Banco Santander SA (SAN) 2015 Q2 法說會逐字稿

I think now is the right time. Morning everyone. Thanks for joining this Q2 2015, results conference call. [Sergio Gamez Galvan], Global Head of Investor Relations.

As we proceed exactly in our last quarter, our CEO, Mr. Alvarez, will present the Group performance, followed our CFO, Mr. Jose Cantera, who will detail on the business areas performance.

The presentation will finish, as we did last quarter, with a live Q&A session. We'll appreciate if no more than two questions are asked by analysts and investors.

With no further delay, I hand over the floor to our CEO.

Thank you, Sergio; and good morning to everyone. Thank you for attending to this conference call about the second quarter results.

Let me to -- first, to say the presentation is going to be divided in three parts. The first one I will elaborate about the Group performance in the second quarter and in the first half of the year, compared with the previous year.

Afterwards, our CFO, Mr. Garcia Cantera, will comment on the business areas; not all of them, on the most important ones in order not to lengthen too much the presentation and give you more time for questions. The rest of the units are included in the presentation and you have all the information there.

Lastly, I will make some closing remarks about where are we in our transformation plan.

Beginning with the environment, well, in the quarter we have had a significant volatility out of -- coming out of the Greek crisis, mainly in the second half of the quarter.

We conduct our business in an environment of, well, quite significant growth in the main geographies -- in almost all geographies but Brazil. In the US, UK and in Spain growth has been significant. Economies are growing above 2% in all these countries.

In emerging markets, Mexico and Chile grew more than 2% and Poland more than 3%.

Brazil is probably the exception with the economy being in recession and taking adjustment policies that probably leads to a recovery later on in 2016.

Banking activity continued to be affected by the extraordinary low level of interest rates in mature markets. Competition is tougher in some markets; you will see later on in the numbers, mainly in lending.

And, the regulatory environment continued to be demanding, as has been usual for the last couple of years.

Move on to the results. The trends in the quarter was similar to the previous ones. The second quarter ordinary profit, I'm going to refer to the recurring profit; I'm not going to refer to the extraordinary gain we made out of the reversal of tax liabilities in Brazil.

So the ordinary profit was EUR1.7 billion in the quarter with good performance in most of the recurring lines: commercial revenues, costs and provisions.

The first half ordinary profit was more than EUR3.4 billion; 24% more than in the same period of 2014 and 12% above the second-quarter half -- the second half of last year.

The drivers were higher gross income; revenues are behaving quite well; lower provisions, as we were expecting; the cost of credit is going down, as we were expecting; and the costs were under control. We are growing right now in line with inflation in a like-for-like basis all across the Group.

Lastly, a positive impact in exchange rates on results in euros. We will see, in greater detail, later on.

As a result, all units increased the attributable profit in euros. We improved the profitability in a significant way. As I said before, I'm going to continue to elaborate without taking into account the one-off coming from Brazil.

When it goes to the balance sheet, we have a growth in line with the one we were showing the previous quarters: 7% in loans; 8% in deposits and mutual funds gathering.

The quarter was -- we saw moderate growth, 1% quarter on quarter, both in loans and deposits and on funds. In the quarter we continue to reduce the financial costs on the liability side.

We improved the NPL ratio for the fifth quarter running. It's something was expected, but probably the pace accelerated a little bit. The cost of credit continued to normalize all across the board. We will elaborate later on, on unit by unit.

When it comes to capital, the core equity Tier 1 rose to 13 -- sorry, 16 basis points in the quarter. I will explain in detail, because there are some pluses and minus that leads to this number.

The P&L of the second quarter shows a couple of trends. Good performance in the upper part; net interest income and fee income growing quite nicely, 3%, in line with 3% above, excluding the exchange rate impact.

Costs increased by 1%; lower provisions. The good trend that we see in the upper part doesn't fit through the P&L, because the huge trading gains in the quarter that were, roughly speaking, half of the ones we used to have in other quarters; and the higher provisions we took to strengthen the balance sheet, not that much related with the loan book.

As regards the -- as a result, the first half revenues increased by 7% on a -- without exchange rate impact and provisions were reduced by 9%. Those are the two lines that affect mostly the P&L.

Lastly, let me to remember that we are not including, and probably we said the previous quarter, the ordinary contribution to the deposit guarantee scheme in Spain that, well, is around EUR15 million to EUR20 million per month, and will be accounted in the fourth quarter, at the very end of the year.

