Banco Santander SA (SAN) 2015 Q1 法說會逐字稿

Good morning, everyone. This is Santander's first quarter 2015 results presentation. This is [Sergio Galvan], Global Head of Investor Relations of the Group. We will proceed with the results presentation which will be covered by our CEO, Mr. Alvarez and our CFO Mr. Garcia, followed by the Q&A session. As you already know we'll take your questions via phone and not webcast this time, so with a limit of two questions per analyst and/or investor. So with no further delays I hand over the floor to our CEO.

Thank you, Sergio. Good morning to everyone. Well the presentation, as usually, we have split the presentation in two parts. The first one I am going to elaborate about the group performance in the first quarter 2015. Afterwards, our CFO Mr. Jose Garcia Cantera will elaborate on the main business areas. We plan not to go through all the business areas just to give more time for questions. Naturally, you have in the presentation all the details about the units we do not plan to elaborate in detail. And finally, I will make some conclusions of this presentation.

Just starting with the macro environment we are seeing in which we had a drop in our businesses, let's say, we are seeing good developments both in the US and UK. The Eurozone probably is behaving a little bit better than expected, mainly in Germany and Spain. And among the emerging economies we have probably now a better, greater activity in Mexico, Chile and Poland.

Brazil is lagging well behind and is in the middle of an adjustment process that probably leads the economy this year into recession. We are forecasting this -- a decrease of 1% of GDP.

And finally in the macro environment, banking business continued to be affected by the (inaudible) interest rate policy in the majority of the mature markets and last but not least after competition in some markets as we'll see later on in our presentation.

So starting with the numbers, the trends in the first Q were pretty similar of those we saw in the last quarter of 2014. Results continue to normalize. We've been speaking for quite a period of time about normalization of the profits. We are following the same -- the trend. Profit was slightly ahead of EUR1.7b in the quarter, 18% higher quarter on quarter and 32% higher year on year.

Drivers of this growth, the higher commercial revenues, higher gross income which increased in most units, is pretty well spread across the board, mainly driven by the net interest income not so much by fees that we'll see later on.

Lower provisions, something that was expected, probably widely expected in some of our core markets particularly Spain, but there is a general improvement across the board of the cost of credit.

The costs are well under control. We are delivering what the commitment we made, we made a general commitment to grow the cost base in line slightly below inflation so in real terms not to increase costs, taking into account that we face significant regulatory pressures from the cost side. We are proud to say that we are meeting our commitment in this regard.

Lastly and this is very important this quarter, particularly this quarter we've had a significantly positive, significant impact from exchange rates on the units result in euros. In the majority of the presentation I will look at the numbers at the cost of euros just to analyze what is going on in the underlying business.

Well, as a result of this trends, all the units increased profits bar Chile, and we improved the profitability ratios as you'll see later on about the EPS and return on tangible equity is heading in the direction we anticipate to you in our targets for 2017.

Going to the balance sheet, the volumes are growing and we anticipate that, this was our expectation, when we raised capital at the beginning of the year. And the lending is growing in nine of our 10 core markets while we are, as you know, putting some emphasis in new products and service and improving the customer satisfaction. This is delivering.

So when we look at the numbers we are seeing quarter on quarter in constant euros we are growing loan book at 3%, that is significant, deposits and mutual funds 4% and year on year 7% and 8%. And this is growth is increasing as we will see later on when we analyze more in detail about loans and deposit [value].

There is a small perimeter effect in the quarter, this about 1% of the loans with the incorporations of the PSA in the UK and in France. We reduced the NPL ratio. It was probably anticipated. The coverage is increasing, the NPL ratio is falling and our solvency remains, the core capital ratio remain unchanged in fully loaded terms 9.7%. I will elaborate later on the different components of this -- the moves that we got in the quarter.

When going to the P&L attributable profit, as I said, is -- was EUR1.7b, EUR1,717m, 32% up year on year and 18% up quarter on quarter. This was -- the exchange rate contributed about 10 percentage points to year on year growth and 6 percentage points on quarter on quarter. There was also a slight perimeter impact which in year-on-year terms represents a growth of 2 percentage points in revenues and costs, more or less the same about [size].

Excluding the exchange rate impact, the underlying trends are pretty solid. Revenues are growing 7% year on year, and were virtually unchanged compared with the previous quarter. That has -- the first quarter has a seasonal component particularly in Latin America. And some revenues run off mainly in the insurance business in Brazil in the last quarter that really is produced every year in the last quarter.

The costs remain unchanged quarter on quarter and rose year on year partly affected also by the perimeter. Loan loss provisions show a significant decline, and as you can see in the reduction of the cost of credit.

Finally, let me to remember you that the contribution, the ordinary contribution under [Deposit 1] the scheme in Spain is recorded when accruing interest, which is at the end of the year and so was no charge for this item in the first quarter. The charge on quarterly basis should be around EUR50m to EUR60m is the charge we anticipate at this point.

Going to the P&L, the results of the main lines of the income statement, revenues, gross income grew through the period, you have in cost in current euros in the left side in current euros, right side cost in euros. You see the growth, consistent growth of course 7% in constant euros and 13% in current euros. Costs growing 5%, so positive (inaudible) both year on year and quarter on quarter. And loan loss provision declining 10% well as -- well we were expecting and quarter on quarter 10% -- well, year on year 10% down.

If we look at the revenue line, so we have (inaudible) the increase in revenues, almost EUR600m is due to the FX impact. The other 50% so is due to the business itself mainly to the net interest income not so much in fee income where we are -- it has been affected significantly mainly by the regulatory issues, regulatory issues or special regulatory issues particularly in the world of credit cards where the interchange were reduced in significant markets for us and this has an impact in the quarter.

So when it comes to by geographies what you have is all Europe is growing, but Spain mainly remaining challenged because lower trading gains that were exceptionally high in the first quarter 2014. Those were the double of those in -- the first quarter of 2015. So later on Jose will elaborate on trends in Spain but you see different trends on the business, on the commercial business is developing relatively well while the trading gains were significantly lower than in the previous year.

In other geographies all geographies are growing, the revenues are growing. But Chile, Chile due to the, we have been repeating quarter after quarter, the relatively high inflation we have in 2014 that this year -- the last year inflation was around 6%, this year it's going to be around 3%, so -- and this affect the mortgage portfolio in the country.

