Banco Santander SA (SAN) 2014 Q3 法說會逐字稿

Hello, good morning, and welcome to the third-quarter results' presentation of Banco Santander.

Let me begin with just some highlights of the quarter. The Group developed its business in the third quarter in an environment of slower growth. We've seen growth that is becoming a bit more sluggish in most of the economies where we have developed our -- where we develop our business.

As a result, interest rates continue to trend down. We've seen a decrease in interest rates in the Eurozone; basically, the Euribor to which they are referred most of our credits, in Poland, Mexico, and Chile, and they remain at historic lows in most of the economies.

In this environment, and as I commented last time, the Group has been focused on two aspects.

On one side, increased profits and profitability, implementing measures that enable us to gain market share in key markets and in key segments and products, and continue to improve efficiency and productivity.

Second, to maintain a solid, liquid and low-risk balance sheet.

In this context, the mean features in the third quarter were, on one side, attributable profit that continued its upward trend, absorbing the usual seasonal aspects of the third quarter in revenues and costs.

The basic lines of the P&L consolidated trends of the last few quarters. Volumes reflect the Group's strategy and segments, products and countries. We see a rise in lending in eight out of our 10 core markets. Also, in funds, we maintain the focus on reducing the funding cost. In risks, the number of the loan ratio dropped for the third consecutive quarter, and the cost of credit continued to improve.

We improved also loan to deposit to 112%, maintaining a very comfortable position in liquidity. And, we have an LCR of more than 100%.

We also very comfortable in capital. We have a core equity Tier 1 of 11.44% and a total capital ratio of 12.6%, following a sharp rise in the third quarter.

In short, the balance sheet and capital we feel they are very adequate for our business model, as the recent AQR and stress test have shown.

I will now develop each point.

With respect to the profit, the third quarter attributable profit we had of EUR1.6 billion, this is the highest for the last 10 quarters, and it's increasing 10% over the previous quarter. Profit for the first nine months of EUR4.36 billion, up 32% year on year; should we exclude the exchange rate effect, growth would have been higher at 45%.

From a qualitative point of view, the profit is of great quality, fueled by net interest income and fee income, which represents 92% of our total gross income. The rise was all recurring, as there were no capital gains in the third quarter from corporate operations, and those in the first half have no impact on profit, as we have -- as we showed on the previous presentations.

In short, a quarter which signals another step towards profit normalization and the Group's higher profitability.

Gross income rose in the third quarter; the highest for a quarter in the last two years. Better net interest income consolidated in the quarter, absorbing some of the macroeconomic slowdown in some countries and interest rate cuts that I mentioned before. We had a varied evolution by unit. The strongest growth was in Spain, UK, Mexico, and Argentina.

On the other hand, we had a fall in Brazil. Basically, it was the change of mix towards low-risk products had an impact on net interest income, as Jose Antonio Alvarez will elaborate later; and in Chile, where we have reduced revenues due to lower inflation.

Fee income was unchanged in the quarter, which should be seen positively, as the third quarter tends to the lower due to seasonal factors in Europe and in wholesale activity; and because of regulatory continue to be absorbed in various units, for example, the interchange fees in Spain, or insurance in Chile.

Lastly, trading gains rose strongly quarter on quarter, primarily because third quarter is compared with a very-low second quarter, some are [EUR100 million] less than the average of the five previous quarters. Furthermore, we have managed the portfolios of interest rate and exchange rate hedging, especially in Brazil where we saw lots of volatility, pre and post-election.

With respect to cost, we maintain the good trend in costs with a variable evolution by units. Our first block of countries where costs rose in line with inflation or below it. Of note were Spain and Brazil with falls of 7% and 5%, respectively in yield terms. In Brazil we have, in this quarter, two impacts. One is the consolidation of GetNet that incorporates [EUR90] million of costs. So, let's say, this change of perimeter brings [EUR90] million into the country.

On top of this, we have the review of the agreement with the trade unions with respect to salaries, with an increase of [9%]. However, we still think that leaving aside GetNet, Brazil would be flat in terms of cost this year.

The United Kingdom, where we see it is combining investments in its business transformation plan, with some efficiency -- with efficiency plan.

Mexico and Argentina's costs increased, because of the branch expansion and improvements in commercial activity -- in commercial capacity. We can include Chile here in the same line.

Lastly, we have the US, where costs rose significantly, due to the effort made in improving the franchise, and adapting to the regulatory requirements.

We have $100 million of more costs in -- basically, in new hiring's in starting our Santander holding in the US, in order to enhance our governance, and our enterprise-wide risk management.

In the short run, in the US as I mentioned this means an increase in the number of employees, as well as higher internal, and some consultancy costs.

Across the US we hired more than 400 people, developing new IT platforms, which meant an increase, as I mentioned before, $100 million.

In short, I believe we have a very good performance of the costs -- in costs at a Group level, which are beginning to reflect the measures taken in the efficiency and productivity plan for 2014 through 2016, and we are surpassing the initial forecast.

As I had anticipated in the last presentation, we are exceeding our targets for cost savings.

The quick implementation of efficiency measures in the main units of the Group enabled us to achieve in the first nine months the figure for the whole of 2014. This has led us to re-evaluate the plans impact and progress, which is reflected in new targets.

Increase the amount to EUR1 billion for 2014, compared to the EUR750 million initially envisaged, and the EUR2 billion for the period 2014 through 2016, compared to the EUR1.5 billion initially envisaged.

In 2014 the savings will come from, basically, EUR220 million synergies from the mergers in Spain and Poland; almost EUR800 million remaining will come from local efficiency plans, mainly focused in the review of distribution models, and intermediate and central structures.

By units, savings are concentrated mainly in Brazil and Spain; to a lesser extent in central services and the rest of the countries.

With these plans, we aim to increase cost in the coming years below inflation, while we have a bundle of savings, cost-efficiency measures on running the Bank and, at the same time, we continue to invest in our franchise.

We hope to maintain our differential advantage with the sector in terms of efficiency that is currently 17 percentage points, where our cost to income ratio sits -- stands at 47% compared to our peers at 64%.

Moving on to the quality of our credit, provisions in the first nine months were 10% lower year on year, excluding the foreign exchange impact, largely due to Spain, Brazil, the UK and Portugal.

The rise in the third quarter came basically from Santander Consumer US, as provisions in the rest of the units of the Group, as a whole, declined, especially in Spain and Portugal.

Santander Consumer US evolution reflects the higher new lending, and the rise in the average portfolio, close to 30% over 2013, in a type of business with high income, but high provisions.

Moreover, our coverage has been rising quarter after quarter to 296%, it was at 240% in December last year.

The cost of credit dropped to 1.52% in 2014, from 1.89% in September 2013. Should we exclude Santander Consumer US, the cost of credit at the Group level would be sitting now at 1.26%.

In short, the income statement has performed well quarter on quarter, and year on year.

In the quarter, we see growth in profit, backed by higher gross income. Year on year, and eliminating the exchange rate impact, we maintain a text book income statement where commercial revenues are growing at double that of costs; provisions are falling; and profits increasing at high double-digit rates.

Moreover, and as I said at the beginning, the profit for the first nine months incorporates no impact of the capital gains that materialized in the first half, as non-recurring funds were established in the same period for restructuring costs, deterioration of intangibles, and other provisions.

It also does not include the capital gains that will be generated in the strategic agreements reached in custody and insurance of consumer business in Europe, which we expect to materialize in the fourth quarter.

Moving on to the balance sheet, and beginning by lending, the recovery since the beginning of the year kept up in the third quarter.

In emerging markets there was widespread increase, very notably in Brazil where you should remember that first quarter credit was declining; second quarter was stable; and we see this quarter an increase of 4% in lending in Brazil.

Loans to companies rose in the UK.

Poland reflects the success of the commercial campaigns, and the launch of the new products.

Santander Consumer Finance continues to gain market share and grow its book.

We see a rise of 1% in the US, excluding the sale of unproductive assets and some securitizations.

And lastly, in Spain, we saw lending growing in the year although there was a slight fall due to seasonal factors. Portugal reflects a market that is basically deleveraging.

With respect to on-balance and off-balance deposits and funds, all units performed very well, being the result of joint management of cost control and marketing of products tailored to each market.

Poland, we had a big success of the campaign to increase the number of customers, especially on the affluent segment, improving market share and our liquidity ratios. More than 70,000 new customers were on-boarded in Poland due to this campaign with term deposits.

In Portugal we benefitted from some flight to quality with the events around the Banco Espirito Santo.