When we go to go to the main lines of the P&L. We see the -- you have in the screen the six quarters, the last six quarters. You see trends -- I would say, healthy trends in the main lines in -- and in constant euros.

Gross income continued to grow through the period, all the periods, somehow accelerate the last quarter. Costs increased less. And we have positive jaws quarter on quarter, year on year.

Provisions well below those of 2014, and more stable in the last few quarters.

So I will say this that they are our priorities we established to grow volumes, improve efficiency and continue to normalize provisions of Spain and, as you can see in the trends, we are showing in the numbers.

When we analyze internally the revenues, we have the net interest income that increased in a constant way quarter on quarter, so due to higher volumes and lower funding costs.

It's fair to say that the lending spreads, particularly in macro markets are under significant pressure particularly in Spain, also some in UK. But having said that, we continue to -- the lower funding costs continue to offset these trends that are very strong in some geographies.

The second is the better performance of the fee income in the quarter. So it's true that the environment for fee income is tough, due to regulation. So we suffered the regulatory effect; interchange fees in Spain, Portugal and Poland; insurance in Chile; overdrafts in the UK.

Having said that we're able to grow fee income in -- we were able to grow the fee income in the quarter.

When we analyze the net interest income, well, there is a combination of changing business mix particularly in Brazil; tougher competition in more the mature markets; and the sales liquidity, supplies liquidity, in some market has produced some impact in the net interest income.

Finally in trading gains, well, we got less trading gains in the quarter due to the ALCO portfolios. Also, there is some seasonal effect that in every year in the second quarter happens. But, in general, we got half of the trading gains we used to get in other quarters.

When we look at overall revenues, we have a business like we are growing -- business, like for like, we are growing revenues 7%. The FX impact is [5 percentage points] positive.

The 7% rise in constant euros with all the units growing except two units, Poland, due to the lower interest rates. You know that in Poland these translate into a significant lower yield in the high-yield portfolios, particularly those related with consumer lending and credit cards that have a cap of 4 times the Lombard rate, and this affects the stock.

In Spain, where declined a little, because of continued environment of low interest rates and squeezing the spread on loans together with lower trading gains.

In costs, well, we are growing in line with inflation. Inflation -- average inflation in our geographies is 3.9% (sic - see slide 11, "3.6%"), and we are growing in line with this.

Well, there is significant difference between units. On the one side you have Brazil and Spain that are growing significantly less than inflation. So in real terms are falling in Brazil 7% on a like-for-like basis, and 3% in Spain.

UK we are making significant investments to improve the business franchise, particularly on the corporate side, on the corporate commercial business.

In Mexico and Argentina, as you know, we have been opening branches last year, and this translates into higher costs.

Finally, in the US we are making significant investments to improve the franchise and to adapt to the regulatory requirements.

In short, there is tension in costs between the actions we are taking on our efficiency plan, and the other side the investments we are making to improve capacity to develop the multichannel approach to the customers, better services.

So we're going to have to keep this tension in the coming years: tension on one side to try to make efficiencies in the ordinary costs of business; and, on the other side, the costs -- or the investments we need to make to improve our franchises on the -- in face of the digital -- we need to improve our digital proposition to the customers and improve service, without having in mind that the regulatory costs continue to go through the P&L.

So going to the provisions -- loan-loss provisions were 9% lower, excluding ForEx impact. Well, this was somehow expected. The main falls were in Spain, UK and Brazil.

Of the units where the provisions increased, consumer finance is due to the perimeter impact. We include here the business we bought from GE last year and PSA business at the beginning of this year.

Mexico and Chile increased the provisions. The decrease in provisions is below the increase in the loan book, so the cost of credit is not growing.

US, where 90% of the provisions are related with the SCUSA business. That, as you know, is a [supply] business and these provisions depend largely on how big is the amount of the loans we generate we retain in the balance sheet. This quarter the loans we retained were higher than in the previous quarter.

The cost of credit overall in the Group continues to fall to 132 basis points; without SCUSA it's 102 basis points. Remember, well, SCUSA is -- we split this, because SCUSA has a disproportionate effect in the cost of credit, due to the business they are running.

Looking at the balance sheet, on the loan book growth in most units, but Spain, that is almost flat; and Portugal year-on-year basis. Although in the quarter, we saw for the first time in how many quarters that Portugal has started to grow the loan book, 0.3%, but is the first time probably in the last two years or three years, in which the book has stabilizing Portugal. That is a good news.