Splitting the revenue lines we have, as I anticipate, net interest income the behavior is fairly consistent. Behind this is the volume growth and lower cost of funds. The split on loans have been affected by two trends, changing mix in some geographies and tougher competition I'll say anticipate and due to the ample liquidity in the markets.

Well, I want to remark the NII which rose for the second consecutive quarter and is now positive year on year. That is a remarkable change for what we were seeing in the previous quarter where the changing mix was producing some pressure on the NII.

Fee income is stable, relatively stable. It's (inaudible) regulatory path, as I said interchange credit card fees and insurance in Brazil mainly is due to this. And quarter on quarter in the last quarter these are one-off every quarter, every four quarters in Brazil of around EUR60m to EUR70m due to insurance that normally that makes this comparison is not a like for like before the first quarter of 2015 compared the fourth quarter 2014, but relatively [quick] overall fee income lines.

Finally, trading gains, well, is around 6% of the total income, the gross income and significantly lower than the first quarter 2015 -- 2014 sorry, due to lower management -- lower revenues due to lower trading gains due to the management of interest rates and exchange rate hedging.

When it comes to the costs, the cost side we have pretty much the same, half of the cost increase is due to FX, the other half is due to the ordinary activities. We have several units, some units that are reducing the costs in real terms, particularly Brazil, Spain and Portugal. Some of the units that are in investment process, particularly Mexico that is opening branches, Argentina also that is due to opening branches.

And all the others, the other I want to remark is fungible finances due to change in perimeter as ex-perimeter the costs are falling, and USA where we face, as you know, significant regulatory costs that we've been investing heavily in order to tackle some of the regulatory demands we have from the regulators.

So overall I would say the costs, excluding perimeter and inflation, is minus 0.7% that was our commitment to grow the costs below inflation, inflation in our -- in the geographies in which we operate is -- the average weighted inflation is 3.9%.

In provisions, well, 10% lower without exchange rate impact, mainly due to Spain, Brazil, UK and US. Well, there is a significant improvement in credit quality. This is partially explained by the change in mix, risk management and in some cases significant better macroeconomic environment.

The cost of credit went down from 1.65% to 1.38%. This improving is widely spread across all the units. Excluding SCUSA that is, as you know it's a sub-prime business with very high cost of credit, the cost of credit is worth 1.07%. So is following the same trends that the overall cost of credit cost.

Let me to elaborate in a few lines in the balance sheet, just to show you the main trends in the balance sheet. In the loan book there is an accelerating pace of growth. One year ago we were not growing. As of December we were growing 5% and March we are growing 7%, so there is an accelerating pace of growth in the loan book.

When you look at the geographies, well, all of them basically are all flat or growing significantly. Well, excluding the impact of the exchange rate, lending rose 3% in the quarter, 7% year on year, the later against zero growth which were 12 month before.

The theory they are behind this -- the idea behind this growth is we are focusing in SMEs and mid-corps in Spain and Mexico, we launched advanced product as well as we did in the UK. We are growing -- we are not growing in Portugal but we are gaining market share in Portugal in an environment that is -- the country of [de-leveraged].

In Brazil we grew well in companies and we are concentrating more in SMEs. We grew in the large corporate and GBM kind of businesses. But Jose will expand more on this point and elaborate more on the kind of world we are having in Brazil.

The US, significant growth in GBM and the leasing activities. In Poland we think that we are on track to deliver kind of 10% growth year on year, in the entire year with the economy that seems to be a little bit better than it was at the end of the last year.

As regards to individual customers in general terms, sharp rise in mortgages in Latin America and greater focus in consumer credit in developed economies, in Brazil mortgages grew 35%, Mexico 15%. In Spain and UK big rise in the new lending but not reflected yet in balances because the amortizations are pretty high. Strong growth in consumer finance not only because PSA also because the current market generally speaking in Europe is behaving better than in the previous year, so we saw accelerating growth in the lending activities.

When it comes to the deposits plus mutual funds, the growth is also significant and accelerating. Well, we combine here two strategies try to grow and reduce the cost of funding. The strategy here was to grow in current accounts, reduce expensive deposits and market mutual -- and increase the market mutual funds. The result in cost of euros was 10% increase in demand deposits, minus 3% time deposits, plus 22% in mutual funds is the result of this strategy in these -- in the last year.

By units and year on year UK continues to deliver pretty well, extremely well in the 1|2|3 plus 40% rise in current accounts and the successes of the 1|2|3 well, is beyond any doubt. Poland, well, we had a campaign last year where we attracts significant number of customers. Portugal the main focus is to cut deposit costs. Demand deposits grew 23% and mutual funds 29%.

Latin America including Brazil increased the funds 14% with demand deposits up 15% and mutual funds 17%. US grew 17% current accounts. So lastly, Spain is a good example of the strategy we follow, we see the numbers later on. We combine growth with a big improvement of cost of deposits. Overall, good trends, good dynamics in volume terms both in loans and deposits.

In credit quality the NPL ratio was 4.95% (sic - see slide 16 "4.85%") falling for fifth consecutive quarter 34 basis points in the quarter. Some ideas behind the NPLs, net entries fall another 20% quarter on quarter and year on year while the improvement is well spread across the main units.

You see Spain falling the NPLs, UK relatively stable although a bit lower levels, lending is still down. Brazil that may surprise you in this -- this is the -- this reflect the significant change of mix we've done in the last two years I would say that they announce with a portfolio that is the cost of risk, respective cost of risk should be below the ones we used to be in the past even in this environment.

And finally, US that well it's a combination of the bank that has very good credit quality with the consumer finance that has been improving.

To finalize this part of the presentation let me elaborate on capital. Well the headline number is the core capital remains the same 9.7%. This is the result of a profit -- a capital generation, gross capital generation of 25 basis points. With consumer, let's say, in ordinary growth in business as usual 11 basis points, with the change of perimeter basically PSA so some small pieces of payroll-based lending in Brazil 12 basis points. So overall we can say that we are generating free capital ex-change in perimeter around 10 basis points per quarter.

The fully loaded level of ratio was 4.6%. Well, we think we maintain adequate levels of capital for our model and we are in an excellent position to take advantage of the organic growth opportunities in our markets.