In Chile, Mexico, the US and Brazil we also grew very strongly in the quarter.

And lastly, in Spain, we combined higher volumes with a sharp improvement in the cost of deposits, as Jose Antonio will later show.

With regards to credit quality, the total non-performing loan ratio is 5.28%, it dropped for the third quarter running, 17 basis points in the quarter, and 33 basis points since December.

Of note was a further fall in the net non-performing loan entries. which, in the first nine months, were 54% lower than in the same period of 2013, especially in Spain where new non-performing loan entries came 94% below the same period of 2013.

Coverage increased to 68%; a high level for the mix of our credit portfolio, where around 60% loans have real warranties, which require lower coverage.

The units with lowest level of real warranties, such as loans specializing in consumer credit, Brazil or Mexico, have coverage levels close or above 100%.

If we take a look to the largest four units, we see that they all improved their number for the loan ratios in the third quarter.

Spain fell a little for the second consecutive quarter. The UK, US and Brazil have ratios well below those in September 2013, after further improvements in the third quarter. The rest of the units were stable, or better for the year, particularly Poland.

In short, we are seeing a good trend in our parameters related to credit quality, although there is still room for improvement, especially in Spain.

Liquidity and capital have also continued to improve in the third quarter. No news in liquidity where we remain very comfortable, both in terms of loan to deposit ratio, as well as the LCR, which we easily met and very ahead of the scale.

We see our share price in capital in core equity Tier 1 phase-in to 11.44% with a stable leveraging ratio -- leverage ratio of 4.5%.

The rise of 52 basis points in the core equity Tier 1 in the third quarter was due equally to the organic generation of capital, on one side; and on the other, the issuance of additional Tier 2 -- Tier 1, sorry, in September.

With respect to the fully loaded, our forecast is to end the year with a core equity Tier 1 of between 8.5% and 8.6%. A little below our initial projection, which, you remember, we were expecting to close around the 9%, due the [moderalization] of some corporate operations, which overall took away around 30 basis points; mainly GetNet in Brazil, the global integration of Santander Consumer US and the entry expected during the fourth quarter of GE Money in the Nordics.

We are very comfortable with our levels of capital and our capacity of organic generation, as underscored by the performance of the last quarters and our capacity to withstand adverse scenarios; as reflected in the recent comprehensive assessment and the stress test of the ECB and the EBA.

Moving to this exercise. This -- it has been a very, very rigorous, exhaustive and demanding exercise, and was done basically in order to re-establish confidence in the banking sector, increasing transparency; control; and providing more credibility to the financial institutions. It was obviously done as a prior step to the ECB assuming supervision of Eurozone banks that is taking place today.

The Group results, basically, reflect a good management and balance sheet quality, as well as the diversification benefits.

In the AQR the impact was 4 basis points, which reflect a very accurate valuation of assets and adequate provisions.

In the stress test baseline, the impact, we increased our capital in 161 basis points, which shows and confirms our strong organic capital generation.

On the adverse scenario, the impact was around 143 basis points, which was basically the lowest capital destruction in an adverse scenario of all our peers, which is definitely showing the benefit of our business model, very focus-orientated and very commercial, and the diversification of the Group that is absolutely unique.

Let me now look in more detail to the results of each of the exercises.

The AQR was a comprehensive and detailed assessment of the greater market exposures of banks, in order to assess that the provisions and collateral valuations are adequate.

16 of the Group's portfolios in seven countries were reviewed and in different segments: mortgages, companies, consumer, corporates, etc., which represented more than 50% of our risk-weighted assets.

The adjustments identified in the Group is the lowest among our international peers and has an impact of only 4 basis points on Group Santander core equity Tier 1 ratio; very far from the average 40 basis points for all the banks analyzed. In the case of our peers it would be 23 basis points, 6 times our adjustment.

In absolute terms the impact is also the lowest, EUR200 million, of which EUR50 million was due to portfolio reviews already provisioned in the first quarter. The rest due to extrapolation that does not need to be provisioned.

Moreover the methodology of the exercise did not allow us to consider excess collective provisions, which were around EUR1.5 billion only in the analyzed portfolios.

In short, this marginal impact on the Group shows that we have correctly classified the risks and coverage is adequate.

In addition, in terms of level 3 assets, we also have the lowest weight in our balance sheet, 0.13% of assets compared to other big European banks. This underscores the low complexity of our balance sheet, reflecting our commercial business model.

With respect to the stress test, we also obtained very good results in the EBA's stress test to measure hypothetical evolution of the institution, the baseline and adverse scenarios. We're among the entities generating the most capital in the base line scenario and the one with the least negative effect in the adverse scenario.

The baseline scenario, the Group increased its capital ratio by 160 basis points to 12%, in the adverse scenario the impact on Santander is 140 basis points to 9%, which is 350 basis points above the minimum required. The impact is very far from the average one of the banks analyzed, which is 300 basis points and on our peers 260 basis points.

In both scenarios Santander emerges as strengthened, and is one of the banks with the highest capital surplus in 2016. In the baseline scenario the surplus of capital over the 8% minimum requirement is about EUR22 billion. In the adverse scenario the Group surpasses by almost EUR20 billion, the minimum requirement of 5.5%.

These comments on the phase-in can be extrapolated in the evolution shown in the fully loaded. In the baseline scenario the capital ratio increased 290 basis points, being one of the banks that generates the most capital in this exercise.

In the adverse scenario we are by far the bank with the least impact, 33 basis points versus a range of 100 basis points to 400 basis points among our peers.

In short, the low impact clearly improves our relative position and shows the greater capacity of our model to withstand adverse market situations, due to our lower business -- low-risk business model and great business diversification.

Jose Antonio, do you join me to explain the areas?

Thank you, Javier. Maybe to elaborate on the different units, on the different geographies, as we do every quarter and to focus in the main points.

Starting with where the profits come from, the distribution of the Group profits by geographical area, we have three units, UK, Brazil and Spain, that represent more than 50% of the profit. The US generates 9% of the profits. Another four countries, Mexico, Chile, Poland and Germany between 4% and 8% each.

There is not that many changes in this pie this time, but the one that Spain is recovering some weight in the Group profits.

Starting with Spain. When I focus on the activity side, well, the third quarter is the low season in Spain. But having said that, we produce -- we underwrite new mortgages and credit to companies, as the next slide will show.

The other focus on the liability side has been in reducing deposit costs; this has been a trend. You see the new cost, the new time deposit cost is running at 0.55% and is fairly stable now.

In terms of results, we have -- we continue to have good trends in net interest income, growing 1.5% (sic - see press release, "1.4%") quarter on quarter and 9% year on year with a very good basis, mainly in the good evolution of the deposit costs, although we are starting to see some margin compression on the asset side, as expected with increased competition in the market.

On the other side, the fee income, trading gains and dividends were effected by seasonal factors in wholesale activity. Nothing to do with the retail business; that is performing more or less in line with the previous quarters.

The costs fell as a result of the integration, we announced to you this. The loan-loss provisions continue to normalize, as we were expecting and we were communicating to you in previous quarters.

Going to the volumes, well, we're outperforming the market in terms of lending. We saw that in the quarter the lending fell EUR1.6 billion in the quarter. But, compared with December, we are one of the few entities that are growing and we expect to finish the year growing in line with what we were [you] announcing in the previous quarters.

Corporate new lending rose strongly. SMEs new lending 34% up in the first nine months, back -- at the Santander Advance that we launched back in March; also, the high new lending to large companies, plus 23%, in the nine month [2013].

In deposits the demand -- the [sight] deposits grew EUR5.2 billion; some retail funds also rose. Loan to deposit improved 25%.

So generally speaking, good trends and activity, we are gaining market share on the asset side and mutual funds, as you can see in the numbers.

In relation with the credit quality, one of the main issues in Spain. Spain no news here, but one that the net of new entries were 94% lower than in the first nine month of 2013. That is good news mainly looking at the future loan-loss provisions that we need to face in coming quarters.

When you see the growth centers you have the numbers; you have all the numbers heading in the right direction. Companies with a real estate purpose falling, and mortgages continue to fall. Consumer lending the new entries continue to fall. So, good news in this side, there with -- relating to the P&L in the coming quarters.

Going to Portugal. Well, on the microeconomic a little bit better profit. The GDP is growing again.

Our Bank in Portugal, as you know, is the healthiest in the country, with high solvency; better quality than the average; and producing steady profits through the crisis.