We have a clear strategy to lend more to companies in all countries. We are making specific offers that you know Santander Advance. Santander takes plenty of initiatives to try to grow the loan book, particularly in those markets that were under intense deleverage in the past years.

Regarding to individual borrowers, we are growing quite nicely in mortgages all across Latin America. Mortgages in Brazil are growing at 34%; 14% in Mexico. It's true that the new lending is growing out also in mature markets, like Spain and UK, but this is not enough to offset the amortization we have in the back book.

A strong half in consumer finance, while we incorporate the portfolio, as I referred before, Nordic countries and PSA in France and UK. There's more portfolios coming as long as we are -- when we are progressing with the PSA in other countries. Net lending to the real estate sector in Spain, as a matter of fact, fell 39% year on year.

In deposits, year-on-year growth of 8%. [Add] units make a positive contribution year on year. In the quarter you see some falls, but this is more due to large deposits that are fairly volatile and may go maybe in or out at the end of the quarter; but consistent trend of growth in the deposits gathering, along with significant growth in mutual funds.

We continue to grow selectively and probably better in the most attractive parts of the deposits. We had a 19% (sic - see press release, "20%") rise in demand deposits with growth in all units; marketing mutual funds 17% up year on year; and 13% (sic - see press release, "19%") fall in time deposits, particularly in terms -- in Spain, and also the mature markets like UK.

When it comes to credit quality, well, good news here; the consistent trend, trending down, NPLs, 'til 4.64%, 21 basis points less in the quarter.

The coverage rose to 70%. Taking into account that 60% of the loans have real-estate collateral, this means that outside those loans our coverage is closer more than 100% in all the NPLs.

Some ideas about NPLs. Net entries fell 35% quarter on quarter and year on year. A positive EBIT from the change in the composition of lending in some units. NPL ratio improved almost across the board: Spain; UK; consumer; Poland; Chile; stable in the US.

Lastly, let me to elaborate a little bit, although our CFO will elaborate more in detail, about Brazil. Brazil, the NPL grew a little bit in the quarter. We are not expecting a significant change, due to the economic conditions in the country but this is true, that we do not, for sure, expect the NPLs to fall significantly.

The other way around, we do not expect either a significant increase in the NPLs in Brazil in the coming quarters.

So, overall good trends at the Group level in all the parameters related with credit quality.

When it comes to capital, the Core Equity Tier 1 fully-loaded ratio was 9.83%; 16 basis points, in the second quarter. The main movements is the generation in the quarter -- the organic generation in the quarter were 22 basis points from the ordinary profits and the evolution of risk-weighted assets.

This is well above our sustainable trend. As we said in the previous quarter, we expect to grow -- to be able to retain it to around 10 basis points per quarter, not the 22 we have in this quarter.

We have in this quarter non-recurring effects coming from, well, the one-off from Brazil, 20 basis points; a 3 basis points negative from corporate operations, mainly PSA; and some portfolios we bought in Mexico. In SCUSA we bought consumer portfolios in Mexico.

And, 23 basis points impact of the AFS portfolio, the mark to market of the AFS portfolio. This was at the end of the quarter. This has been corrected, this amount was related with the Greek situation. This was corrected, this amount, by around 10 basis points, so almost half of this is back to the capital ratio.

The total capital ratio is 12.37%, due that we issued GBP750 million AT1 in the UK during the quarter.

In short, a very good quarter in capital. It's clearly in line with our targets that we established by the end of the year to stay around 10% -- above 10% at the end of the year.

Financial ratios, well, as a result we have a better efficiency; it's running slightly below 47%.

The EPS, largely flat Tin the quarter. The return on tangible equity is running at 11.5%, progressing towards our target of 12% to 14% in 2017. The stability in EPS per share, due to the increase a number of shares during the period and a higher cost of the AT1 issuance made, as you know the AT1 cost is included in the EPS.

The rise in tangible book value per share, 8% in the last 12 months.

These trends puts us in a position to achieve our medium-term goals that we established, that we made public, back in February for 2017.

Now, I hand over to Jose that will comment in the main units and we will make some conclusions at the end.

Good morning, everyone. I'll comment on the main areas, a bit more detail on the major ones and quickly on the others.

