particularly the current account balance, which, at one point, had a deficit of almost 10% GDP and this year it's going to have a surplus of 1%. This is an unprecedented change and it's really important, because it's also helping to reduce our dependence on foreign funding. So it's a really important, very positive development.

Another important positive development is the fact that inflation's under control. It will be at around 1%, absorbing all the tax hikes. And the country is dealing with deleveraging of the private sector; the restructuring of the real estate sector; the financial sector; the fiscal discipline; the reform of the labor market. And all this, obviously, has a negative effect on growth. But, it's important so that conditions can improve in the future.

I think the private sector has now made most of the adjustments that were needed. I think we could say even that the worst is over. Companies have cut costs, have deleveraged, as have households. The financial sector's completing its reforms. So clearly, the second half of 2013 will be better.

And, of course, I did mention the fact that now the treasury is able to fund itself at costs which have gone back to what they were in 2010. These are all clear signs of improvement. In Q2, it will be more clear and, certainly, much more clear in 2014.

Having said that, we believe that volumes, for us in our banking sector, this year lending is still not going to grow or will grow very little, in spite of the effort made by all the banks and the government to promote lending with all kinds of plans. But the impression we have is that lending in 2013 will not really grow yet.

And continuing with Spain, Rohith Chandra and Mario (inaudible) from Citi and Sabadell and Francisco Riquel from N+1 are asking about net interest income. Jose Antonio, I think, already elaborated on that.

And deposit spreads and different types of deposit and spreads, volume prices, what's our outlook for the price of deposits? And if we look at [1T] 2013 as bottom?

Yes, I mentioned this earlier but let me either clarify it or confuse you even further. What I said earlier was that we expect a decrease in volumes in lending, about 3%. Deposit volumes that will grow; 5% to 8% growth is what we expect in terms of the volume.

And if the 3-year deposits remain at 0.5% for the year and 0.2% for three months, in the year, we would expect a cost -- a reduction of 30 to 45 basis points in the cost of these deposits. I'm trying to compare December '13 with December '12, 30 to 45 basis points is how much the cost of deposits would fall, with -- and a fall in lending would be half of that. The ALCO we think is stable, about EUR30 billion for the whole of Spain.

Therefore, in the first quarter was negative. The second will be less negative. The third quarter might be stable or growing a little, and the fourth quarter growth, of course, with all the caveats that the Bank of Central --European Central Bank etc., what they might do with their rates. The EURIBOR, you know that well enough.

There's a question about the real estate in Spain. We mentioned that in the fourth quarter, we might make an additional EUR1 billion in provisions for real estate assets, in order to accelerate the selling of assets. Are we still thinking about accelerating that sale and generating capital gains to offset that?

I'm going to answer that question, because I was the one who made that statement in that results presentation.

Yes, when we made our earnings announcement, I think it was in February, we thought that the sales in 2013 and that prices in 2013, if we continued to sell at the prices we sold at 2012, that might give us additional losses of EUR600 million to EUR900 million, or up to EUR1 billion. And that's what I said.

Nevertheless, we saw in the first quarter that our pricing policy is not the same as in 2012. We are more conservative, but we've sold 5,000 units. So, we're still selling quite a lot. And right now, we don't think that this special provision that we were thinking about in January for 2013 will have to be made.

A question from Francisco Riquel from N+1 on whether we still have -- that we still think that we're going to increase our revenue by EUR1 billion. I think that's referring to what we announced in Banesto for the next three years. And yes, our vision of the business in that regard has not changed from 2013 to 2016.

As for Brazil, there are quite a lot of questions on the top part of the P&L, with regards to net interest income, as well as ratios and volumes. So let me to try to summarize. Antonio Ramirez, from Keefe, and another question from Nomura and Credit Suisse and (inaudible)from Mirabaud are asking about the drivers for the fall of the net interest income; the performance of the net interest income as a ratio; the expected evolution of prices, spreads and volumes; and the guidance for the top part of the P&L in Brazil.

Yes, in Brazil, the net interest income is under pressure. There are several impacts here, several effects.

On the one hand, we believe and our management team in Brazil continues to believe that if the economy in Brazil grows 3%, as the consensus has established and that is also the opinion of our economists and of our people in Brazil. Well, if that happens, if the economy grows 3%, the asset volume will accelerate in line with the economy to grow in the part of our private banks. And in our case, we would be growing by two digits, more than two digits from 10% to 15%; 10%, 12%, 13%, 14% if the economy grows 3%. So that's a positive impact on the net interest income.

Now, what is a negative impact on the short term for the net interest income or the fall of spreads? There's a been a fall of spreads for two reasons. On the one hand, because of the pressure of the competition, which is making spreads fall; and on the other hand, because of the product mix that we have in our Bank, because we're focusing on more secure products with more security and, therefore, lower spreads. And that will mean that the cost of lending will fall, because these loans or these products have a lower cost of credit, but also a lower spread.