In relation with activity, we have a strong growth in deposits. This is due to flight to quality, due to the events that have happened in the quarter in the country.

At the leverage environment, we are growing -- we are gaining market share in lending in the last two months, but on individual earning companies.

In terms of profits, we are in a stable commercial revenues; the costs very well under control; some fall in provisions due to improving credit quality; and we expect the provision -- the profits continue to normalize in the coming quarters.

In Poland, two main points to highlight here. The first one is strong growth in volumes in the quarter, both in loans and deposits. In deposits, we launched a campaign that produced this -- such a big uplift in deposits. The loans are growing nicely, 2%, quarter on quarter. [Moves] not only in consumer credit, leasing and factoring.

Results, probably, the numbers are not showing the underlying trends, because last year, we've got significant trading gains. This year, the underlying revenues are growing. The commercial revenues are growing very nicely, compared with the second quarter, you have some one-off events in the second quarter.

Stable costs and provisions. The credit quality is good. And in short, the unit continues to post better quality results and those of the peers. We're outperforming the peers in an increasing difficult environment, due to lower rates. Probably the rates are the lowest we've seen in the country, and this affected the banks that are with such a low loan to deposit, like BZ WBK.

Going to the consumer finance business. First point, the market, car sales are growing in Europe, 5%. Our production is growing 13%. That means that we are gaining market share in a market that is growing.

When it comes to the results, we have -- we show higher gross income and net operating income after provisions in the main unit. In the third quarter, the revenues were solid, at a three-year high. Lower costs and higher provisions, partly due to the sale of portfolios and contingencies at the sector level in relation with upfront fees in Germany.

Well, there is significant operation is underway here. We bought the business in Nordic countries that will come this quarter; and agreement with PSA Finance that we will be able to strengthen our position in this business next year, particularly in France, where we don't have presence.

In relation with the run-off real estate in Spain, I would say nothing new here: a steady decrease in volumes, 19% in the last 12 months; lending 31% down.

We have sold 8,000 units this year. We are focusing this year in disposing in an orderly way. We've not being particularly aggressive in prices in the disposal of those assets.

In relation with the results, a little bit lower losses compared with the previous year.

In the UK, well, I would say good news here. The economy is doing well. We are in the process of the transformation of the franchise, as we shared with you in previous quarters. This combination is producing very good results.

With a small change in the way we are producing results, the spreads continue to be the main driver, but we have some growth, both in mortgages and in companies.

We have better [use of] deposits, as a result of the 123 strategy, and this means that we are able to translate this into solid results, with a stable profit in the third quarter. The first nine months growing 43% year on year.

Net interest income growing. Costs are well under control. Provisions at the minimum level, reflecting the underlying quality of the portfolio.

Going to the commercial side, this shows clearly the effort we are making in order to diversify the business, and to transform the franchise.

On one side you have [clients recovering] with 123 customers is growing at a rate of 100,000 clients per month, and GBP1 million per month in current accounts, where the balance stands at close to GBP38 billion, plus 54%, year on year.

While we are the Bank -- the leading Bank -- the market leader in switches, 25% of the switches come to us. We are continue to extend our relations with companies; we are growing lending to companies 9%, much faster than the market.

Finally, well we are investing in our franchise in order to strengthen our position in this world -- in the SME world.

In short, good results, good business dynamics, and we still see some room to reduce the funding costs, going forward.

In the US, well, we have two focus here. One is building the commercial franchise, and the second one is to invest -- to continue to invest in the regulatory developments, in order to comply with the expectations of the regulators.

On the activities side, some changes here. We are growing the loan volumes in the Bank, 5%. At the same time, we are changing the mix, more into C&I, commercial and external real estate, and we are increasing the quality of deposits; two remarkable developments in the Bank side.

I think the SCUSA, in the consumer business in the US, well, on the back of the client operation, the new lending growth has been pretty strong: 7% more in the second quarter, and 34% above 2013, due to Chrysler.

It's true that the majority of these loans, we sell back to the market, and our balance sheet has been relatively stable.

In Puerto Rico, still the leverage [mood], in order to improve spreads and reducing some exposure that we don't like very much, at the this point of the cycle in the country.

Well, in terms of results, gross income developments are very good. We are growing 18% year on year, in the first nine months; net income 13% (sic - see slide 33, "13.8%") up.

Well, it's true that costs, the rising costs is basically due, as Javier has stated, that the fact that we are working hard on enhancing the franchise and fulfilling regulatory requirements.

This means an increase in structural costs in the short run. This is a part of multi-year plan and it will enable us to improve the quality of our risk-management models; our database strength and basic control functions; and improving our business model. Well, for sure, at the end we will have much-better franchise and more integrated and with better information systems.

Very good evolution in provision; the credit quality is -- in Santander Bank the credit quality is extremely good.

In SCUSA, the business, the consumer business provision increased in the quarter and year on year, mainly due to greater new lending. So when you compare year on year, the growth in the portfolio has been more than [40%], so this explains the majority of the increase in provisions. It's true that also, depending on what we keep in the balance sheet, between short prime, near prime and prime, this may change, quarter on quarter.

Going to Brazil. Well, first let me to give numbers of tender offer, the result of tender offer that we did, a voluntary insurance change. It was effected by 55% of the shareholders. Our stake is now 88.3%, and we issue [3.09] of our capital to change for those shares.

Having said that, this is summary -- short summary of the tender offer. We are happy with the results. We state clearly that we were happy to give minority shareholders. At the same time, we were offering them if they want to sell the shares. And the aim was achieved.

On the results, the macroeconomic developments in the country, the GDP is basically flat, growing very little; inflation relatively high; and interest rates are still -- they were raised 25 basis points, couple of days ago.

In activity, a better trend than in previous quarters. Lending accelerated, growing 4%, quarter-on-quarter, and 6% year on year.

The growth in customer advances is good, 13% in mutual funds -- better in mutual funds, 13%, than in deposits, 4%. And we are growing faster in demand deposits.

Results, the main development, well, year-on-year, is -- we have profit growth, at the bottom line. That has not been the case in the previous three or four quarters.

This was mainly due to lower provisions and very good cost control that rise only 1.5%, well below the inflation rate. Well, there is a change in perimeter in the quarter, due to GetNet.

Excluding the impact of the GetNet [entering] in the third quarter, the increasing cost was less than 1%, when you compare this with the 6.8%, so how [big] -- has been, therefore, in keeping the costs well under control.

If we look at the third quarter, profit was up 2%, vis-a-vis with the second once. Gross income rose; commercial revenue flat; and higher trading gains, remember they were very low in the first quarter, so it's not outside what is -- should be normally in the Bank.

While the higher costs, I mentioned (inaudible) GetNet also, the agreement with the unions that increased the salaries in the country, around 9%. Small raise in provisions, in line with lending growth.

When we go to the -- in more detail to the net interest income and provisions, what you have, the first thing you have is net interest income reflecting change in mix.

If you go at the bottom, you are seeing that we are growing basically in large companies 11% and mortgages 8%. When you go to the most-demanding side, in terms of provisions and higher spread -- relatively higher spread, so the individual and the SMEs companies, we are not growing; we are basically flat on this side.

In net terms, when we look at the net interest income after provisions, it was 14% higher than in the first nine month of 2013. This is what explains the trend in the P&L.

The credit quality is improving, also changing mix affects this. There is a downward trend in NPL ratio, 50% in the last -- 50 basis points fall in the last 12 month. And we continue to see evolution in the [early] arrears over 90 days, and between [15] and 90 days.

In short, we continue to see a underlying strength and potential growth in the country, although we are in a cyclical phase of lower growth.

The pressure on revenues, from lower gross spread, with (inaudible) with the evolution risk and cost of credit that is falling, and while we are making significant efforts in improve efficiency and productivity in the country, as I -- as we said before, and our CEO show in our efficiency plan, in the uplift of our targets in the efficiency plan.

Going to Mexico, well some improvements in the GDP trends, although it's growing below what we were forecasting one year ago, it's 2.4% for 2013. While the forecast at the beginning of the year was more in line with 3%/3.5%.

Interest rates a very low level. We are growing much faster than the market, gaining significant market share. So in lending, more than 100 basis points, and demand deposits, more than 45 basis points, were partially due to our branch suspension plan, that has two effects.

We are gaining market share at the same as our costs, although stable in -- compared with the previous quarter, we open 134 branches and 32 in the third quarter, displaying why the costs are growing at 9.8%, although in the quarter were basically flat.

In lending we are growing mainly in SMEs and mortgages and less in consumer credit and cash.