The first idea is that our net income continues to be highly diversified. Around 40% -- slightly over 40% of our revenues come from developing countries, 59% come from developed countries; similar levels from previous quarters.

Brazil and UK contributed 20% to net attributable income; Spain around 16%; and US and Santander consumers around 10% each.

When we look at the countries, in Mexico we completed the opening of 200 new branches. That's been seen in the level of activity that we have in the country, growing double digit in both loans and deposits and gain in market share.

Profit before taxes is up 9% year on year with a strong gross income. Net interest income is up 13%, as I said, due to volumes and a good management of spreads, and we also had stable cost of credit.

In Chile we kept a good level of activity in our targeted segments, basically companies and high-income customers. Year on year, we had lower benefits, lower profits, because of lower inflation. As you know, we have close to [EUR6 billion] in UFs and because of load inflation, that obviously had a negative impact in -- on our P&L.

In the second quarter relative to the first, we saw a recovery in profits, because of slightly higher inflation in the quarter. Going forward, obviously inflation is going to be key, but we see inflation relatively high in the second half.

In Poland the economy is doing very well, as you know, growing above 3%. Our margins were affected by, as Jose Antonio said, the lower interest rate that retroactively had -- we had to reprice our loan portfolios. This was partially neutralized by the ALCO portfolios.

In terms of activity, we are doing very well, growing in lending and funds; and margins are -- actually, had a positive impact, coming from lower cost of deposits. Remember, the campaign that we launched last year. So we still think that we have some room to lower cost of deposits in the next quarter.

The NPL ratio also decreased.

In Portugal, we think we have the best bank in the country. It's best in class in terms of profit, efficiency, capital adequacy and capital. We continue to gain market share. We're gaining market share in terms of new production.

We are producing around 15% across the board in the country and that means, obviously, that we gain market share in the stock year on year, around 50 basis points in both lending and deposits. This was thanks -- we are gaining market share in individuals.

We launched the -- what we call World 123 in Portugal and in companies we launched Santander Advance and, as I said, this is being seen in the pickup in the level of new production.

Profits continue to normalize. They're up 44% over the first half of 2014 with strong performance in net interest income, up 6% and lower provisions.

Argentina, Uruguay and Peru all increased their profits at high double-digit rates with good activity in all these three countries.

There's continued real-estate activities in Spain. We recorded the lowest quarterly losses, since the Company was constituted as a rundown portfolio.

If we go into the main countries, let's start with Spain. In the quarter, as you know, we launched the 123 strategy, which is basically a framework. It's a relationship framework with our customers, to look for or to try to increase engagement, loyalty, of our customers with us.

It's therefore not a campaign to capture funds, but it's basically a way in which we interact with our customers. It's too early to tell if -- the level of success of this new strategy. However, the results of the first few weeks are very encouraging and we are seeing a sharp rise in payrolls, in payments and the use of credit cards and debit cards.

Loans. Good dynamics in the business, as I will mention in a minute. Strong production. New production is very strong. It's not yet sufficient, though, to compensate for the decrease that we have in our balance sheet, particularly in mortgages.

The total lending of the Group in Spain last year, in the first half of the year, amounted to EUR50 billion. Funds up 6% year on year with a significant change, as we will see in a minute, into demand deposits and mutual funds.

Profits were up 50% year on year due to improved cost of credit and operating costs.

Gross income fell a little against the -- because, obviously, of the -- an environment of low interest rates with very strong competition on the asset side. This was obviously seen, as you can see in the page, in lower returns on our assets, partially compensated by lower cost of deposits.

As I said new lending is very strong. We are growing 17% in new lending to companies; 33% to individuals; and in product, in mortgages new production is at 29%. Obviously, still, this is not reflected in the balance sheet, because of the amortization of the existing mortgage portfolio.

In terms of funds, as I said we are growing in demand deposits; time deposits are down 19%; current accounts up 20%; and mutual funds up 17% year on year, which obviously is consistent with an environment of very low interest rates.

In NPLs, a good news in the quarter, the NPL ratio is very clearly below 7%. We had negative new entries in the quarter, and the cost of credit continued to fall and is now at 84 basis points.

But in short, I think the summary in Spain is that we had a strong performance in terms of profits, due to lower cost of credit, lower operating costs. Lending is weaker, as we had anticipated. And, we see a strong competition on the asset side of the balance sheet, and this we think will continue in the next few quarters.