Now, coming to the financial ratios you have there, efficiency we are on track to meet our targets. Remember that our target for 2017 on efficiency was to be below 45%; we are 47% right now. EPS growth 6% year on year, return on tangible equity where we establish a target of 12% to 14%, we are approaching the lower end of the range. We established that target for 2017. And the tangible book value per share is growing 16% year on year, so good trends in the profitability ratios. And we are on track to meet our targets we announced in February.

So I now hand over to Jose that he is going to comment on the main business areas before I make some conclusions at the end of this presentation.

Good morning, everyone. Let me go through the main business areas. The breakdown of our profits continue to show our high level of diversification and very well balanced source of profits around. 20% come from Brazil and the UK. Spain contributes around 15%, US and Santander consumer around 10%. This is a similar breakdown from the one we had in the previous quarter.

If we look at the profits by geography all of them had positive earnings in the quarter, positive growth in earnings in the quarter with the exception of Chile basically because of the lower inflation we had this year relative to last year.

I'll make a quite comment on the smaller countries and then I will go into a bit more detail on the major units. In Mexico we have a positive commercial strategy. The business is expanding. We also expanded our branch network. As you know we grew our branches by around 200 and that is basically contributing to positive net interest income. That increased 11% in the quarter. And the lower cost of credit that we have in Mexico basically explains the 13% growth in net attributable profit that we showed in the quarter.

In Chile, we have a close to $6b portfolio. It's affected by the rate of inflation. We have significantly lower inflation in the quarter and that explains the lower revenues. This hides to some extent the very positive commercial dynamics that we are seeing in the quarter growing in -- in companies growing in high income individuals, regaining our commercial punch in the country. So we feel comfortable, very happy with the performance in Chile. And we think that excluding these inflation effects the underlying trends are positive.

In Poland, we were negatively affected by the lower interest rates that we had in the quarter. Interest rates were cut by 50 basis points in the first quarter, 100 basis points year on year. This, because of the Lombard rate cap this means a cut to what we can charge in consumer loans basically and that affected our net interest income. We also focused on keeping cost of deposits under control after the campaign that we had last year. So overall I think the trends are positive, the economy seems to be picking up a little bit. So positive trends despite that interest rates again are having a negative impact.

In Portugal, as Jose Antonio said, we are gaining market share. We are running a 50-basis-point market-share gain in deposits and loans which is very positive indeed. That is driven a net interest income up 10% year on year and with lower provisions. That explains the very high level of profits that we see in the bottom line growing 58%. But this has to be framed within the normalization of our activities in Portugal. And also it's worth mentioning that year on year we've had a one-off in the fourth quarter that explains the drop in quarter-on-quarter basis.

Argentina, Uruguay and Peru increased their portfolios, their contributions to the business. They are -- a very positive performance there. And lastly, the real-estate run-down unit that we have in Spain posted the lowest losses since it was incorporated a couple of years ago.

If we go into the major units starting with Spain, loan growth was 1% year on year, a slight decrease 0.8% quarter on quarter basically because of seasonal factors the fourth quarter tends to be strong in terms of loan growth. Also funds grew 7% year on year, 6% quarter on quarter. We will see the breakdown of these two in a minute.

We have a positive evolution of net interest margins. On the asset side we see strong competition driving down the profitability of our credit portfolio. This is compensated by the lower cost of deposits. In the first quarter we had a slightly higher decrease in the cost of deposits than the drop in the loans.

This is -- as a result of this we had positive net interest income growth of 1.5% year on year. Within these we have a lower contribution from the government portfolios from the ALCO portfolios that because of the drop in interest rates contributed less in the quarter. Despite that, we had positive net interest income growth year on year.

Fee income was weak due to some limits that we had in the credit card business. And because of lower activity in general, also we had some one-off gains associated with M&A and other corporate activities in the first quarter of last year that we didn't have in the first quarter of this year.

We also had less trading gains this quarter. And this explains that gross income year on year was slightly down 1.5%. But we have very positive performance in terms of costs, very positive performance in terms of provisions. And as a result, our attributable profit was at 20% quarter on quarter, 42% year on year.

If we look at the loan evolution we show very positive new production rates. We are producing loans for companies 24% more, 36% more to individuals, 23% more in mortgages. The dynamics in the mortgage portfolio are those that with the new production we are not able to compensate for the amortizations of that portfolio and you see the mortgage portfolio contracting.

On the other hand, the companies portfolio is expanding and expanding at very, very good rates. One basically balances out the other and that is the reason why we are not showing more growth in the balance sheet but the underlying trend us clearly positive. And the new production of loans is clearly positive in the quarter.

We are also growing our demand deposits and funds, mutual funds, at the expense of time deposits. In general, we are focusing on segmentation, branch specialization and this is we think yielding positive results.

In terms of asset quality, very positive numbers as well, a very significant decline in non-performing loan balances in the quarter. The NPL ratio is still at 7.25% at the end of March and the coverage ratio at 47%, 2 percentage points higher. And the cost of credit is now slightly below 1% and it should continue to decrease in the coming quarters.

So in general we think that the performance in Spain to some extent also hides the good underlying performance of the business. New loan production is positive. And clearly we are controlling costs better and we are having a much better contribution from the cost of credit.

Moving into the UK, loan growth was 5% year on year, 3% growth in funds. It is important to note here that the growth in loans includes the incorporation of the PSA portfolio which amounted to around GBP2.5b. Net interest income was up 8% year on year, basically due to lower cost of deposits and higher volumes. Quarter on quarter is flat because of the reduced SVR portfolio that, as you know, has higher margins than the average mortgage portfolio. So that explains the slight decrease quarter on quarter. Also the lower -- the less number of days that we've had in the quarter and the impact of PSA explain that change quarter on quarter.

We have higher costs, basically because we're investing in our digital capabilities. We are refurbishing our branches and strengthening our GBM business and our corporate businesses in the UK.

We have lower provisions as well. Quarter on quarter there was an increase because of the releases that we had in the fourth quarter -- we already talked about that -- for the sale of a portfolio.

Looking at the activities in individuals, the 1|2|3 continues to yield very positive results. We're capturing around 100,000 new clients a month and adding around GBP1b to our current accounts a month. We're improving our service quality. We are now, for the month of March, we were top three in the quality of service in the UK. And we are the bank that is capturing the most switchers in the country. So we are very happy with the performance here. And we think that we're going to see even better results in the future.

With regard to the Company's growth of 9% in the quarter in a market that is declining, that shows that we are gaining market share. And again I think it's also a very positive result.