In gross income, good performance of the net interest income in the quarter, 3% quarter on quarter.

Well, we have low interest rates, as I mentioned; a stable cost in the last few quarters, although in the year we are growing at the rate we mentioned.

And provision, growth was less than the recent lending, and the increase in the third quarter was due to one-off entries of two companies.

In short, improved trends and results. It is still not still reflected in profit, because the higher costs from the expansion plans, and the higher tax rate.

In Chile, well, the economy is growing below the average growth of the country in the last 15 years, only 2%. Inflation relatively high, 4.9%, and interest rates relatively lower, 3%.

Our Bank has performed pretty well in volumes and results. So you see the volumes growing; loans and deposits are 8% and 12%. In funds we are improving the structure and growing strongly in mutual fund.

In results, as we were mentioning before in the previous quarter, we profit from relatively high inflation that translates into the P&L through the dual-currency system of the country.

In this quarter the inflation was significantly lower and is kind of -- well, the comparison is a little bit the result of these two facts being relatively high in the first/second quarter and relatively low in the third quarter. That explains the difference in the results.

When you look at the underlying profit, the trends are pretty good in the country.

So on top of that, increase we have some strong regulatory pressure that has been there in the country for the last two years.

Costs were in line with inflation.

Provisions lower than 2013; nothing to say there.

In short, I will say excellent results in the first nine months with some positive impact coming from inflation in the first two quarters that was negative in the third quarter.

In other Latin American countries, we've very few words to say about this.

Argentina, EUR220 profits (sic - see slide 38, "EUR220 million"), up 35% year on year, and the gross income growing in a relatively high -- or high inflationary environment, 37%. Uruguay profits increase 11%; and Peru 28%.

Lastly, Colombia, where our new subsidiary, Santander de Negocios Colombia, began to operate in the quarter.

When it comes to corporate activities, lower losses than in 2013, mainly due to the reduced provisions this year compared with 2013, where it was a chance for integration in Spain, related we are applying the same criteria to the portfolios of Santander and Banesto to the most conservative one at that time.

The improved gross income comes from the lower costs of funding the -- in the wholesale funding, reflected in the net interest income and higher trading gains in the third quarter, largely due to two main factors: the parent bank inter-rate management; and significant impact of exchange rate [with] hedges here in the corporate center.

I now hand back to Javier, the CEO, to wrap up this presentation.

Let me now just sum up. As I said in previous presentations, Santander continues to improve the basic trends of its results.

We've seen a solid dynamic of commercial revenues in a less favorable environment, due to low interest rates, and more slowdown in economies.

We are moving ahead with growth in loans and funds, compatible with our reduction in the cost of deposits in most of our units.

Also noteworthy is the good management of costs and the structures, enabling seven of our 10 core units to operate with a stable costs, or lower ones in real terms.

The efficiency and productivity plan is already bearing fruit. The goal for savings for the whole 2014 was reached in September. We still see savings that can be made, so we have raised the goal by EUR500 million in 2016, to EUR2 billion.

Lastly, the Group continues in the path of normalizing its loan-loss provisions, with seven of the 10 units showing a stability or declines in the last few quarters. Areas such as Spain should continue to improve, given the evolution of the credit quality.

All these trends signal a radical change in the Group's underlying profit compared to previous years, as the chart in the slide shows.

Compared to sharp falls in the net operating income after provisions in previous years, in 2014 there is year-on-year growth of around 30%, which continues to accelerate over its -- over previous quarters.

The improvement will benefit, basically, from two types -- two type of actions. On the one hand, due to the gradual implementation of various of the Group's units of specific plans to improve productivity, efficiency, and engagement of customers.

In the fourth quarter we will complete the roll-out of the costs plan, with the incorporation of units of a smaller relative weight.

We will also continue to extend Santander Advance. After Mexico in September, and Portugal last week, it is the turn of the UK to breakthrough in the fourth quarter, before we jump into Brazil and Chile at the beginning of next year.

Moreover, and in parallel, and as I will show you later, we will continue to work on many digitization initiatives, and the integration of the Group through the [general] posting, SANTANDER ideas, one; and two, the engagement survey for [183,000] employees, and so on.

On the other hand, some strategic operations and alliance is underway, and which offer a future growth potential.

In Brazil, after incorporating GetNet in the third quarter, you know it's the acquired business, we are going to out into effect our joint venture with Bonsucesso, to explore payroll lending, which has been decreasing all this year; which will increase business and engagement.

In consumer credit in Europe, the business acquired from GE Money in the Nordic countries will be incorporated in the fourth quarter, in order to create a management area whose contribution to the Group in the medium term could be equivalent to Germany, in our view.

Lastly, and in relation to the joint venture with PSA in Europe, scheduled for 2015, we are bring -- we are working hard to bring forward the contribution of the business to the Group's results.

All these measures reaffirm the idea I put forward in previous presentations. The Group has begun to recover profits and profitability, which will continue and begin to spread to all units in the coming quarters and years, even though we see a more difficult environment, due to the lower GDP growth and to the lower interest rates -- and to lower interest rates for longer.

Let me just finish, because we're always saying that we are improving our franchise; and just to show you some of the activities we are doing.

On one front we are trying to enhance and having -- focusing on customers, and having an integrated view on a -- around the customer.

We -- the target was specially to improve our data quality and our analytical capabilities; try to maximize the business effectiveness, with very powerful commercial tools, in order to deliver to each customer what he needs; and have a more customer-fit value proposal for each customer.

The actions which we put in place are basically, we're improving our data quality, through IT and operations on a risk-data aggregator.

We have implemented advanced business-management tools, like the Neo Front that we mentioned there before. And I will now show you whether -- what are the plans, in terms of implementation in the different countries?

We have worked hard on segmentation, and incorporated specialized models and value propositions for each segment, like private banking, Advance for the SMEs, or a -- or the affluent segment.

Just a quick look to what is the Neo CRM that we have in Chile. That is an advanced business-tool model at the commercial front, for all bankers to be -- to use when they are dealing with customers; but also -- not only at the branch level, but also on a multichannel basis.

It provides a 360-degrees customer view. It helps in terms of customer integration, in order to truly understand how the customer is integrating with us. So for example, he goes into a branch, and the banker can already see if this client has done a simulation for a mortgage through the Internet, and he can continue to try to close the sale on the spot, and to continue with the advice process.

It brings, of course, business intelligence, in order to try to find more areas, in order to increase our wallet share with customers, and try to cover more of their needs.

Very user-friendly, which is absolutely key.

It is being implemented and will be implemented during this quarter in Brazil, in the UK and in Spain. And in 2015, it will be implemented in Mexico, Poland and Portugal.

Of course, we are taking the Neo CRM of Chile as a base, and it will be adapted to the particularities of each country, in terms of the customer needs, and also the maturity of our franchise.

Just to give you an idea in terms of figures, and I don't want you to extrapolate this to what could be the fact in other countries. In Chile, we saw an increase in commercial productivity of 53%, since we implemented the Neo CRM a couple of years -- more than a year ago. And the satisfaction of our bankers, in terms of the Bank helping them making their job easier, has increased.

On the other hand, we are working on the distribution model. Our targets were, basically, to redefine the branch model as a more valuable channel, taking into account how the customers are changing the ways they interact with the Bank.

In this sense, also, we needed to enhance our digital channels and, of course, take a very close look to all our customer journeys, in order to improve our customer experience; trying to generate a simple banking model.

We've been reviewing our branch model. And I will show you later that we have already some proof in place in Argentina and Chile.

We have a -- at the corporate level, we have developed projects that are being implemented in the countries by the local teams, to develop channels.

And we have projects to improve the critical processes experienced by customers on the day to day. They're very critical processes, like the onboarding; opening an account; applying for a mortgage, which are, basically, in every country being addressed, in order to guarantee -- that is a very streamlined process, which guarantees quality and reduces costs by eliminating brokers in all these processes.

Just a quick look -- I'm sorry for the chart, because it's full of flags and data. But as you see, we're working on a multichannel approach on the mobile, with our project that is called Mobile First, where we will be implementing the personal financial manager before the first -- by next year in most of our countries; the mWallet on the mobile implemented in Spain this quarter; and in [Open] Bank in Poland, the UK, first half of next year, and second half in Chile and Brazil.

All the notifications and alerts, and the wall, will be also, in Spain, in place by this quarter.

We're working also on the self-service and the ATMs, in order to improve the quality of our ATMs, and increase the functions of these ATMs, to make them more customer-friendly.