The 123 strategy should strengthen, going forward, our relationship with our clients, and we will see this in the next few quarters.

In the UK, basically we continue to build a Bank with more client relationships, customer relationships, both in individuals and corporates.

Lending rose in the quarter 5% year on year, as well growing in company lending 11%, which is significant in a market that is basically not growing, or is slightly declining in the UK.

Mortgages, new mortgages were GBP12 billion in the first half in a much more competitive environment.

Deposits are increasing the pace of growth, 4% year on year; 2% in the quarter. Of note is to mention that the new current accounts, both from individuals and corporates in the quarter, were up 36% and 26% year-on-year respectively.

Good quarter results, with profits up 12%, due to higher net interest income costs under control, and lower provisions.

Net interest margin fell slightly in the quarter, because of the decrease in the SVR portfolio. We think that the margins that we will see in 2015 should be very much in line with what we reported last year.

Year on year, similar trends: 18% growth in profit; net interest income up 7%, due to lower cost of deposits and higher volumes.

Cost basically up 5.4%; as you can see because of the investments we're making to improve our technology and digital capacities; the new branches and the remodeling of branches; and the strengthening of corporate distribution network, as we will see in a minute.

We also had lower provisions as the economy is improving. It's already at very, very low levels, but it continues to increase.

We also had some reversals in the second quarter, due to the sale of portfolios.

Our strategy to diversify our business, increase engagement, and improve the quality of service continues, and continues to yield very positive results. The key elements of this strategy are in the individuals segment, the 123 account.

We continue to grow over GBP1 billion a month in current accounts, we already have GBP47.7 billion -- at the end of June, we had GBP47.7 billion.

We are also the bank that is capturing the most switches; we are capturing one in four.

At the same time we're improving our customer satisfaction. We are already top three in customer satisfaction in the UK.

In corporates, we are, as I mentioned, increasing our physical presence, opening business centers. This is helping us growing the business; as I said, 11% year on year, 8% in the first half in a market in decline.

We are also making significant investments in our multichannel strategy. We recently launched Apple Pay, KiTTI, and other functionalities on applications for mobile and online banking. We are activating on average 1,400 new mobile users every day. One in four mortgages is retained online, and 32% of our sales are conducted via digital channels.

So in short, the unit continues with its good performance; good strong commercial dynamics; improving the quality of service; and increasing profits.

If we move to Brazil, as you know the economy is in a slowdown at the moment, we think that's good news for the medium and near term. We think the medium/long-term potential of Brazil continues to be strong and obviously the measures that are being taken are positive to build a strong foundation for future growth.

In this scenario, our strategy, the strategy we started to a few years ago, of de-risking our balance sheet and focusing on customer relationships and customer engagement is the right one and is yielding, as we will see in a minute, very positive results.

Lending declined a little in the quarter. This was partially affected by the exchange rate, and also because of some seasonality in our corporate lending to -- our lending to corporate clients.

Loans are up 16% year on year. There is some perimeter and some exchange rate impact there. Excluding this, growth was 9%.

In funds we are growing at double digit.

Results, ordinary profits rose 13 -- 39% year on year, 1% quarter-on-quarter consolidating the trends of the previous quarters.

Gross income increased with net interest income up from the third -- for the third consecutive quarter.

Fee income also rose, although there's some perimeter here.

Operating expenses grew, as well as inflation rate. However, the costs are growing obviously at much, much lower rates than inflation that is in the region of 9%.

At the moment, we are investing, as I said, in those platforms that allow us to increase engagement of our clients.

Provisions fell year on year, we had a higher cost of -- higher provisions in the second quarter, because of some one-offs in the corporate -- in corporate clients. But we don't see significant deterioration, as Jose Antonio said in the coming quarters.

Going a bit more detail into the change in our business mix that we showed already in the previous quarters, it continues. We have higher growth in mortgages and loans to large companies.

We have better trends in SMEs; we have a positive 6% growth year-on-year for the first time in several quarters; we had negative rates before.

We see the fall -- we see a fall in gross spread, which, as you can see, is starting to stabilize in the second quarter when we had an increase in the Selic rate. We suffered for two or three quarters, but then we have a positive impact, we are seeing that already in the second quarter.

The cost of credit continues to improve, so the net impact of this is an increase in net margins for the second quarter in a row.

