Banco Santander SA (SAN) 2014 Q2 法說會逐字稿

Hello, good morning. Welcome to the second quarter results presentation of Banco Santander. [Jose Manuel] (inaudible) responsible for investor relations, and Jose Antonio Alvarez, the CFO of the Bank will join me for this presentation.

The Group has conducted its business in the second quarter in a global economic environment in which developed economies have strengthened, and emerging ones were still below their potential. Interest rates remain at historic lows in most countries.

In this environment, and as I said at the last presentation, the Group's management is focused on two main priorities. On the one hand, exploit fully the new cycle of higher profit and profitability, implementing measures that will enable us to gain market shares in key segments in all countries. On the other, maintain a solid liquid and low-risk balance sheet.

The main aspects in the third quarter -- in the second quarter are, attributable profit rose at double-digit rates, both quarter on quarter and year on year.

All P&L lines, gross income, and costs and provisions, consolidated the good trends of the last few quarters.

Business volumes reflect the different macroeconomic momentum of each country and the Group's particular strategy in each one. But, in general, they show rise in lending in nine out of our 10 core countries, in the second quarter, which is beginning to reflect the focus and the strategies we are developing.

In funds we continue to focus on reducing the cost, while customers find more profitable products better suited to their needs by actively managing deposits and selling mutual funds. At the same time, we see very good growth in current accounts.

In risks, the non-performing loan ratio dropped again for the second consecutive quarter, and the cost of credit continued to normalize.

Our liquidity position remained comfortable; net loan-to-deposit ratio stood at 114% in an ongoing improvement. Moreover our liquidity coverage ratio is above 100% in all geographies.

We also feel very comfortable with our capital. Core Tier 1 capital stood at 10.9%, and a total capital ratio above 12%.

In short, we are on the path for sustained growth in recurring profits and higher profitability.

If we take a look to the income statement, the second quarter attributable profit was EUR1,453 million. It's 12% higher than the first quarter of 2014 and 38% more than the second quarter of 2013, accelerating over the first quarter.

The first half profit was EUR2,756 million, 22% higher year on year. Excluding the exchange rate impact, it would have increased 40%.

Some qualitative comments on profit. It is a profit of great quality, fuelled by net interest income and fee income that represented 93% of total gross income and improved over the last quarter, although the increase was recurring, as it did not incorporate the capital gains from a corporate operations during the first half.

As I will later mention, these gains were basically to restructuring costs and one off provisions to bolster the balance sheet.

In short, and I insist on this, we took another step towards profit normalization, and enhancing the Group's profitability.

With respect to the gross income, two comments. Firstly, the change of trend that continues to strengthen, particularly net interest income that increased for the second straight quarter by EUR378 million, excluding the exchange rate impact, 3%; that is an annualized rate of 12%.

The fee income grew for the third quarter running due to greater customer transactions, growth in mutual funds, and higher income from fees related to global banking and markets. That more than offset regulatory impacts from, basically, interchange rates from grade cards in Europe or maximum fee rate in Chile. In both cases the annualized growth rates of the quarter are higher than the ones of the first quarter.

Second, most units registered growth in net interest income plus fee income, as Jose Antonio Alvarez will later explain.

With respect to costs this continued the trend of the first quarter with a differentiated evolution by unit. We can distinguish three main blocks. First one with those units undergoing integration, like Spain and Poland, or restructure adjustments like Portugal with costs declining in nominal and real terms.

Our sales growth in costs was well below the country's inflation rate, 5%, all in real terms, underscoring the work done to improve efficiency and service quality. At the same time, the growth in costs in Brazil decelerates with respect to the first quarter.

Our second block with the UK, which is combining investments in its business transformation plan with efficiency plan to achieve a rising cost that is basically in line with inflation.

Also Santander Consumer Finance and Chile increased their costs basically in line with inflation.

A third block, with Mexico and Argentina, whose costs are rising because of the opening of branches and commercial capacity improvements.

In the US costs also rose significantly at Santander Bank, which is improving its franchise at the same time that investment on the new regulatory environment, and Santander Consumer USA that is growing strongly in the country.

In short, a very good performance at Group level and one that enables us to reaffirm our objective of cost saving this year, which we definitely expect to improve. We will come back in October with more detail on this.

All of this should increase the advantage we already have with the sector in terms of efficiency.

With respect to the cost of credit, provisions continue to decline. We see a further fall in the second quarter, notably in Spain, Brazil, the US and the UK.

And overall, provisions were 4% lower than in the first quarter, and down 11% in the first half of the year.

The cost of credit, also continued to normalize and was 1.56% in June compared to 2.14% a year earlier.

And then if we take a look into the income statement, it performed well in all lines, both quarter on quarter and year on year.

In the quarter we see a good evolution of the main P&L lines. Profit rose more than 10% quarter on quarter.

On year-on-year terms and eliminating the exchange rate impact, the P&L performance was [one] by the book: commercial revenues increased at double the costs; provisions on a downward trend; and profit growing at high double-digit rates.

As I said before the first-half profit does not incorporate any of the capital gains. That amounted to EUR1,335 million net, coming basically from Altamira from the sale of our Altamira in the first half; from the listing of a Santander Consumer in the US; and from the changes of benefits in the pension entitlement in the UK.

There was a one-off fund that was established for basically restructuring costs for an amount of EUR740 million; the impairment of certain intangible assets, basically IT, for EUR512 million; and other allowances for EUR79 million, where basically we see the bulk of it is EUR65 million in order to complete the provisions for PPI in the UK.

Of course, the first half does not include the capital gains which will be generated in the strategic alliance in custody and insurance of the consumer business in Europe, which will materialize during the second half of this year.

Moving on to the balance sheet, the volumes basically reflect the strategy followed in recent quarters and the environment in which the Group operates.