So in short, in the UK, very positive dynamics despite the fact that it's difficult to expect an increase in margins going forward. We are managing our business with improved asset quality, improved quality of service. We think it's also a very positive performance.

Moving to Brazil, we have a very positive P&L which is basically not a coincidence. Two and a half years ago we decided to push a strategy that focused on growing in loan -- low-risk products and low-risk segments that tried to control costs and improve efficiency and try to improve also our commercial capabilities. The result of that strategy I think was starting to be seen in the previous quarter, but it's clearly seen this quarter when we are seeing a very positive development in net interest margin, net of provisions, the margins as a result of focusing on low-risk clients and low-risk products.

Obviously net interest margins are down, but net of the cost of credit, net of provisions, margins are starting to improve. And we've seen the best margins this quarter for the last nine months.

It is important to mention that the growth in loans that we see quarter on quarter of 6% is very much affected by the depreciation of the real. 13% of our credit portfolio in Brazil is denominated in dollars. The dollar appreciated 23% relative to the real. So this affect -- explains around 3 percentage points. And we also added, as Jose Antonio said, the portfolio of Bonsucesso, the payroll-based entity which explains another 0.7% growth.

So excluding those two effects, loan growth was 2% in the quarter, which is very much in line with our expectations for inflation in the year. So it's basically those elements that explain this very high growth in loans.

Looking at the P&L, we had 11% year-on-year growth in -- sorry 5% year-on-year growth in fee income, net interest income and fee income, basically driven, as I said, by the improvement in margins. Costs are well below, growing well below the rate of inflation. Inflation is at around 7%; costs rose 3%. Provisions were lower, improved cost of credit and the NPL ratio was also lower. And also we had a positive impact because we have now less minorities in the quarter after our transaction of last year. And as a result net attributable profit was up 41%.

On the next page we can see in fact the strategy that we're following, growing very low income segments and client segments and -- sorry, low-risk segments and low-risk products; growing more in companies and in mortgages. And then in payroll-based lending than in, for instance consumer finance. We're seeing improved performance in SMEs. So overall we think the strategy is positive.

When comparing to what the market is doing, we're growing a little bit more than the system year on year, as you can see 15% relative to 11%. But this is basically explained by the higher growth that we have in companies where we have a higher market share relative to other banks and because of the impact of the US dollar.

As I mentioned before, the cost of credit is down to 4.6%. And it's basically the consequence of this low-risk strategy that we started following a couple of years ago.

So the bottom line of Brazil is that we think we have the right strategy in the current economic environment in Brazil. We are prudent in risks, but we have to take benefit of the opportunities that we see in the market, particularly in companies. And we have a higher contribution from Brazil to the Group because of lower minority interests.

Moving to Santander Consumer, we are seeing positive underlying trends in Europe where [conception] is picking up and car sales in those countries we operate was also up 8% year on year at the end of March.

We are -- obviously the focus is integrating the acquisition that we realized in the Nordic countries and the agreement with PSA. Gross lending amounted to EUR72b. That's a growth of 20% year on year; excluding the change in perimeter, growth was 2% year on year. New loans increased 9% excluding the perimeter changes.

Attributable profit was EUR242m, 11% growth year on year. Excluding -- all the components of the P&L have very positive, very high double-digit growth rates basically explained by the change in perimeters -- in perimeter.

Again as we add those units of the PSA agreement, that has not been included in the quarter, in the coming months, we will see similar rates in the future.

Moving to the US, lending -- let's -- the P&L we show here is the consolidated business that we have in the US. So it basically includes both units, SCUSA and Santander Bank. At the bank, lending increased 9% year on year excluding the sale of loan portfolios that we did and the securitizations that we did last year. Including those you see the 1% growth, but excluding those we're growing at 9%. The focus is on companies and auto finance. Deposits also grew 10% year on year, 4% quarter on quarter. And here, As Jose Antonio said, the focus is basically core deposits.

SCUSA, the strategy at SCUSA continues to be optimizing the business mix between what we originate to keep in our balance sheet, what we originate to sell and the activities, the servicing activities that we do for other entities.

Results, the attributable profit was up 28% year on year due to, as we can see, higher gross income and lower provisions. The main explanation for the better figures in gross income is SCUSA. The bank suffered because of the low interest rate environment that we have in the US.

Costs increased 9% in an effort to comply with regulatory requirements and the IT investments that we are making.

Loan loss provisions were down 4%, again thanks to the favorable evolution of SCUSA. The NPL ratio stood at 2.3% and coverage at 211%, over 300% coverage at SCUSA which is best practice in the sector in the US.

Quarter on quarter we have a decrease because of the capital gains that we have with the sale of a portfolio to optimize Santander Bank's balance sheet, as I mentioned before. And I just wanted to make a final comment that we are making progress in building SCUSA as the operating entity in the US.

If we move to the corporate activities, we have a higher cost associated with the corporate center this quarter, basically a combination of different factors.

We have lower cost of funding in the quarter that was compensated by lower income from our corporate and securities portfolios. In general, we have a -- less cost there. We have higher costs associated with regulatory impacts. And also we have a lower tax recovery which is linked to a rise in the Group's tax charge and the better business evolution that we have in Spain.

Losses were obviously lower than in the fourth quarter, basically because you remember in the fourth quarter of last year we had a impact of the handling fees in Germany.

And with this I will turn it over back to Jose Antonio for his closing remarks. Thank you very much.

Let me do the sum up in a minute to leave you time to make the questions you want. So let me do to sum up the conclusions. Well, we are thinking we are facing a relatively benign growth environment in our main markets broadly, but Brazil, with some uncertainties in very low interest rates and increase in regulatory requirements that is a constant in the industry in the last couple of years.

We are starting the year with a solid -- what I deem as a solid start-point. Good dynamics in results 9 out of 10 core units have grown profits. Volumes we are growing in almost every geography. From a qualitative standpoint, we have some liquidity and capital ratios appropriate for the business model, but it's a structurally (inaudible) profile.

We are seeing and we expect to continue to see good dynamics in risks, NPL and coverage ratios and the cost of credit improving at the Group level in almost all the units. I recognize that in some units there is very little room to improve.

The evolution of reserves, volume and capital is allowing us to improve our main profitability ratios, in line with our -- the targets we established for the three-year plan.

We continue to make progress in our strategy. And I need to finish this presentation making some comments in relation with the other -- how we are evolving in our strategy in relation with customers and employees and associated with the target we established.