We began already in the US and in the UK, where we will be launching them in Spain. But as you see, also Brazil and Portugal are on the spot.

Working also in the Internet, of course, for channel analysis, and for pull sales; our Wi-Fi on branches. Especially, we want our bankers to onboard customers showing into our mobile capabilities, in order to show them how to work with this tool.

Enhancing, of course, with the advanced project, our digital companies' platform. For SMEs, where we'll have new homes in Spain and Brazil; and mobile apps for SMEs in Spain and Poland just this quarter, and next year in Brazil and the UK.

We're also digitizing some banking services where, basically, we're trying, the bankers, through the -- with an iPad, in order to have their bank there, so they can advise and close transactions and operations with the clients at their office or at their home, out of the branch.

This is an experience we have imported from Mexico, where it's called (spoken in Spanish), which has had great success in terms of productivity and in terms of a quality of service, and satisfaction of our bankers. So we are spreading this to some other countries.

In the contact center also from Mexico, we had the voice print, with very good success, in terms of the satisfaction of customers; and the cost reduction in terms of the number of times of every call, which will spread -- especially in Brazil, where we receive more than 30 million calls every month.

We're working, as I was mentioning before, on the branch model, with some prototypes in Argentina and in Chile. We'll have also some prototypes in Spain by the second quarter of 2015, and spread this to Brazil and Spain.

This is just a few examples, but I think it would be [most] noteworthy to show you facts of things that are implemented, or, basically, some that are being implemented, that are our day to day business, in order to make a more customer-centric bank, and try to enhance the engagement of our customers.

So thank you very much. We now move on to the Q&A.

(Operator Instructions).

(technical difficulty) to continue to send questions you may have. As usual as well, we will address the questions received by major themes.

Starting with the first major theme, we have a range of questions that have to do with TLAC, and the process of new regulation regarding this areas; as well as our plans to issue our issuance that we have done on future plans on issuing AT1/Tier 2 capital.

In this regard, we have questions from Stefan Nedialkov from Citigroup; Francisco Riquel from N+1; Sergio Gamez from Bank of America; Britta Schmidt from Autonomous; and Andrea Filtri from Mediobanca.

These questions come -- most of them be summarized in, basically, three things: whether we have a clear view of what the impact of TLAC will have, in terms of our liabilities going forward, the structure of liabilities? Whether we have any sense on where the amount of [issuance] or what plans do we have for the remainder of 2014 and 2015, both in terms of issuance of AT1 and Tier 2.

Yes. Very good. Sorry. Well, the first thing, with respect to TLAC, you should all remember that Santander is organized from a resolution perspective as a multiple point of entry. So the TLAC should not be addressed at the consolidated level, but it should be addressed at the different units' level.

So in that sense, our initial approach is that it shouldn't have a meaningful impact in any of our affiliates, as we are well covered with the initial assessment we have, in terms of where TLAC should stand, even though we still don't have what will be this level.

In terms of issuances, we continue with the plan; that was, basically, to have, more or less, around 1.5% of additional Tier 1, and 2% of additional Tier 2 in the mid-term. So we will continue with our issuances, in order to meet with these targets.

Thank you. Second range of questions also regarding with the impact of new supervisory regulation changes; have to do with the new regulatory authority, and our relationship with the ECB, particularly in the range of our dividend policy.

So we have questions from [Stanislav Reuni], BNP Paribas; Juan Carlos Calvo, Espirito Santo; Daragh Quinn, Nomura; Britta Schmidt, Autonomous; [Victor Rodriguez], [FDA]; and Raoul Leonard, Deutsche Bank.

These questions, basically, address three issues. One is, whether, with our existing level of capital, and particularly the guidance we've given on fully-loaded Basel III, we think that we can continue to maintain the dividend payout as we currently have it.

Second, whether we have had any indications from the new regulator, from the ECB, about regarding our dividend policy and its application going forward.

And, third, range of questions also having to do with the fact that are we planning a change in the timing of our dividends due to fiscal aspects in Spain.

Okay. So, the ECB's will begin to be, today, the supervisor. We have had lots of contacts with them, basically, in order -- at every level in order for them to better understand Santander. So hopefully, through the joint supervisory teams by the ECB and the Bank of Spain, this should be achieved.

With respect to the dividend we have received no indication.

With respect to the dividend policy, as you know the dividend policy is set at the General Shareholders' Meeting every year. We have already approved the dividend policy for this year. In fact, in terms of timing, we are not changing. We have already announced the complementary dividend for January 2015.

And the ambition is that -- that's it.

Thank you. We have a third question of the area regarding AQR. We have a question from Mario Ropero, Fidentiis, who's asking whether the impact from the AQRs are booked to this quarter. And if any -- or whether there is any expected further impact to book next quarter?

I should say that we have only EUR51 million of specific provisions identified in the AQR, and those have been already booked in the first half of the year. So there's really no additional expectation of any booking in terms of the AQR costs.

So moving on to the cost section, our announced new cost targets and our cost plan; we have a number of questions related to this. The questions basically come from Sergio Gamez, Bank of America; Britta Schmidt, Autonomous; Ignacio Cerezo, Credit Suisse.

There are two range of questions. One, whether we can give a little bit more flavor on where those cost savings are going to be coming from, particularly to what extent will they be coming from different geographies, or just across the board. And whether they're going to imply branch closures or reductions in staff.

And the second range of questions has to do with the impact that these cost savings will have on the P&L going forward. Particularly, whether the additional costs will all directly go into the bottom line going forward, and whether there are any expected restructuring plans, or restructuring costs in particular, resulting from these additional cost savings?

So in terms of the geographies, you will probably see something similar to what you have seen for the cost plans for 2014, were basically the biggest units, let's say, Brazil and Spain, should account for the bulk of it, even though we are wide-spreading all these costs -- our cost efficiency -- our efficiency plans into the smaller units. So everybody will contribute into this, including the corporate center.

In terms of impact on P&L, we have -- our aim is our costs to grow below inflation at a Group level, in terms of composite inflation, and in every country where we are. So basically this should mean a reduction in real terms.

What we are looking forward is to -- we need to invest definitely in the franchise. You've seen already all the plans we have for 2014, for 2015 and beyond, in terms of transformation of our commercial franchise.

It's not only about the digitization at the customer level, but also in quite a number of areas. We will use some of these efficiencies that we are funding on the (inaudible) Bank, in order to enhance our franchise in the countries where we are.

And in terms of restructuring costs, we don't expect to have a significant restructuring cost. What we expect is that this should mean -- we should have you know a bank that is simpler; that is more customer friendly, where our bankers have better tools in order to assess our customers; and where the customer journeys are, at least, if not the best, at least as good as the best.

Thank you. Now we have a number of questions regarding the outcome of our tender in Brazil, the tail-off effects from that.

We have a question from Francisco Riquel, N+1; Juan Carlos Calvo, Espirito Santo; and Sergio Gamez, BofA Merrill Lynch. These questions basically comes down to two areas.

One, whether we have a new outlook regarding the performance of our Brazilian franchise, particularly within the context of a macro that has more deteriorated?

And the second one has to do more with the technicalities of the [tailwinds] of our tender, particularly whether we expect any flow back.

What is the meaning of the announced share buyback of shares that the Brazilian subsidiary has announced this morning?

So with respect to the performance of our Bank in the economic environment, I said before in previous presentations that the results of our franchise in Brazil will be more due to our work and our success or failure than on the economic conditions.

And I stand to what I say. And I am sure that all the work that we are doing there will have a reflection on the results of the Group.

Let me now move -- Jose Antonio, can you explain on the tender?

The technicalities of the tender in Brazil there's a couple of events there. The first one that may produce noise in the price of the share of our subsidiary, the first one is the new weighting if any in the main indexes, so particularly Bovespa, Morgan Stanley, measure market indexes, that is happening around today or tomorrow.

The reason why our unit in Brazil decide to ask the Board for having more room in treasury stock was partially due to not to have a significant disruption in the price formation in the market in these two or three days.

In relation with the other relevant data for this, and please confirm with the Investor Relation department, what I have in mind is the shares we issue of the parent company start to trade in the market November 7, but please confirm that -- this.

The [IR] is 10th of this month. But confirm this with the Investor Relations department, because I may be wrong and this maybe one change, one day. Those are the technicalities in relation with the tender offer.

Yes, please come back to us with the specific dates and we'll be happy to provide you all the necessary information after this conference call.