In lending the second quarter underscored the change of trend shown since the start of the year in mature markets.

By units we see Spain rising again in the second quarter spurred by greater companies.

The UK where credit grows, not only in companies but also in mortgages, reversing the -- in this case in mortgages, the declining trend that we had seen in the previous quarters.

In the US both Santander Consumer and Santander Bank are growing well.

Santander Consumer Finance, that continues to improve.

Lending in Portugal kept in a deleveraging environment that this enabling us to gain market share in recent quarters.

As you see compared to the previous quarters, all our countries grow except Portugal; so nine out of 10 are already growing.

In emerging markets lending grew in all countries. Of note was the strong growth in Mexico, both in the segments of large companies, SMEs, government and mortgages.

And less so in Brazil; because of its economy it is growing below expectations, although it's improving over the first quarter when it reduced, a slight decline.

With respect to deposits and mutual funds, they grew on the second quarter and over December 2013. The strategy being followed in general terms is increasing demand deposits that increased 3% in the quarter and 6% with respect to December 2013 reducing the expensive term deposits, and a very nice increase in mutual funds, 7% in the first half.

As a result, as I was mentioning, demand deposits rose 3% in the second quarter; time deposits declined 4%; and mutual funds that increased to the number -- the figure I already said.

With respect to credit quality the total non-performing loan ratio was 5.45% after declining for the second consecutive quarter, which means 7 basis points below the previous quarter, and 16 basis points with respect to December 2013.

We see a sharp fall in new entries, which were 52% below those in the first half of 2013.

The coverage ratios are improved to 67%, a high level for the mix of credit portfolio, where around half of the loans have a real warranty, which requires lower coverage. And then the units with a lower weight of real warranty, such as Santander Consumer Finance, Brazil or Mexico, have coverage levels close or above 100%.

Of particular note is Santander Consumer USA whose coverage reached 282%.

If we take a look to non-performing loans by unit, and especially in our four biggest countries by loans, we see stability in the four largest units, which represent 75% of our lending portfolio in the second quarter.

The UK, the US and Brazil, in particular, all have lower non-performing loan ratios than a year ago.

Spain's ratio continued to stabilize, and for the first time in many quarters it inched down 2 basis points.

Mexico, Chile, Santander Consumer Finance and Portugal, all of them have lower non-performing loan ratios.

In short, this is proving to be a good year in terms of evolution of the credit quality.

Taking a look to the solvency and liquidity ratios, the core equity Tier 1 is 10.92%, the same as Tier 1 capital ratio, while total capital ratio is 12.1%.

These ratios already consider a Spanish regulation homogeneous with European one regarding intangible assets.

On a like-for-like basis the core equity Tier 1 rose 15 basis points in the second quarter. The increase is basically due to organic capital generation.

In addition, there was an issuance of additional Tier 1 and hybrid debt for a similar amount that was amortized.

The leverage ratio is stood at 4.5%; stable in the quarter.

And with respect to the liquidity ratios, net loan-to-deposit ratio, it stood at 114% on a very comfortable level. In Spain it is stood at 87%.

The liquidity coverage ratio is above 100% in the Group, and also at the main unit, which is well above the 60% that will be required for 2015.

In short, we are very comfortable with our capital liquidity levels and our capacity to improve them organically.

Just a small comment on AQR and stress tests. As you all know, we are under our confidentiality agreement with the European Banking Central Bank. However, we don't change our outlook with respect to previous quarters, and we expect to go through this process without any impact at the Group level.

I will pass over the micro to Jose Antonio Alvarez who will comment on more detail on each of the Group units.

Good morning. Let me to go into more detail into the Group business areas.

We start with the chart that represents the distribution of the profits for geographies; small changes leading to the recovery in UK and in Spain. So UK represents now 20%; Spain 13%; and Brazil 19%.

Then US is 9% of the Group profits. And there are other four countries that represent between 5% and 8% that are Mexico, Chile, Poland and Germany.

Starting with Spain, as Javier has pointed out, the main change from the previous quarters has been the change in the trend of the lending. The lending rose 2% quarter on quarter excluding repos, as we will see in the next slide.

The other factor in the quarter, that was already in the previous quarter, was the continued reduction of the funding cost. You have in the slide the cost of the new time deposits that is running at 0.75% compared with one year ago, that we were running at 1.54%, double than is currently now. Those are the main marks on activity.

On results, well, I would say the [more] recurrent commercial revenues are growing. Net interest income plus fee income is improving by third quarter. Basically, it's on low deposit cost; the beginning of the recovery on lending; and higher fee from wholesale activity on mutual funds.

Operating cost reflect a downward trend due to the integration that we announced.

Loan-loss provisions continue to normalize, still above the average across the cycle, but is trending in the direction we told you in previous quarters. For the coming quarters we see similar trends, consolidating a greater contribution of this area to the Group profits.

If we go a little bit deeper into the balance sheet, the loan book, commercial loans grew [EUR3 billion], so over the previous quarter. They grew basically in the corporate and institutions, mainly in corporates. This is the Santander advanced initiative that we launched two months ago, is having very good results. We are capturing new customers -- new SME customers and our lending is growing in this area.

It's true that the lending is also growing to individuals. So in fact, mortgages grew 62%; the new production and the consumer credit 40%, but this is not reflected in the stock, because the higher volume of amortizations. But the lending is improving, is growing well, and we are relatively optimistic about -- to keep going in this direction.

In deposits the main two trends here, the downward trend in costs; and we have the substitution between time deposits that are falling, that go into mutual funds. In fact, we are growing mutual funds 37% with significant market share gains that is shifting from time deposits into our balance sheet products.

If we look at the credit quality that has been one of the main issues in Spain in the past quarters, we have seen a clear stabilization before they start to trending down in a significant way.