In relation with customers, we are extending different tools. The new CRMs in Chile, Brazil. US and Spain. The 1|2|3 work has been implemented in several geographies, Portugal, Poland and Germany. We've had new initiatives in relation with companies to have a better operating model, digital operating model with companies and individuals. The multi-channel strategy is following -- is progressing well all across the units.

In relation with the employees, we are launching a new human resources (inaudible) plan to ensure that we develop properly the talent we have inside the Company.

Well, in relation with our commitments with the society you know that we have an extensive program of universities in which we expect to invest EUR700m in the next four years. In this regard, this quarter we present a new web for the Santander Universities Company portal, was presented. And we also reached an agreement with a university UC3M to pioneering research institute in big financial data.

Lastly, during the first quarter, several steps were taken to enhance the transparency with our shareholders and make easier to exercise their rights. In fact, in the last general shareholder meeting the participant via electronic devices has multiplied by a factor of 7.

In short we are progressing well in terms of results as well with the cultural transformation we're following internally in the bank in order to reach our targets and to became a bank simple, personal and fair, as we decided we want to be.

Finally, let me to remember that, well, we have an Investor Day that is going to be held in London at the end of September this year.

Now we remain at your disposal for the questions you may have.

Now we have the Q&A session. Please let me remind you to ask no more than two questions per participants so everyone who has joined the call can ask the management. And now we can take the first question.

(Operator Instructions). Jernej Omahen, Goldman Sachs.

Good morning, gentlemen. Thank you very much for doing the call in English and for taking the questions live as well. I would like to ask two questions. The first one is on the deferred tax assets. Can you just update us please what the outstanding amount as of the first quarter is? And what your views are on the debate at the -- relating to the European Commission revision of the deferred tax assets and their potential deductibility from the capital base. How would you react to that and what do you think the impact on Santander would be if that went through?

And the second question I have relates to the credit quality evolution. So your non-performing loans are falling. The coverage ratio is -- so went up by 2 percentage points this quarter. But the P&L charge for credit risk was broadly flat this quarter. How should we think about this? Is there a level of coverage that you think you want to reach and at that point we should expect a sharper decline in the P&L charge, or do you think there's going to be a gradual decline? How should we think about the provisioning leverage in the context of Santander? Thanks a lot.

Thank you, Jernej. Let me to elaborate on the DTAs issue. As you know, what we have is a very -- a process that is about to start. The European Commission is thinking in opening an investigation but it has not yet opened an official investigation on this topic. To speculate on the outcome of a process that is not yet started probably is to play and I am not going to elaborate on this. What I can give you is data that related with a -- the amount of DTAs we have in the balance sheet and that potentially can be affected.

But whatever outcome of this process or another process that may follow the same path, done by the European Commission or the ECB or what -- or other regulators, we have around EUR5.7b or something like that in our balance sheet. And so you translate this into core capital, it's below 1 full percentage point of core capital. This is the amount that's in our annual report and we publish every year, I think, in the annual report; [you have here] report, yes? So we update the market with these figures every six months.

But it's too early to elaborate more on this. So I think it's -- we don't have more information than that.

The second question is about credit quality. Well, as I anticipate in my presentation, we were talking for years about normalization of the profits. And one big piece on this normalization was a reduction on the cost of credit. Well, we've been going through a normalization in the the (inaudible) markets for sure. We are already normalized probably in consumer finance. But the main deals remain to be done in Spain probably and in Portugal somehow. And because of credit -- particularly in Spain where we are right now slightly below 100 basis points, we should head into this. But the average across the cycle is 60 to 70, but probably you can expect some kind of overshoot happens normally after a crisis like the one we suffered in Spain because of the collection, the recoveries.

Well, the room, from where we are now around 100 basis points cost of credit, the average across the cycle that is 60 to 70, gives you a number about where we are.

In Brazil, that may be the other point, the cost of credit is falling because of the change in mix. So we've done a pretty radical change in mix in the country. So now we have less consumer, unsecured consumer lending and much more secured consumer lending, let's say mortgages. And we have also much more large corporates and GBM exposure that normally has significantly lower cost of risk.

Thank you. Next question please.

Daragh Quinn, Nomura.

Hi, good morning. I have two questions, the first one on Spain net interest income and margins. It looked like there was fairly decent pressure on margins this quarter with the decline in net interest income. I wonder if you could just elaborate a little bit more on the type of pressure you're seeing on lending yields and how you think the competition is going to evolve, i.e. how much more pressure, downward pressure do you expect to see on lending yields in Spain?

And the second question is on Brazil. As you highlighted, the changes in mix and cost control that you're focusing on is having quite a positive impact on the P&L. But I just wondered, given the ongoing deterioration in the macro environment, how long do you think you can expect to see positive trends in the P&L in Brazil, given the deteriorating economic conditions? Thanks.

Okay. Let me elaborate on Brazil and I will pass the Spanish question to Jose. In Brazil, so it's true that we are facing a challenging environment. But let me to re-stress what we've done in the last two or three years that lead us to be relatively optimistic about the outlook of our franchise in Brazil. We are not working within a scenario in Brazil that is significantly different than the consensus. We are thinking that the GDP is going to fall 1% this year. So we don't expect a significant lending growth. Meaning a significant in Brazil real growth; we expect to grow the loan book probably around 8% in line with inflation, so no growth in real terms that for an emerging economy, as you know, is not particularly demanding or particularly aggressive. And we expect to grow in line with this.

What we have -- we had done in the last few years, we improved significantly our franchise in several fronts. The cost base, it's the third year in a row that we are growing our cost base significantly less than inflation, while our competitors probably are growing in line or above inflation. Remember that the wage agreement in the country was around 9% and we are lowering the cost much lower than this. So this is -- we work a lot in the cost base. We work a lot in our capacity to -- in our collection skills. And at the same time we changed dramatically the business mix.

So having all of these, taking all of this into account and understanding that the environment is quite demanding, we are fairly positive that we can continue to deliver some revenue growth in the country, with very good cost control and probably about the same cost of risk. So maybe there's more up and downs due to the specific cases, but overall we see a fairly stable P&L in the coming quarters, in the trends, in a market that is not performing very well.

So now I hand it to Jose to elaborate on NII margins in Spain.