Moving on to a different area of regulation, we have a number of questions regarding our situation with the SICAD process in the United States, and some related impacts from that. In particular we have questions from Raoul Leonard of Deutsche Bank, who is asking us whether we can update on the SICAD process, whether we're planning to apply for the fiscal year 2015?

We also have related questions about whether the implications that we have seen from the SICAD process and the lending that we have done there, whether we expect -- this is a question from [Victor Rodriguez], [FDA]. Whether we expect that the ECB would rather qualitative [ascribing], in addition to positive assessments going forward in a similar way to what the US has [done].

Finally, we also have a related question whether we can update on cost of this [product balancing] we have [drawn down] already in the presentation.

No. Basically, on the SICAD process, right?

Yes.

I think Jose Antonio already elaborated on this.

We are working hard in order to improve our franchise and resolve the regulatory questions that we have around the SICAD, or the enterprise's risk management process.

As you know from a quantitative perspective our Bank in the US, our Santander holding, is one of the most-capitalized banks in the US.

Of course, all this work means that we are increasing the number of employees, as I went through the presentation, almost by 400. It will basically increase our costs at the holding level and at the different units for about around $100 million, both for a personal cost, but also for administrative expenses, in terms of improving the IT platform.

As Jose Antonio has said, you know this is a multi-year plan, in order to create the basis, not only to go through the SICAD successfully, but also in order to improve the quality of our franchise in the country.

Great, thank you. Now moving on to more issues of our strategy, we have a number of questions related to inorganic growth and transactions.

We have questions from Alfredo Alonso, Kepler; Britta Schmidt, Autonomous; and Atif Ali, Citidel, basically, on two areas. Whether we have an appetite for acquisitions, particularly in the case of Novo Bank in Portugal, or Monte dei Paschi di Siena in Italy? That's one question.

Second question is whether we can give any update on the developments of the negotiations relating the deal with Pioneer?

And the third related question, you know whether, on the announced -- transactions that we have announced and we're in the process of completing the fourth quarter, whether we'll be using those capital gains to book against the restructuring charges or to improve capital ratios?

Number one: we are very happy in Portugal. I was there last Friday. We will probably increase our market share 2 percentage points this year, so we are growing organically incredibly well.

Of course, you know our obligations in every country where we are to take a look to all the opportunities that can be there. But you know we are very, very rigid in terms of the strategic fit and the financial fit of any operation that we do. So of course we will take a look, but nothing is granted, of course.

We're not taking a look into Monte dei Paschi di Siena, and we had no contacts with respect to this.

With respect to Pioneer, we should note where basically we said that we were in conversations with them, in order to integrate Santander's management with Pioneer. There's nothing new on that front.

And with respect -- and the third question was about the capital gains to be booked in the fourth quarter. They will be used basically to strengthen the balance sheet.

Thank you. One final issue on regulation we have a question from Carlos Garcia, Societe Generale: whether we see a risk that -- as HSBC has reported today that we will need to have significant additional investments to satisfy more compliance and regulatory issues globally?

Yes, definitely. I just spoke about the case of the US. So that is why we need to go deeper into the efficiency plans on the [run] the Bank, because they grow the Bank, plus the regulatory costs are going to absorb a meaningful level of resources.

So that is why we define that combination that should help us to improve our franchise on one side, both from a commercial point of view, from our customers' perspective and also from our regulator's perspective, with all the regulatory burden that we are seeing right now. At the same time, we grow our costs below inflation.

Thank you. We have one final issue in terms of investment costs and expenditures. We have a question from Britta Schmidt, Autonomous: whether we can provide some guidance on the cost that the additional investment into IT and digitization can [play] in terms of millions of dollars and other (inaudible) [horizon]?

Additional costs from this digitization initiative that we have been talking about. Whether we can give some guidance on what we're implying in terms of additional costs or it's just within our general operating budget?

No, there's a number of initiatives in all of the -- it's not easy, because -- in order to understand, because most of them are some multi-year plans. Only, for example, the RDR risk data aggregation process that should help to improve our data analytics for all in credit and in customers will be a EUR500 million initiative to be done on a four-year basis. But this is just a part of it.

That is why I was mentioning that in order to be performing correctly, and addressing all these projects, we needed to go deeper into the efficiency plan.

Thank you. Moving on to issues within (inaudible) having to do with our financial management. We have a number of questions regarding the evolution of our corrected tier 1 capital ratio throughout the quarter.

In particular, whether we can provide some flavor on what has been the breakdown of the [52] basis points increase between three components: basically, the contribution of the AT1 issuance that we have done; the organic growth; the risk-weighted assets?

Well, basically, the contribution as I stated, was half due to organic generation and the other half, basically, due to the AT1 issuance.

Thank you. We have another set of questions regarding our fully-loaded Basel III capital position. Questions from Mario Ropero, Fidentiis; from Carlos Calvo, Espirito Santo; Daragh Quinn, Nomura; Ignacio Cerezo, Credit Suisse; and Raoul Leonard.

What will be our expectations of our fully loaded going forward beyond this year?

And second, what will be the implications of the Brazilian transactions, in terms of this ratio, if any?

Couple of things. First, as you know we don't provide the long-term expectations.

So I already mentioned that we expect this year to be a fully-loaded Basel III between 8.5% and 8.6%. Our approach to this is that we should -- and we've been mentioning this during the last quarters, that we need to compare the ratios taking into account what are the risk that every bank, every financial institution is carrying on their balance sheet and on their way of doing business.

So the AQR -- but basically the stress test has shown that Banco Santander is very conservative in terms of our policy for provisioning. But also, our business model is a business model of lower risk has been demonstrated on our stress -- during the stress, the scenario has been the Bank that destroys less capital of our peer group. Basically one-third less than -- sorry, 66% less than our next competitor.

So we believe, you know, that Banco Santander, due to our business model, due to our diversification, we have a ratio of capital that -- we are very comfortable with it.

Thank you. I believe that is last explanation, very detail also addresses our final question that we had on capital by Benjie Creelan, Macquarie, which was wondering why did we feel comfortable running the Bank -- operating the Bank with levels of capital that appeared to be lower than our peers?

So moving on to --

[Especially] I already explained, no?

Exactly, yes, thank you.

So moving on to another issue having to do with our ALCO portfolio. Francisco Riquel, N+1; Mario Ropero, Fidentiis, asking us basically whether we can detail the composition of our ALCO portfolio as of this quarter? As well to give some flavor of breakdown by country and duration?

Okay, well, the outlook portfolio has been relatively stable, yes, in the region of, I think, it's EUR66 billion. Of which including the insurance company, so that is EUR4 billion/EUR5 billion. In the Bank, Spain is EUR21 billion; Brazil, EUR11 billion; Mexico, EUR3 billion; US, EUR5 billion; Poland, EUR5 billion; UK, EUR5 billion; and the other, another EUR6 billion/EUR7 billion. Those are the main numbers.

Typically, the duration of the balance sheet is particularly short at this period in Spain and in UK, due to the fact that, well, the available-for-sale portfolios are not enough to offset the duration -- the negative duration of the current accounts.

Thank you. We have two questions also related to the contribution of the ALCO portfolio this quarter.

One from Andrea Filtri, Mediobanca, which asks for the contribution to the overall Group in the P&L?

And Benjie Creelan, Macquarie, which specifically asks whether we can provide a contribution of this to the P&L in Spain of this portfolio?

The ALCO portfolio in Spain is producing, between the corporate center, because the ALCO is split in the corporate center and the retail, we hedge the retail and we also have some in the corporate center, is producing, in terms of net interest income at the year -- in the entire year, between EUR300 million and EUR400 million, split between corporate center and the business in Spain.

Okay. We have a couple of additional more specific questions on the financial management: one having to do with the AT1 issuance. Raoul Leonard, Deutsche Bank, asks how do we account for the AT1s that we are being issued? Whether this is a P&L item, this Tier 1, the coupons that we pay on the AT1?

The second question has to do with our tax performance. Sergio Gamez, BofA Merrill Lynch, asked why our tax rate in the corporate center has been so low this quarter?

Well, I mentioned in the presentation in relation with corporate center, we have one thing that is more or less stable; that is the lower cost -- the lower wholesale funding cost that goes into the corporate center.

We have, specifically in this quarter, one issue that comes and goes, but is hedge of inter rail -- sorry, interest exchange rate risk that depending on we have hedges for the respective profits in some jurisdictions, like Brazil and partially Chile, but this is a tactical hedge, so sometimes we have it, sometimes we don't and this quarter came in this line.