What we have seen in the flows, NPL entries are falling, net of recoveries are falling 90%. This is due to a big fall in gross entries by date in companies, mortgages and individuals, as you can see in the right side of the slide. We expect this to continue to go in this direction and probably to accelerate in coming quarters.

Going to Portugal. Let's say, a better macro environment; GDP growth and employment outlook is much better than it was in the past year.

Well, in relation with our franchise, it's the Bank in the country by any measure: by solvency; by credit quality; by the capacity to generate profits through the crisis.

And even in this deleveraging environment, we are gaining market share, even though our loan book and deposit book is still shrinking. But we are gaining market share in a market that still is in a deleverage mood.

In results we continue to normalize the profits. Net interest income went up due to lower funding costs. The costs continued on a downward trend and the credit quality has improved, or has stabilized, and we see improvement going forward. We see this trend basically to continue in the coming quarters in an environment that is clearly improving.

In Poland, a different macro environment here. The country GDP grew more in the region of 3%; low inflation, below interest rates for the standards of the country, 2.5%.

In this environment, the unit continues to perform very well. There is significant growth in lending in the quarter, 5% year to date, and 3% quarter on quarter.

In deposits, the reduction on the quarterly deposits coming from the former JV came to an end in the quarter. On the other hand, demand deposits and mutual funds are growing nicely.

The results, we have good trends in net interest income. Fee income is doing well. Trading gains went down. Last year we sold some ALCO positions, and this year the capital is again lower.

And, generally speaking, the unit is generating recurrent profits in the region of 20%, excluding the capital gains that I mentioned before.

So good news overall, and we expect this trend to continue as the economy is -- the GDP growth accelerates in the country.

In consumer finance business, their margin is much better. Car sales in Europe finally went up, so car sales increased 5% in our footprint; so it has been the first time in years.

In this scenario, the consumer business continued to deliver very good results. The new production in car finance rose 10%, double than the sector growth, and direct credit and cars almost 30%.

The results. Profit quarter on quarter went up 9% and 21% compared with the previous year. Our unit did very well. Pre-tax profit increased in all the large countries. The growth was especially strong in Nordic countries; Poland, Spain and Portugal.

We have two operations underway that improve our diversification and our presence: the acquisition of GE consumer finance business in Sweden, Denmark and Norway. We bolster our leadership position. We are already in those countries leader in market -- leader in auto finance and we will be the market leader also in direct credit and cars.

The other agreement here has been with PSA, the Group PSA Finance, to create a joint venture in 2015. This will [allow] us to improve and to reinforce our positions in the countries we already operate and entering other very attractive markets, such as France.

In short, the area is producing very good results and we keep a significant gap in profitability vis-a-vis our main competitors in this field.

The Spain run-off real estate, the exposure continued to fall. The reduction is EUR500 million in the quarter. So basically the reduction comes from the loan book, it's 25% year on year, while foreclosure remained, basically, stable.

The coverage ratio stays above 50%.

The losses in the first half were EUR307 million, lower than the EUR337 million in the same period in 2013.

We sold 6,000 units in the first half.

We continue to see the fall in credit in run-off in the coming quarters at the same pace as currently and a sales policy less aggressive in prices with foreclosures falling at a slower pace.

UK. Well, it's very well-known that the economy is -- the situation is improving. We are in the middle of a transformation of the franchise, but continue to deliver excellent results where we see the lending and deposits rose in the last two quarters.

This is a remarkable change vis-a-vis the previous year where we were reducing the mortgage book, because we changed our underwriting standards for interest-only mortgages, and this produced a reaction in the overall mortgage book.

And, deposits growth reflected the rise in demand deposits and they're up in the quarterly [ones].

This modest increase do now reflect the underlying -- the strong underlying transformation is happening in the UK in terms of products and revenue diversification.

Results profit was up 5% in the quarter and 54% compared with the previous year. The main driver has been the funding cost. The funding costs were falling above deposits and wholesale funding cost. There is good cost control and the provisions, given the very good credit quality keep falling.

If we focus a little bit what has going in the transformation process and in the franchise, what we see is, well, a very successful trend here. We are boosting retail customers; so the number of customers in 123 keeps growing. The balances in current accounts trebled in the last two years, so it's a remarkable success.

We are seeing -- we are capturing the highest number of switchers in the UK. That probably reflects the strength of our retail franchise in the market, and we continue to grow in the corporates well. As you know, this is one of our targets: to improve our position in this segment. And we are growing at 10%, and the corporate loans represent already 12% of the total loans in the book.

There is also -- not in the financial numbers, but there is also a significant improvement in customer service quality that probably explains our success in attracting new customers through our propositions to the retail customers.

In the US, well, the environment is not particularly good given the low level of lower level of interest, [as in other] jurisdictions..

The Group strategy is focused in growing in specific centers; commercial and industrial in the Bank; and consumers business through SCUSA; and improving the mix of funds.

As a result, Santander Bank did increase lending to companies and auto finance; demand deposits grew. SCUSA new lending rose not as much as in the previous quarter. The stock of credit, year on year, has grown at 21%.

New production in quarter on quarter fell 12%, because well, we apply tighter underwriting standards, given the trends we were seeing some in previous vintages coming from 2013.

Business volumes in Puerto Rico, they are the unit included here, are falling due to the economic situation in the island. And we are [reducing] our portfolios from to other [assignments].

The results. Solid results in the quarter, EUR270 million plus 25% quarter on quarter.

I think the profit grew in three units; Santander Bank Puerto Rico and SCUSA.

In year-on-year terms, profit was 22% lower in the first half, largely due to more provision at SCUSA, because its strong growth in lending without -- from provisions make -- explain this change.