Well, as we showed in the presentation, we see a strong competition on the assets side, very strong competition. As interest rates are very, very low and we have lots of liquidity, we've seen lots of competition on the assets side. Just to give you an idea of where we are in terms of companies, including all types of companies, the -- we are producing right now loans at around 200 basis points. A year ago it was around 260 basis points. And that trend is continuing.

The only exception to that is mortgages. New mortgages are being produced at a rate of around 150 basis points relative to the back book at around 90 basis points. But the trend clearly, going forward, is lower spreads on loans because of competition.

On the liabilities side, so far we've been able to compensate because of the drop in the cost of deposits. But that has a limit, obviously. We think we can have a few more quarters, just a few more quarters of positive news there, but there will be a point where that factor will stabilize.

So we think that going forward the pressures in terms of margins are going to mount. On the other hand, as we described, we've seen very positive trends in new production. We are seeing new production in mortgages going up 24% and companies lending also going up high double digits. So the combination of those two factors is what is going to be driving net interest income going forward.

Thanks for your questions, Daragh. Next question please.

Francisco Riquel, N+1.

Yes, hello. I wanted to elaborate a bit more on the net interest income in Spain and also in Brazil driving the contribution of the bond portfolio because net interest income has fallen quarter on quarter despite the best -- diversified customer spread. So you can update on the bond portfolio and NII contribution in the quarter?

And also in Brazil the net interest margin is up quarter on quarter despite the lower loan spreads. So if you can update there on any contribution of the bond portfolio affecting in the quarter as well.

Okay. Let me to elaborate on this and I'll pass the question to the ALCO portfolio to Jose. In Brazil, probably -- sorry, I forgot to elaborate on the loan spreads. It's the only geography in which we are seeing clearly the front book increasing; we are able to increase the spreads in the front book. So in the last quarter we saw this trend and we think this is going to remain in the market for awhile. So positive news in this front assuming that our mix -- I'm speaking like for like naturally -- the mix effects continue to be there. But on a like for like we are able to increase the spreads in Brazil.

You want to elaborate on the ALCO contribution in Spain?

Yes. Well, in both Spain and Brazil, in Brazil there was no contribution whatsoever from ALCO portfolio to net interest income. In Spain, because of lower interest rates, the contribution was significantly lower than the one we had last year. Roughly it was like around EUR100m less, slightly more than EUR100m less contribution to margins this quarter than it was a year ago.

Thanks, Paco. Next question please.

Carlos Peixoto, BPI.

Hello, good morning. My question was on the portfolio on (technical difficulty).

Sorry, Carlos, we really can't hear you.

(technical difficulty) revenues in the quarter. And I guess half of it can be explained with the quarterly earnings. My question is what are the rest of the evolution related with. And probably related with this point is also whether the (technical difficulty) includes capital gains on the bond portfolio in the numbers.

My second question would be a bit on (multiple speakers).

Sorry, Carlos --

-- over the coming quarters but particularly given the low expectations on inflation and the impact that this has on the inflation and portfolio. Thank you very much.

Sorry. I'm very sorry, Carlos, we couldn't hear you. So unless you repeat it on a much more clear basis, we will take the -- the IR department will call you for a follow up.

Do you hear me better now?

Yes, much better now.

Hello?

Yes.

Hello, Sergio. Can you hear me?

Absolutely yes.

Carlos, go ahead.

Okay.

Please go ahead with your question.

Carlos Peixoto, BPI.

Carlos Peixoto, BPI.

Hello, are you hearing me now?

Yes.

Yes, Carlos, go ahead, we can hear you.

Hello.

I think we jump Carlos and we'll follow-up with him. Next participant please.

Andrea Filtri, Mediobanca.

Yes, good morning, two quick questions, one on strategy and one again on ALCO. Could you please provide more details on the Pioneer Santander's with management deal with regard to the Santander's [management] P&L in 2014, prospects for a subsequent IPO and further acquisitions, and a comment on the completeness of the product offer and on the governance of the combined entity?

And on the ALCO if you could please provide as usual the breakdown of the portfolio, the contribution to the Q1 2015 P&L and the maturity profile. Thank you.

Okay, in relation with Pioneer deal we have announced, I think two days ago, that we signed with [HR] a memorandum of understanding, we signed terms and conditions. Now we're entering the process of drafting the contract that is going to last maybe two months. We will sign the final agreement around two months -- in two months -- don't take this for granted, it's not written in stone, maybe two months, maybe one month and a half, maybe three months. But we will sign the contract in two months. And afterwards we enter into all the regulatory process that is going to be quite long, probably as long as one year. So -- because we will be asking for regulatory approval in all the jurisdictions in which we have asset management companies. That basically means in all the jurisdictions in which we are -- we have a core subsidiary, so Mexico, Brazil, Chile, Spain all these jurisdictions.

So we will have then an operating company probably one year from now is the timetable I have in mind. But this may have to slide as more changes are down the road. This is the timetable I have in mind. As I said it's not written in stone.

And now, Jose, you want to elaborate on the ALCO, yes?

Yes, well, the total ALCO portfolio that we have at Group level amounts to EUR84b. And the contribution to net interest margin in the quarter was EUR350m for the Group.

Thanks, Andrea, for your questions. Next question please.

Britta Schmidt, Autonomous Research.

Yes, hi there. I hope you can hear me. I've got two questions please. The first one is to what extent was the level in Brazil impacted by the US dollar versus the real? Is that hedged on a local basis? And do you expect that this will be reversed at some point if the interest rate continues to improve?

And then secondly, within the Santander Bank in the US, the cost/income ratio is at 71% impacted by the higher regulatory charges there. Is there any management action that you can anticipate and could talk about, improve the situation there? Thank you.

In Brazil, I think your question refers to the -- to what point the level of interest rates, if I understood you well, is impacting the capacity (background noise) revenues or up to what point a movement in the rates changed our capacity (inaudible) rate to generate revenues. It's not an important topic this one in Brazil. As you know the amount of the spread we get on deposits is relatively low, is around 1%. As you know, the majority of the current accounts and cheap deposits should be reserved in the Central Bank. And the Central Bank pays you nothing or a fixed rate, so higher rates in Brazil do not translate necessarily into higher interest significant higher revenues, because on the liability side we have the reserve requirements coming from the Central Bank. And this -- we've been asked to make -- to increase the revenues due to this.