We also sold some components in the ALCO portfolio. But those were -- this is the [pricing] of the three components: lower funding costs, ALCO and an exchange rate risk.

Thank you. Now moving on to the issue of credit quality, we have two general questions are related. Carlo Digrandi, HSBC, asked you -- is asking: why are the loan-loss provisions higher quarter on quarter, given that NPLs continue to decline?

Well, you already explained in the presentation that this was partially due to the performance of Santander Consumer USA.

So (inaudible), Redburn continuing on this question asks: why is the cost of risking rising in Santander Consumer USA? And what this will be, over the cycle, cost of risk for this business, as well as, related to this, what is the right coverage level that we should see, for the Group overall and, in particular, in Santander consumer USA?

I think Jose Antonio already elaborated a little bit on the Santander Consumer.

But basically, provisions are growing because -- through risk also. One is that the production is 30% higher than last year.

The second reason is our methodology for provisioning where we're provisioning for 17 months, which takes two fourth quarters that are normally higher provisioning -- higher non-performing loans producer quarters than the rest of the quarters.

And, we are producing slightly more consumer credit than prime car credit.

So these are basically the three reasons for an increase in provisioning in Santander Consumer.

With respect to cost of credit, we also gave some views on that, where the Group cost of credit as this is standing right now should we exclude Santander Consumer, adds [1.25]? We see this clearly trending lower. We expect that next year it should be a stable to a slightly lower to what it is today.

Thank you. Continuing with the issue of credit quality and now going by geography, we have a question about credit quality in Spain from Ignacio Cerezo, Credit Suisse.

He asks: whether we see improvement in our guidance going forward on the cost of risk in Spain? And, if we were to see improvements, what are the main reasons by the performance o1n the cost of risk, particularly lower NPLs, or with higher recoveries, or with more stable property prices and macro outlook?

Well, the reason, right now, is basically that, as Jose Antonio said before, the new entries -- the new NPLs entries are 94% below last year, so basically we are seeing a very clear risk -- improvement in the risk profile basically due to the improvement that we're seeing also in the economic conditions of the economy.

We are -- we think that we should close this year on what were our initial expectations at the beginning of the year, closing our cost of credit in Spain between 100 to 120 basis points. And this should be trending lower to reach something that should be, across the cycle, the normal, between 60 to 70 basis points by the end of 2016.

Focusing still on credit quality, but now on Brazil, Francisco Riquel, N+1; and Ignacio Cerezo, Credit Suisse, they both ask about our expectations on non-performing loans there. Whether we see a pickup going forward and what will be our guidance towards 2015?

Well, the figures we have for Brazil in terms of non-performing loans are encouraging, so we are seeing early arrears. They're all trending down, and that's very good signals from what we can expect from non-performing loans.

Of course, the portfolios will continue to rise. The mix that has been hurting us, on one side on the net interest income, on the other side is helping us, in terms of the trending lower of the NPLs, as we are growing in lower-margin businesses and segments, but of course with a lower cost of credit, like mortgages or (inaudible), or the agro businesses, or the corporate segments.

This year the credit in consumption is flat, or with a small decrease. With Bonsucesso we will come back into the payroll credit, which is also important.

So I think I'm positive with respect to the expectations we can have, with respect to the cost of credit in Brazil.

Thank you. One final question on credit quality now regarding Mexico. Mario Ropero, Fidentiis, ask whether we could comment on why the NPL ratio increased in this quarter?

And what do we expect, in terms of evolution going forward, in particular, what level of cost of risk will we consider to be sensible, given the risk profile that we have in the country?

Well, in this quarter, as Jose Antonio elaborated, we have to mark up a couple of projects that were basically the reasons for the increase in the quarter. The rest of the Bank we're seeing good trends.

However, our expectations in terms of the growth of the portfolio growth of credit, is big for next year. So my view is that probably the specific provisions should decline, but the general collective provisions should increase for next year with -- at the same pace as we increase the size of our credit book.

Thank you. We are now moving on to different geographies and business areas, starting with Spain.

We have a number of questions regarding the evolution of loan volumes throughout the quarter. In general these questions come from Ignacio Cerezo, Credit Suisse; from Francisco Riquel, N+1; Juan Carlos Calvo, Espirito Santo; Mario Ropero, Fidentiis.

Basically their questions are in two lines. One, whether the loan book fall, that we have seen throughout the third quarter, whether it's mainly due to seasonality reasons or whether we think there's a pattern there?

And second, whether we can be -- whether we can give some guidance where do we see volume growth going forward in Spain also going into 2015?

Well, definitely, it was absolutely seasonal, the decrease in the third quarter; we see this every year.

We expect to be seeing a pickup in October and we expect a good fourth quarter, so our initial expectations of growing the credit in 2014 are still there. We are confident that we'll be up to that.

With respect to 2015, we continue to see some acceleration in credit. Jose Antonio gave some figures about the credit, the new production for SMEs is 34% higher than last year. The new production in mortgages is 75% higher than last year.

We continue to see every month a slight increase or an increase with respect to the previous month, and a big increase with respect to the same month of the previous year. So our expectation for 2015 is that we should continue to see our credit portfolio growing.

Thank you. We have an additional question regarding volumes in Spain, this was specific on SMEs.

Stefan Nedialkov, Citigroup, asking us how do we see the SME lending in Spain, and particularly how has our market share performed since the beginning of the year?

And second, how do we see yield spreads developing in that area?

(Inaudible) in the volume side, we launched this Santander Advance program in March is working well. I mentioned in the presentation that the new products and the new volumes are going up 34%.

In relation with the second part of the question, it was more the net interest -- the margin. I mentioned also that we are seeing some margin compression. There is competitive pressures on the market and we are seeing a pressure across the board. Still a couple of basis points, but we continue to see a quite dynamic, competitive environment in this front.

Thank you. Moving on still within Spain now to the issue of spreads; we have a number of questions regarding our cost of deposits. These are questions from Juan Carlos Calvo, Espirito Santo; from Britta Schmidt, Autonomous; from Andrea Filtri, Mediobanca; and Rohith Chandra, Barclays.

The questions basically are along three lines. What is the cost of deposits -- existing cost of deposits now in the third quarter? Where do we see a floor in the cost of deposits going forward?

And the third one, whether we see a [closing up] -- a convergence on the cost of deposits across the different euro area countries.

Well, this is [because] deposit costs, well, I don't have in mind the number, is 0.7-something-%; it's going down where we started the year and 1.25% we're around or slightly below 0.8%.

The overall deposit costs, this is split between a couple of basis points in current accounts and still higher than 1% -- significantly higher than 1% in time deposits.

As we show in the presentation, the new products in timed deposits is coming up 0.55%, so there is still room to reprise the timed deposit book and still room to reduce from the current around 0.8%/0.7-something-% total deposit costs.

In relation with the third point, the convergence side, well, we provide you with the numbers with the deposit costs in Portugal and in Spain. You see the new production in Portugal, I speak in my memory, it was coming at 1.36% in time deposits, while in Spain it was 0.55%; still a significant divergence for -- to the so-called [product-critical] countries. The liquidity positions of the different financial systems affects this.

Also there is a question of other competitors in the markets, particularly in several markets in Europe there are even government bonds sold to the retail at very competitive rates that affect the time deposits.

So it's, I will say, if they were not other non-bank competitors in the market, so it will be positive on convergence. If there's other competitors in the market not being banks, I'm not so sure that it's going to happen so quickly.

Thank you. We have a question regarding commissions from Francisco Riquel, N+1.

He points out that fee income looks weak beyond the typical turnover for the three quarters. But he wonders if we can elaborate on the trends and provide some guidance for the coming quarters, particularly on the impact that there is some regulatory measures on credit cards on pension fund rates, they have on this line.

With respect to commissions, we have basically the impact of the interchange fees.

With respect to credit cards, it's been -- we have also some of the effects of the (inaudible) [central bank], the initiative that we brought to the Banesto customers. Of course, in the comparison with last year, it's dragging also on the P&L.

But aside from that, we see a pretty good year in terms of funds.

In insurance we see a slight decrease in investment insurance, because there's some of that money is going into funds, but we're happy. I think the trends we are seeing in Spain are good and we are positive with respect to the future.

If I may, what you have in the quarter in commissions is -- the drop in commissions comes mainly from the wholesale side of the business; it's not the retail side, it's the wholesale side. You have global banking and markets there, and the third quarter it's a seasonal low.