Let me to remind you where we are in the Sicad. As you know, Santander Bank comfortably met the quantitative -- Santander Holding US comfortably met the quantitative capital requirements of the stress test, and we are top three among the US banks that went into the Sicad process. But we are working to strength the qualitative issues that were raised by the [Fed].

Incoming quarters in the business; we see growth in business and revenues, more stable costs and provisions, which will gradually feed through profits.

Brazil. The macro environment -- the growth is relatively subdued, only 1%. Inflation is running 6% and interest rates 11%.

So, the business, the lending was basically flat in the quarter plus 4% year on year, but flat in the quarter. Double-digit growth in funds: plus 25% in mutual funds; plus 5% deposits.

A greater emphasis in deposits and linkage of the customers. In results, the profit was 2.6% higher than in the first quarter, due to the evolution of costs and provisions.

We told you last time that we were focusing the [reduction in] provisions on costs. Costs continue to decline in real terms minus 5% year on year, while provisions continue to fall.

The first half profit was 3% lower year on year, because of higher taxes as pre-tax profits increased 3%. The growth compares relatively well with previous quarters.

I will now comment in net interest income and provisions in Brazil. A fairly stable net interest income in the past quarter, reflecting lower growth in lending and gross spreads that continue to be somewhat pressured by the change of needs.

We are growing] more in mortgages and large companies; and we are growing less in consumer-related lending. That explains why the net interest income -- how the net interest income behaved.

In credit quality, the NPL ratio was 1 percentage point lower than the beginning of 2013 and was more stable in the last few quarters. Coverage increased by 5 points in the period.

In Brazil, we see a country with underlying strength intact. It is going through a cyclical phase of lower growth. Some pressure on revenues from volumes and gross spread with a better revolution of net [split] up the provisions.

We are making efforts to improve efficiency and productivity, combined with the specific plans to increase linkage some business in the [ground].

Mexico. More or less like Brazil, growing less than the potential growth. It's growing around 2%, the country. In Mexico we are expanding activities.

We are opening branches. We opened more than 100 branches in the last 18 months, and this is reflected in our market shares that are growing in lending 110 basis points, and in demand deposits 100 basis points.

Lending, we have been having stronger growth in large companies, SMEs and mortgages, and less in cars and consumer credit. This explains why the net interest income is reflecting this different mix.

Results. The main developments are good quarter in gross income due to recovering net interest income, due to higher volumes and with lower spreads.

Positive results in trading gains from lower interest rates; stable costs in the last few quarters. I already said that we are opening branches, so because our growing is still a significant rate to the previous year, quarter on quarter, they were flat.

Provision increased mainly as a result of the growth on lending; this is in line. The cost of credit, it remained stable.

In short, a good quarter in results; is not still reflective in the year on year, because the higher costs of the expansion plan, which grow high in the market in target segments, going forward. We expect to get lending market share in the country.

Chile. The country is growing 3%. Deflation became higher and this has helped the results in the last two quarters; and officially, the rates are 3.75%.

In this environment, the Bank performed well in volumes and results. We are gaining market share in lending. We are growing 7% in SMEs, 16% in high-income individuals and 10% in companies.

In funds, we are improving the costs of growth in demand deposits and [the use] in time deposits.

In results, been high growth in net interest income, 27% year on year, due to our growth in lending; better mix of funds; and the higher impact -- the high inflation on the US portfolio.

In the last few quarters, the country has had a strong regulatory pressure; has been affecting net interest income and fee income mainly. Of note was the regulation of the [management] rate with limited spreads on consumer credit and card, and the charge of fees and commissions.

Costs in line with inflation; lower provisions than in 2013.

Chile results, as I said, were [apparently] benefiting from the positive impact of inflation on revenues. In any case, we grew this impact. Profits for the first half we have grown double-digit rate year on year, driven by good business dynamics.

In other Latin American countries, we are seeing good trends. In Argentina, the first half broke at EUR135 million, 30% higher year on year. Uruguay, profit increased 9%; and Peru 27% higher.

Lastly, we opened a new subsidiary in Colombia, Banco Santander de Negocios Colombia; that is starting operations in the country.

Finally, the corporate activities. The first half loss was EUR849 million, lower than the same period in 2013. The difference came, basically, there is several differences with the previous year; the most important one is the provisions.

Last year, we -- when we integrated Banesto, we standardized the portfolios to the most conservative criteria. At that time, we made a charge of EUR200 million. This is the difference in provisions, EUR200 million charged last year.

In the income, there is an improvement in net interest income. The lower cost of the issues was offset by lower trading gains.

The CEO now will make the conclusions of this presentation.

Let me just sum up the quarter. As I stated in previous quarterly presentations, Santander continues to improve the basic trends of its results at Group level, as well as at individual units.

This presentation has shown an improvement in the dynamics of commercial revenues in almost all units; nine units grew in the quarter.

Good management of cost structures, which is enabling seven out of our 10 core units to record a stable costs or declining in real terms. And all this before extracting the full value and the full potential of savings of the efficiency plans that are underway.

Lastly, the lower provision needs of the Group. Nine out of our 10 core markets show stable provisions or declines in the last few quarters, compared to just six markets or six units in the first quarter.

The combination of these trends has produced a radical change in the Group's underlying profit, as can be seen in the chart on the slide. While there were sharp falls in net operating income after provisions in the two previous years, in the first half of 2014, year-on-year growth was already more than 25%. This is 10 percentage points above the trend that we saw in the first quarter of this year.

This trend will continue, and will benefit from two types of actions. On the one hand, from the gradual implementation in all the Group units, of special plans to boost productivity, efficiency, and linkage of our clients.

In the second half we will extend the cost plan to units that do not have it yet; while seeking to warranty the results in the countries where the plan is already underway.

As I said before, in October we will provide more detail of where the plan fits, and any further expectations that we might have.