The second question related with the US and the cost income in US. Naturally we have a unit that is the bank that the costs are relatively high; the cost of income is very high. We are mixing there in the bank. As you know we are incorporating a holding company in the US from scratch. Probably all these costs are falling into the bank cost. Probably we should look more at the costs of the consolidated holding and not that much into the bank isolated because probably some of the costs that will fall into the holding in the future now are situated in the bank.

Having said that, it is true that our operation, banking operation not the consumer operation, banking operation in the US is -- we have plenty of work to do to improve the franchise. And the revenue side should be improving in a significant way. It's not that much that it's not that we have extraordinary high cost base, it's more that our capacity to generate revenues, particularly the fee income, is particularly -- is weak compared with our competitors in the capacity. The NII we are more or less with the competitors. In fee income we are lagging well behind those competitors and there is plenty of work to do in improving the franchise in order to improve the revenue generation and having a better cost income ratio.

Thanks, Britta, for your questions. Next one please.

Ignacio Ulargui, BBVA.

Hi, good morning, everyone. Just one question on Mexico and the increase in the cost of risk. What should we expect going forward on the cost of risk in Mexico for 2015? Thanks.

Well, we don't expect a significant change in the cost of risk on line by line. What is happening this year in Mexico is we are growing the market and ourselves we are growing less. The loan book is growing around mid-double digit, 15%, 14%, 16%. And what we have is a growth that is significantly lower in credit cards; it's an industry issue. But being the credit cards, the higher cost of risk in Mexico the trend -- we keep the same trend probably the cost of risk is going to be relatively stable. But it matters a lot if the credit cards portfolio starts to grow or not, because in that case the credit card portfolio, as you know, has a cost of risk that is in -- maybe around or above double-digit, while the average cost of risk is significantly lower. So taking aside this change in mix, particularly in credit cards I will say relatively stable cost of risk in the country.

Thank you. Thanks, Ignacio. Next one please.

Mario Ropero, Fidentiis.

Hello, good morning everyone. Two questions, the first one is could you give an update on the front and the back book cost of the time deposit book in Spain?

Second question is you mentioned the ALCO portfolio at the Group level. Could you also give an update on the ALCO portfolio in Spain, average duration and average yield? Thank you.

Well, deposit cost I don't know if this quarter the front book we are running -- the new production is coming up 0.30% something, 0.33% or 0.35%. So this is the new production. While I think the average cost of the time deposits is still above or around 1%. So that -- this gives you the dynamics of this -- the time deposit portfolio.

In the ALCO portfolio, Jose, do you want to elaborate specifically on this?

Yes, in Spain we have a total of around EUR27b with an average duration of slightly less than four years and an average interest of slightly above 2%.

Thanks for your questions, Mario. Next one please.

Alvaro Serrano, Morgan Stanley.

Hi, thank you for taking my questions, just a follow-up on the Spain NII with Euribor lower and the mortgages still having to re-price, and all the dynamics you've explained, do you think you'll be able to grow NII this year in Spain?

And the second question was more on M&A. The Postbank is now up for sale. You've looked at the bank in the past and my impression is that Germany is an interesting market for Santander. And I think you've shown interest in the past with acquisitions of SEB and the consumer business you're building there. What -- how should we think or how are you thinking about opportunities such as this one? And also if you can update us on where we on Novo Banco? Thank you.

Okay, in relation with NII in Spain Jose already elaborate on this, but allow me to add a bit of color. We think that we continue to be able to re-price downwards the deposit book. I told you the new production in front book how it's behaving. So this is still a trend but has limit. We are running at 0.6% the cost of deposits, probably we can reach some figure that is 0.4% or something like that, but there is a limit.

On the other side and I mentioned before, we are -- we were not expecting so the decrease we are seeing in asset spreads -- or we were expecting this to come later. What we are seeing by the way is more offers coming to the market at lower prices and probably this is due to the sales liquidity in the market and to the effect of the quantitative easing. So we are seeing a relatively -- this quarter we were able to offset the decrease in asset spreads with decrease in deposit spreads. Probably this is not going to be possible more many quarters more, probably one more. But probably afterwards we're going to suffer in NII in Spain.

(inaudible) elaborating on the ALCO portfolio that is more tactical than anything else.

In relation with M&A you know our -- we are participating in Novo Banco. We are not -- I don't know if the deal yet has started, or it's about to start. We've analyzed the bank and we're going to put an offer within -- that is attractive for us once we see the numbers.

In relation with other markets, we clearly stated our policy there, our priority is organic growth. Naturally we're going to look in the markets in which -- that are core for us. The potential opportunities probably not very big ones and this is our stance in relation with M&A, so the only process we have right now is Novo Banco in which you know where we're at.

Thanks for your questions, Alvaro. Next one please.

Raoul Leonard, Deutsche Bank.

Hi there, I have two questions. The first one is about balance sheet growth. You obviously grew your net customer loans and total assets in the quarter. What I'm interested in understanding is what's your expectation for balance sheet growth going forward for say the end of 2015 or 2016? And do you expect the same pace of growth to continue, because leading on you end up with risk weight inflation growth? Could you update us on what your expectations are for that?

And then will -- do you think your capital base will end up being your capital base target between 10% and 11%. Do you think that will end up being some kind of constraint on your balance sheet growth? And would you actually pull back from loan growth if you're not making the bottom of the target at 10%? So that was like three questions.

My other question is actually on tax rate guidance, the tax rate has been trending up and this quarter it was around 31%. And how should we think about that going forward? Thank you.

So, I'm not sure if I get right these questions. I understood that given the growth and the prospect of growth we have in relation with the capital base we have. Well, it's true that we are seeing a pace of acceleration in the growth we are having in our geographies. At the same time we are uniting -- the profits are going up. And as I mentioned in the presentation with the current growth and the current profits naturally we are able to generate around 10 basis points free capital per quarter after dividend and after the growth in risk-weighted assets.

This quarter was different, I elaborate before, but due to PSA that brought into the books EUR12b new loans. So overall I think that we should be on track to get into our target that is 10% to 11% core capital ratio. In coming quarters we're going to approach the lower part of the range and we feel comfortable in this regard.

The second question was about the tax rate. It's true that the tax rate this quarter came 30%. And this is one-off, we are just accruing 30%, last year we were accruing at this point of time 27.5%. It's true that we are expecting a higher tax rate due to the combination of the Euro office and the corporate -- different corporate tax we have across Euro base.