On the other hand the contrary effect would be the fees that will accelerate with credit volumes, because fees are doing well. And if lending increases by two digits then, obviously, fees will also grow by two digits. Therefore, if the economy does grow at 3%, as is expected, that would give us better performance in volumes and also in the credit quality. And that is why we believe that in our outlook for Brazil we will improve our results in the next few quarters, because of the combined effect of all these things that I've mentioned.

There's a question from Ignacio Cerezo, whether we expect a fall in the NPL rate and our cost of lending, which I think we already covered.

David Vaamonde talks about changes in management in Brazil. Can we say something about the fact that Marcial Portela will no longer be the CEO at Santander Brazil?

Well, changes in management are a natural process in any company, so we shouldn't be too surprised by this. Marcial Portela has been working as CEO of Brazil for almost three years; he was there to overlook the merger process, when we realized that we were a little bit late in our schedule; we weren't really complying with our schedule. So he went there to overlook that and he did an excellent job, because today Santander Brazil is a fully integrated bank, and Real and Banespa have been fully integrated.

Now the priorities are different. Now we want to focus more on the business, on commercial activity. And so the Group has sent, as CEO, someone who has two conditions for this job.

First of all, he knows America -- the American continent very well. For many years he's been working and leading the America division and, therefore, he knows the continent very well. He knows the practices and the markets in the American continent. And he is very good on the commercial side of the business and commercial development of a bank. And therefore, we are convinced that he is going to do an excellent job in Brazil.

And to finish with Brazil there's question from Francisco Riquel on the impact of rates and the net interest income for Santander. Jose Antonio, would you like to elaborate on that?

Sensitivity to increases in interest rates, how would that have an impact on margin volumes?

Well, I already mentioned in my presentation that we expect the interest rate in Brazil to continue to rise. They went up 0.25%, they're now at 7.5%, we think that they might go up to 8.5% by the end of the year.

What is the impact of this on the business? Well, the business is not too sensitive to these increases in rates, so we won't be feeling the impact that when rates go up you have a greater spread; a little bit but very little.

Now, what might have an impact -- what that might have an impact on is on the competitive pressure on lending, because the origin of decreases in margins that we've seen are related to lower rates of last year and the perception by part of -- or public Brazilian banks being very aggressive and trying to transfer that to the lending market. So that might have an impact, but it's very difficult to quantify what the impact will be on the prices of lending. But on deposits it's going to be a very small impact.

There's a question on the levels of capital that we have in Brazil. We have high payouts, in local terms more than 90%, that is our capital management policy.

There's another question from Citi on the fall of the net interest income in Chile, what was the reason? Basically, inflation and with low inflation as we've had in this quarter that has an effect.

From the UK two questions; Ignacio Cerezo would like to ask on the top part of the P&L deposit; if we want to elaborate a bit more on that?

And Ronit Ghose from Citi, what is our opinion on the help to buy? Is that going to have any impact on volumes, on spreads, and how do we see that? And what on the help to buy on the government program to foster mortgages, did they put a percentage on the risk?

Okay, with regards to the first question, the dynamic is very positive. Therefore, it's positive, because we observe a certain stability in the spreads on lending and a reduction of cost on deposits and wholesale funding. And that combined -- those two things combined will -- I think the net interest income is going to grow 6%, so it's more positive.

On the revenue side we have the negative impact on the standby situation of the selling of financial products. We have to make a decision on what policy we're going to follow for these products. That has had a negative impact.

With regards to the government program, if there's aid and that helps, but it will be favorable, but we can't say by how much right now.

Well, there's a question from [Stephen Goldman] on Poland. Can we extrapolate the results? Remember that this quarter KB is included in the volumes; the contribution to earnings is almost null or very small or even negative, slightly negative. And we already gave data on synergies and expectations on the recent placement of the market -- in the market.

On the United States, the last question is on the US, what are the business expectations, revenue expectations in the US? Would you like to add anything to do that? And we would finish with this question.

There we have two units, one of them is going through a transformation process in extending the range of products. We're trying to foster sales or try to sell -- to do asset management, insurance, selling cards; that is the Bank's priority right now. And when that materializes that will be -- have an effect on the revenue. But that doesn't happen in one single quarter, it takes longer.

In the case of Drive of the consumer business in the US, it is well-known that a deal has been signed, which is transformational for them, which is to turn into the supplier of funding for Chrysler car dealers. That is going to make it grow strong and it's a transformational deal for the consumer business in the US that we're not going to see yet, we'll notice that in the next few quarters. But it is an element that does change things, the size and the pace of growth of the Consumer business in the US.

Let me answer these questions in Chile, they ask about the evolution of the NPL rate. It has been going up since La Polar, we've been recording more provisions for that tool getting ahead of movement and that means that the cost of risk is -- will be flat during the year.

Britta Schmidt asks about the fall in the rest of Latin America of revenue -- fall of revenue. It is the addition of different countries that we already gave you, also a small fall in BPI, but it's a marginal fall.

I don't think there are any further questions, no questions from the conference call either. So with this we finish this presentation. 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.