We will also work -- we will launch Santander Advance in places for SMEs in places like Mexico, UK and Portugal; and prepare the ground for extending it to Brazil and Chile in 2015; together with a number of new projects, working towards segmentation, commercial efficiency, quality of service, and transformation of our multichannel distribution network.

We will also continue to work for the Group's greater integration, with initiatives, like global job posting, that we launched this month.

On the other hand, from all the operation and strategic alliances already underway, which offer a future growth potential.

In the second half of this year, we plan to integrate the acquiring operation in Brazil, GetNet, which will increase our business.

In the fourth quarter, the consumer units in Nordic countries acquired from GE Money are scheduled to be incorporated.

And lastly, the joint venture with PSA in Europe will come into effect during 2015, enabling the Group to enter attractive markets like France and Switzerland.

I wrap up this presentation repeating the idea that I anticipated in the first quarter.

Grupo Santander is on the path to a recovery in profits and profitability that will continue in the coming years, and spread to all units.

Thank you very much.

(Operator Instructions).

(Technical difficulty) to the Q&A session. As usual from previous quarters, we will start by taking the questions that we have received via WebEx and address those. And then, later on, at the end, we'll take any additional questions that may remain over the telephone.

Also, as usual from previous quarters, we will try to group the questions around the major themes.

So to start with one major block of questions in the area of regulation, macro views, and strategic issues, we have a couple of questions on the TLTRO program announced by the ECB. We have questions by Raoul Leonard from Deutsche Bank, and Francisco Riquel from N+1. Basically, the questions go along three different areas.

What is the amount of [stake] that Santander may take from the TLTRO?

What is the impact in terms of the likelihood that we'll go to both of the auctions? Will we take the full amount that we're eligible?

And the third part, what is the impact that the TLTRO may have on the spreads going forward and the evolution of business activity in its main geographies?

With respect to the TLTRO, considering our business in Europe the maximum amount we could apply for in September and December is EUR9 billion.

We haven't taken a decision yet with respect to what amount we will be applying for. But, for sure, we will be going both to the September and to the December auction.

What do we expect in term of impacts on the spreads? Well, definitely you know, our view is that it will have some impact, although our view is that it will have a limited one, on spreads, specifically on SME lending.

Thank you very much. Now, moving on to within the context of Europe, we have a number of questions regarding the situation of Banco Espirito Santo in Portugal. We have questions by Mario Ropero, Fidentiis; again from Francisco Riquel from N+1; Benjie Creeland from Macquarie; Marta Sanchez from Keefe and Andrea Filtri from Mediobanca.

I would say that these three questions go along three major lines. First one is regarding the announced re-capitalization plan for the situation of Banco Espirito Santo, whether Santander will be interested looking at taking a stake in Banco Espirito Santo? Or what are our views in terms of potential M&A activity in the short term in Portugal?

Then the second line of questions along this line are broader on non-organic views both beyond Portugal, particularly; non-organic views in Spain; and in any other potential geography.

So, Portugal. We are very happy with our Bank in Portugal. Our Bank is the most capitalized bank in the country; it's the most profitable bank in the country. Without any quarter -- without any losses during all the process, which -- so doing very well.

We are gaining market share, organically, very well on current accounts, on credit, especially on SMEs. So the team is doing a great job and we're happy with what we have.

With respect to Espirito Santo, it is -- well you know it's our obligation in very market if there is any opportunity to take a look. However, you all know that any possible operation needs to meet our expectations, in terms of profitability and so on.

But I would basically say that we are very happy with what we have and with the organic growth that we're having.

With respect to other countries, again, let me repeat the idea that we will take a look to any inorganic operation that makes sense from a strategic point of view. Of course, that, at the end, it needs to meet our expectations in terms of profitability.

We don't see anything now in Spain. We were out of the auction of Catalunya Caixa, because we were -- our offer was not as good as the offer from another competitor. That's the story.

Thank you. Moving on to other geographies, but still in macro and regulatory issues. We have a question regarding the Sicad process in the US.

Raoul Leonard from Deutsche Bank, he's asking us on an update on the progress to pass the Sicad process in the next stage. What resources are we putting into this? Whether we can give some flavor in terms either of number of staff or cost? And to what extent that this limits Santander's strategic choices in the US?

Let me see. Well, it's important to remember that out of the -- today, out of all the banks that went through the Sicad, we are the third most-capitalized bank in the US. Just to remember this.

So from a quantitative perspective we are well. Within the Sicad, there were basically some qualitative issues that were raised by the Federal Reserve that drove them to reject our capital plan.

We are -- I think we're taking all the necessary measures to go through this process most optimistically on next year.

So it's costing us, of course, money. We're investing $85 million this year, with more than 200 people dedicated to the capital plan in the US. So I think we're taking the necessary steps on the right direction. I don't think this will change any strategic decision or mean any constraint to any options that we might have in the future.

We continue with the western hemisphere. We have questions regarding the situation in Argentina and the recent news regarding the potential default. We have questions there from Andrea Filtri, Mediobanca; Britta Schmidt, Autonomous; Marta Sanchez, Keefe; and Britta Schmidt, Autonomous as I said.

Basically, these questions are in two dimensions. What are our positon in terms of sovereign bonds held by the Group? What's the potential impact of selective default product Argentina?

And whether we have any particular view on what would be the impact also going forward, not just in the short run?

So with respect to Argentina, just to remember that we have the first private bank in Argentina, almost 10% market share. 70% of our P&L comes from current accounts and transactions by clients.

So definitely, a potential impact of the bankruptcy of the country would not affect us at all. We still expect that an agreement is possible. So we will need to see what happens in the next days.

In terms of sovereign bonds, we don't have US dollar sovereign bonds. In fact, I think that the figure is $2 million or $3 million. So as you see, we have almost nothing. And of course, we have sovereign bonds in Argentina in pesos for the -- in order to invest the excess deposits that we have. And there we have around EUR700 million. But, as I said before, they are in local currencies.