Thank you. To finish with, Spain, we have two questions regarding our run-off real estate portfolio. We have a question from Mario Ropero, Fidentiis; and a question from Carlos Peixoto, BPI.

Basically, they ask whether -- where do we expect the net interest income in this division to turn positive, as well as whether we can some update on what's the rate of asset sales in the quarter? And also whether we're seeing a large number of recoveries in the portfolio.

Well, we don't expect the net interest income in this portfolio to come positive. Most of the credit that, basically, was sitting there is moving into NPLs or into a repossessed.

So basically that division should be run on a net interest income that is negative. That is basically the cost of financing the repossessed assets that they are holding on the balance sheet.

With respect to recoveries, we're not counting on that. It is true that the sales we are doing right now are basically done on a -- with no loss, only with a slight profit; that the outlook is better. But we're not counting on any of these recoveries in terms of increasing our profit for the next quarters.

Thank you. Moving on to other divisions, we have two questions regarding Santander Consumer Finance division; a question from Raoul Leonard and Benjie Creelan, Macquarie. Basically, they're asking whether we can explain: what was the underlying reason for the large negative provision in [net] income for this quarter and whether this is one-off.

And then a second question, also from Raoul Leonard, Deutsche Bank, regarding consumer finance in Canada; our announced acquisition there. Whether we could elaborate a little bit on the strategic rationale of this acquisition and whether we are planning to report this under our consumer finance division going forward or will it stay as a stand-alone unit within the Group?

Well, I think the question of Germany, that is basically a one-off. Jose Antonio already elaborated on this, due to the handling fees question that all the financial institutions have now in Germany.

With respect to Canada, Canada is a very interesting market. We have entered this market through the business that we know well, that we do in North America, in the US; that we do across Latin America; that we do in Europe; and that we now do in China, as you all know.

So, we're very happy with this operation and, definitely, yes, it will be under the Santander Consumer Finance division.

Thank you. Moving on to the UK division, we have a question from Britta Schmidt, Autonomous. She's basically asking: what do we expect to happen on the UK mortgage market, and particularly mortgage spreads, now that the two regulatory issues have been cleared, particularly the mortgage market review and also the announcement of the new leverage ratio that's going to be applied on the UK banks?

Our expectations with our mortgage book is to grow at the same level as the market. So, basically the market is expected to grow at around 2%, and this is what we expect to be growing in the UK.

We don't expect an impact from the mortgage review, because we already adapted all our processes and everything to be fully compliant with it; so no impact with respect to any of these measures.

For the leverage ratio, well, we had a new paper that was issued in terms of the guidance on the leverage ratio, 3% for the UK with some buffers in terms of -- for systemic institutions and so on. But I don't think expectations were much higher, sitting at between 4.5% and 5%, so it's come lower than many of the analysts expected.

So, I don't think they should have a big impact on the mortgage market in the UK.

Thank you. Moving on to the western hemisphere, and particularly Brazil, we already addressed the question that we had prior regarding the macro outlook, that we have more specific questions on the evolution of volumes going forward -- loan volumes.

We have questions from Stefan Nedialkov, Citigroup; of Francisco Riquel, N+1; Mario Ropero, Fidentiis; and Daragh Quinn, Nomura. These questions basically have to do with how do we see the composition of our loan book going forward, likely to change in 2015? What is our risk appetite for growth going there?

And also, do we see any potential risk on growth volumes -- on loan growth volumes, next year due to the macro outlook?

Well, our expectation with respect to the macro is that the growth of the country should be better than this year, at slightly above 1%.

This year we've been -- we are growing credit well, specifically in the segments where we wanted to grow. And we are doing, as you saw, with the -- and as we've mentioned, with Bonsucesso in order to come into the payroll market again.

But we think that, for next year, we can expect volumes to grow slightly better than this year, but probably in single digit.

Now, moving on, still in Brazil, regarding the devolution of net interest income and margins, we have questions from Francisco Riquel, N+1; Ignacio Cerezo, Credit Suisse; and Daragh Quinn, Nomura, where they're basically asking whether -- what the loan outlook for margins going forward? And in particular, whether the apparent decrease of net interest margin in quarter 3, whether we should expect that going forward, beyond the change in the mix profile?

Well, I -- we don't see any particular margin compression due to a competition right now in Brazil. So, the change in our margin -- in our business margin is basically due to the change of mix. I don't expect to see the net interest margin to continue to have a big drop and more especially even after the provision charge.

Thank you. One last question on Brazil from Sergio Gamez, Merrill Lynch, regarding our trading gains. He wonders whether this has to do with portfolio rotation of our ALCO portfolio or are there any other specific issues?

Those trading gains in Brazil.

What I mentioned is the comparison with the second quarter. The second quarter was particularly low. You analyze several quarters in a row; [is] the comparison between the third and the second quarter, because the second quarter was unnormally (sic) low. It's not that we have something unnormally high in this quarter.

Well, in relation with the ALCO portfolio, well, we've been pretty active with this. The portfolio right now, as I mentioned before, is EUR11 billion; is lower than the usual size we have in the country.

Okay. Moving on to Chile, we have two questions regarding Chile.

Daragh Quinn, Nomura, wonders that there seems to be a deterioration in economic conditions in Chile. What would be our outlook for provisions for loan growth going forward?

And Sergio Gamez, BofA Merrill Lynch asks us: what was the underlying source of the negative impact on the net interest income for the quarter? I think we have already discussed this on the presentation, but you may want to elaborate further, particularly whether we should expect further negative impacts going forward.

Yes. The economy in Chile has been slowing down this year. Our expectations for next year are a better growth than what we have seen in 2014. We don't expect any material impact in provisions due to the deterioration that we have seen in the economy in the previous months.

Thank you. Now moving on to our --

While inflation is very well known, normally we have a -- the mortgage portfolio in the country that is pretty large, is very [basically in] UF; so it's [basically] inflation plus rates, while the liabilities are all of them in nominal rate.

This position, this [lower] position in inflation means that when inflation comes relatively high, the quarter affects, in a significant way, the NII, and the opposite is also true.

So we were mentioning in the previous quarter that the level of NII was very high due to this, and this quarter, the inflation came in on the low side. And this will continue there, because this is a position that is quite structural. You can reduce a bit or increase a bit, but to hedge 100% is not possible. There is no -- the market is not big enough. There is no counterparties to hedge 100% of this position.

Thank you. Moving on to questions on the large geography, Poland, we have questions. We have questions from Britta Schmidt, Autonomous.

Two questions. One, whether we can elaborate on the commercial reason to grow deposits so strongly in Poland?

And the second question whether the Polish divisional P&L that we report includes already the consumer finance business that was sold from Santander Consumer Finance to BZ WBK.

Okay. The second question, no, it does not include. We report Poland -- in the local figures they're reported, but we report our Poland Santander Consumer Finance unit within the Santander Consumer Finance.

The first question with respect to deposits, it's been basically a broad campaign that has been launched, in order to increase the number of affluent customers that we have. We have on-boarded 70,000 new affluent customers, which we now need to work in order to strengthen our relationship with them.

So it has basically -- it has nothing to do in terms of management of the balance sheet, even though, of course, it will have an impact in terms of reducing the cost of financing the Santander Consumer Finance balance sheet now that is consolidated. But basically, it was a customer action in order to increase the number of affluent customers that bank with us.

Thank you. We've finished the coverage of all our geographies.

We have received two additional questions regarding the Group level that I'd like to put forward to you, one from Andrea Filtri, Mediobanca; and also from Carlos Peixoto, BPI. These questions have to do with issues relating to the ECB.

Particularly, we have a question whether we have a Pillar II charge for coming out of the AQR, for non-[Santander] portfolios coming out from the AQR. The answer to that is, no.

But then they ask whether we expect an annual repeat of the EBA stress test scenarios?

And second, whether we can elaborate on our approach to the coming TLTRO auction in December? How much do we expect to raise in that auction? And what's our current exposure to the ECB?

So with respect to the Pillar II charge, no, we don't have any Pillar II charge and we don't expect any.

And with respect to the TLTRO, we went already to the auction in September. We will go again in December.

The -- Jose Antonio, you can elaborate on the figures, but basically the figure, EUR9 billion is what we expect from both of them.

Thank you. We have reached the end of all the questions that we have received. I hope we have addressed them all adequately.

If we were to have -- if any of you were to have additional issues or additional questions, I'd like to remind you that we, at investor relations, are always at your disposal; we'll be happy to address them individually.

Thank you very much for attending this quarterly results presentation, and have a nice day.