, Thanks, Raoul. Next question please.

Ignacio Cerezo, Credit Suisse.

Yes, hello, good morning. I had a couple of questions. First one is on the valuation adjustments line in the balance sheet has been close to EUR3b decline in the quarter, if you can split that between AFS and FX.

And the second question is on the contribution to deposit guarantee fund. I think EUR50m to EUR60m quarterly number was given for the Spanish business. But if you can give us like a Group number and split that with individuals. Thank you.

Valuation adjustment EUR3b between AFS and FX. I have in mind FX being EUR2.3b or EUR2.4b and the rest just comes from AFS. Remember our policy, let me to remember our policy in hedging the FX, we -- you have a policy to hedge the capital ratio. It means that we hedge the ratio not the actual amount and this is the reason why we have this difference in valuation adjustments.

In relation with the deposit guarantee scheme, I mentioned the Spanish one, do you have the figures of the other ones? I do not have here.

We'll follow-up.

We'll follow-up with you, Ignacio, and we'll provide you the figures for the other [journeys].

Thanks, Ignacio. Next one please.

Stefan Nedialkov, Citigroup.

Hi guys, good morning, it's Stefan Nedialkov from Citi, two questions from our side, another one on the balance sheet. We are seeing that Spain and Mexico are seeing increases in basically the trading portfolio due to credit institutions as well as due from credit institutions. I just wanted to understand, is this an FX effect through the derivatives line of some sort? Or is this something else, maybe liquidity related?

And number two on Brazil, what's very good showing this past quarter, ROE in the mid teens. Your Group ROTE is at 11.5% so that's very close to the target of 12% to 14%. I wanted to understand how much upside is there in Brazil to help you to get to upwards of 12% to 14% ROTE as you're targeting? Is Brazil the driver to get you to 12% to 14%? Or is it another geography? Thank you.

Thanks, (inaudible) Mexico and Spain.

It's mostly FX.

It's more the FX.

There is an increase in both assets and liabilities on financial institutions that's basically related to FX in most countries. And also to increased activity in the repo market associated with GBM activities. So there's no special issues with regards to liquidity, it's basically repo in Spain associated to GBM and for the rest of the Group it's FX.

Okay, in relation with the second question that our targeting account annual equity being 12% to 14% and we being 11.5% that we are close, well, there's still room to go. And up to what point Brazil is going to help on this, as Brazil being the main contributor to the profits of the Group, it naturally is a key part of the Group. And as I said, our franchise in Brazil has improved quite significantly in the last two years and I remain confident that Brazil is going to help us in a significant way to achieve our targets, not only in return on tangible equity, also the other targets we establish at the Group level.

But I'm -- I remain optimistic about the outlook for Brazil in the medium term. Clearly in the medium term short run we're going to produce good results. But in the medium term we expect Brazil to produce growth -- superior growth compared with the average of the Group.

Thanks for your questions, Stefan. Next one please.

Sofie Peterzens, JPMorgan.

Yes, hi, here is Sofie Peterzens from JPMorgan, thanks for taking the question. One quick question on the collective provisions. They were up quite significantly from EUR6.3b end of last year to EUR8.5b in the first quarter. Can you just talk about why you increased the collective provisions? Are you concerned about something particular like Petrobras? Or is something that hasn't hit the balance sheet -- the balance sheet later this year?

And second of all, can you give an outlook on how you view the UK? Growth in the UK has been very impressive so far. Should we expect similar growth in the UK going forward? Thank you.

Well, it's related, the collective provisions is related with the exchange rate, so it's basically due to this. And the outlook for UK as Jose elaborate in the presentation, we are seeing fairly stable spreads while the liability re-pricing is coming to an end. And we are seeing relatively or good credit quality, so we don't expect this from this side. And all the capacity to grow in the volumes in the country is going to be key to produce better results than the ones we got in this quarter.

Thanks for your questions, Sofie. I'm afraid we are running out of time, so we have maybe time for just one or two more incoming questions please. Go ahead with the next one.

Robert Noble, RBC.

Good morning, two questions from me. In Chile should we expect more pressure on net interest margins in the coming quarters? Or do you think that the positive customer dynamics you've got will outweigh the negative inflation impact?

And in Brazil, could you comment on the progress of all the lawsuits going on? And specifically the press reports on potential tax fraud scheme? Also what litigation provisions you have set aside for any lawsuits in Brazil as well? Thank you.

Well, in relation with Chile we elaborate on inflation. Last year inflation was 6% while this year we're expecting somehow around 3%, around 3%. Well, going forward, pressure probably in the first quarter you split the 3% we expect for the year in the first quarter we got a little bit more, so than the other quarters. But overall aside from the inflation, and the inflation has an effect, we tend to have a loan position due to the mortgage book between EUR5b and EUR7b. This is impacting the P&L, so inflation different from the 3% and the impacting EUR5b to EUR7b portfolio.

The lawsuits in Brazil, I don't know which one you are referring to, but probably I don't know you refer to the relation with fiscal issues or which one are you referring to?

On the tax fraud scheme.

Yes, on taxes. Well, we don't have any indication from the authorities. And we think while this was -- our behavior has been correct and we don't expect any kind of bill there.

So, the last one.

Yes, last question please.

Carlo Digrandi, HSBC.

Yes, good morning, two small questions. You've been guiding for organic capital generation of 40 bps this year if I understood correctly, 10bps per quarter. So the question is if you expect a capital generation to accelerate as of 2016 onwards, maybe 60 bps, 70 bps? Or you think the regulation will take its toll and you expect a flat 40 bps per year over the next two years.

And the second question on the Spanish real estate run-off. You've been guiding for a good improvement in non-performing loans especially from Spain, good trends. So I was wondering if the weight of this division will come to zero by 2017 in terms of negative contribution to the profit. Thank you.

Carlo, organic capital generation I mentioned in the presentation around 10 basis points per quarter. It's what we see with the current outlook we have, so -- and this is what we expect.

The run-off we are stating in Spain as you saw the results, the negative results are falling. So we expect this to keep this pace and to produce less and less negative result. And you mention 2017 coming to an end, probably we are at the pace of 25% if 2017 coming to an end or not if this not coming to an end will be very, very low, with negative contribution.

Thanks very much everyone for joining. Obviously the IR team is at your disposal for further questions. I'll see you next quarter. Thanks.

Thank you.