And there was another question on this, on Argentina?

no.

That's it?

Now moving on to more strategic issues, but still related with macro regulation issues. We have a question on the AQR profits, by Britta Schmidt of Autonomous.

Basically, whether we could give us -- we could give them any update on views from the AQR and the stress test? Has the assessment of the Latin American division already taken place? And do we see any foreseeable provision top-up required in any of our businesses?

Well, as I said during my presentation, we are precluded from giving information, due to the confidentiality agreement that we have signed with the European Central Bank.

The only thing we can say is just to reaffirm what we said on the previous quarter, in the sense that we don't expect any surprise; and we don't any expect any kind of impact out of the AQR and from the stress test. And specifically to the stress test, we are -- we believe that we will go through very nicely.

Thank you very much. Now, moving on to more strategic issues. We have a question regarding our outstanding offer for the minority shareholders in Brazil. And particularly, also what's the potential implications for the strategy of the Group regarding the different subsidiaries?

And we have questions from Andrea Filtri, Mediobanca and Andrea Williams. Basically, the question's [going]: are we targeting to release Brazil from the stock market there?

Are we planning to repeat this operation in some of the current list of subsidiaries; Polish, Mexico and Chile?

And on the other side, Andrea Williams asks when do we plan to do an IPO in the UK? And what would be the conditions for that to take place?

Okay. So with respect to Brazil, we also discussed about this on the previous presentation, where we announced the operation, the exchange offer to our minorities.

Santander Brazil will continue to be quoted in the markets. You know that the policy of the Bank is to have our affiliates independent in capital, or autonomous in capital and in financing, and to be quoted in the markets. It is our policy. So you can expect to see our affiliates quoted in the markets where they operate, in some time or whenever we deem appropriate.

The operation, the transaction in Brazil with the minorities is, basically, on track and is fulfilling its timings. So we expect that the exchange would take place, basically, at the beginning of October.

And the -- with respect to the UK IPO. Well, it's not on the table right now, so it's -- we will do the IPO of the UK whenever we think it's up a bit. But it's not on the table right now, so you cannot expect [to be there] for this year, or for 2015 at least.

Thank you. Thank you very much. Now, moving on to more strategic issues. We have a question on dividend policies by [Stanislav] (inaudible), BNP Paribas.

Can you please confirm your dividend policy for this year, for fiscal year 2014?

And if possible, can you give an outlook for 2015 onwards? In particular, do you consider the EUR0.60 current dividend policy is a floor for the future? And would you consider more cash dividends at some point, or buybacks, to compensate for this [diminution]?

Well, as you all know, the dividend policy is approved by the General Shareholders Meeting. So the policy for 2014 has been already approved, EUR0.60 in (inaudible) scrips. And the policy for 2015 will be approved in the General Shareholders Meeting of next year. So it's not -- we cannot comment on that.

Thank you. Now, one last question in the area of strategy. We have a question on our announced cost plan for -- from Raoul Leonard, Deutsche Bank.

Basically, he refers that we get back information in October. Whether we could give some color on what do we mean in terms of expectations on delivery on that plan? And what cost-income ratio target do we have in mind for the medium term?

We will come back in October, detailing where we're sitting in terms of the cost plan. If there is any review on the initial cost plan, because we are -- as I said today and on the previous presentation in April, we are delivering above the initial expectations. So you can expect to see the -- a revision of that plan.

And what we expect in terms of cost to income? What we expect is to be the most efficient bank in every country where we operate; and to continue to broaden the difference with our peers.

Great. Thank you very much. So we're going to move on now to a second block of questions regarding our financial management section. Here, we have a number of questions on the evolution of risk-weighted assets; capital; intangibles.

So let me start first with evolution of risk-weighted assets. Ignacio Cerezo from Credit Suisse is asking: what are the sources for the increase in risk-weighted assets in the second quarter? And what should be looking forward for the next part of the year, for the second part of the year?

Well, the increase, basically, comes EUR10 billion from the increase in credit. As you see, we have had an increase in credit balances of around EUR27 billion in the first half. And the other EUR7 billion comes from -- basically, from exchange rates.

What's the trend that we should expect with respect to credit? We hope to see -- to continue or even to accelerate in certain geographies the trend of growth in credit that we have seen in this quarter.

Thank you very much. We have also a number of questions regarding our capital ratios. In particular, issues related to our fully-loaded Basel III capital. Mario Ropero from Fidentiis, and Marta Sanchez of Keefe, asks us whether we know -- whether we could tell our ratio, and the outlook for the ratio over the next months?

Benjie Creelan from Macquarie asking us for an update.

And Marta Sanchez from Keefe also asks whether we can confirm our target for the end of the year for this ratio.

Yes. We would definitely confirm our target of 9% of Basel III fully-loaded for the -- for yearend. We are sitting on a very comfortable level of capital, both in phasing; that is (inaudible) today; and on the fully loaded, with respect to the level of risk that our business carries, that we hope to see confirmed through with the AQR and the stress test that is being carried out by the ECB.

Thank you, very well. We also have a number of questions on our ALCO portfolio, and the contribution of the ALCO portfolio to our results.

We have questions from Andrea Filtri of Mediobanca, and Francisco Riquel of N+1. Basically, asking us whether we can update on the portfolio. Was it the size; the maturity profile; the P&L contribution of the portfolio; the size of our bond portfolio in Spain? How do we see this -- how do we see the contribution-- how do we see the contribution-- how do we see the contribution to the P&L going forward as well?

As you can see on the balance sheet, the ALCO portfolio is always classified in available for sale. At the Group level, the available for sale portfolio is EUR76 billion, of which, EUR95 billion is sovereign bonds.

The main portfolio [used], well, is in Spain, the ALM portfolio is around EUR20 billion, fairly stable compared with the previous quarters. The second largest is Brazil, [EUR14] billion; and the other EUR3 billion US; EUR4 billion Poland; EUR5 billion UK; so small numbers in those countries. While the [RGT] for the ALCO portfolio continues to be the same; to hedge the site deposits.

The impact in net interest income is in the region of EUR400 million in Spain; less than that in Brazil, because in Brazil the slope of the L-curve is relatively small. We need to raise one up.

In the other countries, the impact in NII is relatively marginal compared with the NII of the different jurisdictions.

Finally for this section, we have a question from Francisco Riquel, N+1: whether we could elaborate on our EUR512 million announced impairment of intangible assets?

Well, this improvement of intangible assets, as I said before, is basically an IT; either software or certain hardware that we're not serving for the final; either that they were developed or botched, so basically we wrote them down. So all of it is related to IT developments.

Great. Thank you very much.

Moving on to the section on credit quality. We have a question from Mario Ropero of Fidentiis, whether we can comment on the evolution of the stock of our NPL and the evolution of gross entries going forward as well on the NPL [portfolio]. At the Group level, yes.

Our expectation is to continue to see the non-performing loan ratio trending down; and the cost of credit trending down.

Of course, we won't see at Group level a big deceleration with respect to where we are, but definitely these rates will continue to trend down during the next quarters and probably during the next year.

Very good. We also have questions on the evolution of provisions in Spain; where the [commonest] provision charges in Spain and Brazil; whether we could comment on the views for the second half of this year versus the first half, in terms of the evolution of provisions? And whether we could give some guidance in terms of the cost of risk in Spain?

Well, as we've been saying in previous quarters, what we are seeing at the beginning of the normalization of the cost of credit in Spain, but we should see in the coming years a moving down to between 50 to 70 basis points of a cost of credit.

Our expectations is that we are seeing this already and that we should continue to see this periodically during every quarter.

Thank you. A similar question for the UK from Mario Ropero of Fidentiis. Whether we could comment on what level do we think that the cost of risk should eventually converge to in the UK?

Well, as you know, in the UK we are changing the mix of business slowly, but changing the mix of business, because the mortgage portfolio is very big compared to the SMEs or the unsecured loans or whatever portfolios.

So I don't think -- even though we are changing this, I don't think we should see any big change on the NPL or on the cost of credit on our UK book in the foreseeable future.

Great. Thank you very much. Now we're going to move on to a block of questions by the different geographies starting with Spain. We have questions basically in all the different lines of the P&L starting with volumes.

Mario Ropero of Fidentiis has questioned us about the evolution of loan growth in Spain; whether we could comment on the breakdown by mortgages, consumers, SMEs and institutions?

Out of the volume growth, the net volume growth is coming -- the gross one is coming basically from companies and SMEs and from public administration.

We still see a decrease in the mortgage portfolio, even though it's much more reduced than in previous quarters. The increase in new production in mortgages is around 70% compared to the first half of last year.

Thank you very much. We have a number of questions also regarding the evolution of spreads both on the loan and the deposit side. There are questions from Mario Ropero, Fidentiis; Rohith Chandra, Barclays; and Francisco Riquel, N+1; regarding the evolution of term deposits. Whether we could comment on the evolution of the price of term deposits both in terms of cost of back book versus front book?

And also, whether we can make comments on the evolution -- on this evolution of the size of those term deposits going forward?

Well in terms of size, we don't see any substantial decline on the size of the term deposits. In Spain, basically, the deposit war as it was so called, is not there any more. In fact, we also think that this -- the TLTRO will help towards this.

The stock today is basically at around 90 basis points and it's trending down as we are seeing the new production being done at below 70 basis points. I think Jose Antonio has shown this on the slide.

So we should continue to see a trend in the decline on the cost of deposits during the next quarters.

Thank you very much. Now moving on to the loan side, we have a question from Ignacio Cerezo of Credit Suisse regarding the evolution of spreads for companies in Spain, for corporates.

Particularly, what's the relationship again between the evolution of spreads in front book and back book; more particularly SMEs but also corporates in Spain?

Well, we are beginning to see a little compression in margins although I would say it's negligible, especially in June and July, not in the previous months. So the production was basically more or less in line with the stock in terms of pricing.

In terms of margins, we think that we will continue to see some compression, although I believe that it will not be something very material.

Okay. We have a question on fees from Marta Sanchez of Keefe. She comments that fees in Spain look a little bit weaker than peers. So what do we think; can we give some flavors going forward regarding (inaudible)?

Fees in Spain have a double impact. One is the interchange fees for credit cards that will impact us in Spain between EUR45 million and EUR50 million.

And the other part is basically, out of the integration of Banesto with Santander, something that we mentioned in the previous quarter, the integration of the Banesto clients into the commercial offer that is [Comercial de Banco] with no fees, has also had an impact.

So I think this is -- these are one-offs, and we are seeing much better trends in transactionality; in ForEx; in insurance; or in mutual funds, that will -- that we should see in the next quarters.

Thank you. Now moving on to our -- to Santander consumer finance division, we have a question from Mario Ropero, of Fidentiis, asking us about how we see the business evolving, and margins particularly; whether we could comment on our expectations for loan growth and margins in the unit.

Well, Santander Consumer Finance is developing it's a business in a much better environment. So we're beginning to see a new car sales in almost every country where we are picking up.

On top of that, I think that the team is doing a great job, which -- we are growing at twice the pace that the new car sales are growing in all these markets. So we are optimistic in terms of volumes.

Margins will basically stay where they are, so they will basically stabilize; and we see cost of credit that is at historical lows, basically remaining where it is.

On top of this, of course, we will see from the non-organic operations in the Nordics, a -- and from the -- and next year with the operation on -- with the -- with PSA, a huge increase, of course, in volumes; and the -- a much higher contribution of this area into the Group.

Thank you. We also have a question on consumer finance, from Raoul Leonard, of Deutsche Bank. Whether we can give an update on the (inaudible) talks, JV talks, they mentioned, but we said that we signed already an agreement with them.

And also asking again about the outlook of the business, but also the -- Raoul asks particularly on the cost-income ratio, which should be the cost-income ratio on the Santander Consumer Finance division?

So with respect to PSA, a -- basically the bulk of it will come through 2015. It would differ according to the different countries where we established the different joint venture. So you can expect between the first quarter of 2015, and the -- basically and the third quarter of 2015 we'll have the bulk of the operations already in place in the different countries; at least in the most material ones, like France; Germany; or the UK.

And the cost-to-income of Santander Consumer Finance. We like to look at Santander Consumer Finance on the cost-plus-provisions-to-income, in order to see the profitability of the business. And we basically think that it will continue to stand where it is.

Thank you. Now we're moving on to our UK division. We have questions by David Vaamonde and Marta Sanchez, basically asking us about giving some flavor, going forward, for the outlook of the business. They both comment on the good performance of this division in this quarter.

So David Vaamonde more is specifically asks about whether we see the top line and the cost of risk evolving in the future? Whether we expect this trend from these parameters, going forward, as we go through the next quarters?

And Marta Sanchez also asks what's driving this good performance for this quarter? And to what extent can we expect this, going forward?

So with respect to the top line. The huge success that we've had -- that we're having in the UK in transforming Bank is fueling into the P&L.

This is basically with the 123 account on the transformation -- and the commercial transformation that we're doing at the Bank. We are a -- during the first half we have 300,000 new, loyal clients into the Bank. And we're opening 100,000 current accounts of -- every month.

Volumes in demand deposits or current accounts have increased [EUR35 billion] in the loans list, so this is having a huge success. This is helping us to drive down the cost of deposits in the UK, which has made the client margin move to historically-high levels, if we take a look into the last two years.

We do not expect any further increase in the -- in margin -- in client margin over the next quarters.

Growth should come in the next quarters from a growth in margins, in -- sorry, in financial income should come basically from growth in volumes. And there we expect nice growth in volumes to continue in the current accounts, where we are taking one each of four -- one of every four clients that switch accounts in the UK are coming to Santander.

And we expect growth, not only in SMEs and in companies, where we are growing at the nice level digit levels; but also growth in mortgages, which is basically a changing trend with respect to the previous quarters, when basically we are seeing this book deleveraging.

We expect now, basically, to grow in accordance, and to keep the market share that we have in the market.

And back to provisions. Even though we are changing the book in SMEs and in companies it's growing at a much higher rate than in mortgages. Due to the size of the mortgage book and the sanity of the market in the UK, we don't expect any material change in trend with respect to provisions.

Thank you very much. We also have on the UK a more specific question from Raoul Leonard, of Deutsche Bank, on the expectations for deposit spread and for customers (inaudible), which I think you have answered already very well.

Let me move on to Brazil, the next geography. Here we have a number of questions. Before we start, let me remind you that we are in the middle of a process of an offer to the minority shareholders there. So we're in a quiet period, so we're somewhat limited in the amount of statements we can make about this.

Nevertheless, I'll forward the questions. We have questions from Mario Ropero, of Fidentiis; and Benjie Creelan, of Macquarie. Basically, if we could give any update or guidance on loan growth for 2014, given the experience that we have had already in the first half of this year?

I would love to give it; but I am sorry, but I cannot give any guidance, as our lawyers have told us that, due to the reason that as Jose Manuel just mentioned, any forward-looking statements, or any guidance are -- we are forbidden to give them.

So, sorry to not comment on that.

Thank you very much. I think the same applies for another question that we have from Ignacio Cerezo of Credit Suisse, regarding the evolution of LLPs for the trimester and going forward for the rest of the year. So we'll skip that.

Now moving down to our last geography on which we have questions: we have a question on Mexico from Raoul Leonard of Deutsche Bank, asking us, basically, on the evolution of loan growth. Is that going to lead -- is that driving a surge in profitability?

What is our guidance for the balance sheet growth, going forward? And what sort of retail business is being growing as customer margins seem to be contracting? In what areas are we growing?

So with respect to loan growth. We have very nice loan growth in the first half in many areas, as I mentioned before. So it's in SMEs; it's in corporate; it's in mortgages.

However, a -- basically, credit cards and in consumer credit is not growing at the level we expected, probably because of the situation of economy. And this is basically the explanation of the -- for the margin compression that we have seen, because it's a question of a business mix. So very nice growth in mortgages, as I was mentioning.

And in SMEs, with the Nafinsa guarantee that, of course -- and in corporates that are all segments and products have a margin that are well below the margins of a -- of consumer credit.

And the -- we do think, definitely, that this growth in business, not only in credit, but also in deposits and in funds, we have gained 100 basis points of a market share in demand deposits, in current accounts.

So we believe that during the second quarter -- during the second half of the year we should see this growth in market share in different products filling in to the P&L.

Thank you very much. I have received one last question from an investor, from [Luke Nambadabni, of Vanguard], asking about -- basically what's the situation for -- regarding the Banco Espirito Santo?

I think we have answered this in the past. I don't know if you want to add any additional flavor to this?

Nothing else.

Thank you very much. I have -- I think we have addressed all the questions that we have receive via WebEx. I understand that we have no questions waiting for us via telephone.

So I believe we have answered all the questions. If that were not to be the case, and we have missed something, then we apologize upfront already.

But, nevertheless, I want you to know though, here, Investor Relations department we remain totally at your disposal, and you can always reach us with any additional questions you may have.

Thank you for attending this conference call.