Better trends in NPL ratios than on private banks, as you can see on the left -- on the right-hand side of the slide.

So in short, in a very difficult environment we are -- we've been able to continue to improve our results. The underlying trends in terms of customer relationships asset quality, change in mix, etc., show that the business is more sustainable, and much more under control going forward.

Given this mix, and given the steps taken in the last couple of years, we should see a much better evolution of asset quality relative to our main peers in the coming quarters.

If we move to Santander consumer, there are two key issues here. One is obviously the incorporation of the businesses we bought in the Nordic countries from GE, and incorporation of PSA.

But also, the underlying trends are very good. Car sales in Europe are up; new car sales in Europe, in the countries, we operate are up 8% year on year. So obviously this is helping the business.

The key strategic focus is integrating PSA while, at the same time, obviously, improving the business mix in those countries what we operate.

New loans rose 23% for the whole area, driven by direct credit and cards, up 24% and new auto finance up 34%.

In terms of results, second quarter profits increased 8% to EUR263 million, because of a strong net interest income and lower -- very low provisions.

The first half -- profits in the first half amounted to EUR505 million, 11% up year on year.

Strong gross income on all lines, as you can see in the P&L, registered double-digit growth in the 20%s, benefitting from perimeter changes.

The rest of the units start to be incorporated into the PSA agreement will be Portugal, Spain and Switzerland in the second half; and Germany, Italy and Benelux in the first half of 2016, which really should add into this good performance going forward.

In the United States the macroeconomic environment is robust. GDP growth estimates for the year point to a 2.5% growth rate, low inflation. At some point, this year the market is expecting a hike in interest rates, either in September or December.

In terms of activity, the Bank doing pretty well, lending up 7% year on year. This is excluding the sale of some parts of the portfolio that we did to optimize the balance sheet; including this, obviously, growth was lower. We are focusing on companies, both commercial and industrial.

Funds up 10%, year on year, with a focus on core deposits.

SCUSA, as Jose Antonio said, we had more retained assets in the quarter, and increased servicing portfolios.

In terms of results, the first-half attributable profit amounted to $515 million, 5% higher year on year; and 16% higher before minority interests, due to, as you can see, strong growth in gross income. It rose 12%, basically, because of a good performance at SCUSA. We had higher origination, improvement in the spreads, and income from services.

Santander Bank's net interest income is suffering, because of completion and also lower interest -- and low interest rates.

Operating expenses increased 11%, mostly due to the investments that we are making for regulatory compliance, and because of IT.

Loan-loss provisions up 8%. The Bank, nothing's -- important to mention at the Bank -- the level of provisions at the Bank was almost at normal levels. We saw a significant increase in SCUSA, as Jose Antonio said, basically, because of more origination, some seasonal factors and because we retained a bit more in subprime.

The NPL ratio though, was reduced 2.3%, and the coverage ratio increased to over 200%; it's well over 300% at SCUSA.

The second quarter profit was lower than in the first quarter, because of this impact, the impact of higher provisions at SCUSA. The upper part of the income statement basically continues to grow.

Lastly, we are making progress in the construction of SHUSA, the holding company, as an operating entity.

Finally, let me make a quick comment on the corporate center. We had losses in the second quarter. They were higher than in the first quarter, because of lower ALCO gains.

If we compare year on year, we also had higher losses in the first half, compared to the first half of last year, due to the combination of four factors.

We had reduced gross income, because of lower results from centralized management of interest rates and exchange rates. These were partially offset by lower cost of funding.

We had higher costs, basically, because of ongoing corporate transactions and tougher regulatory requirements; more provisions, to strengthen the balance sheet; and smaller recovery of taxes, linked to the increase in the Group's tax rate, and due to the better evolution of our business in Spain.

And with this, let me turn it over back to Jose Antonio, for his closing remarks. Thanks very much.

Let me to finish this presentation with some general comments, about where we -- and where are the main trends.

As you can see in the results, the results were very good quality results. The growth in results is due to a growth in commercial revenues, cost control and lower provisions, which produced a significant increase in profits, in the main units.

The volumes are growing, are growing in a consistent basis, and this is a good sign for the future of the development of the business.

Liquidity and capital [raises] are comfortable. This doesn't mean any kind of restriction to develop our business. As to that, our business is not -- our plan is not to reduce risk-weighted assets. Our plan this more to be sure that the risk-weighted assets grow, come with a return on risk-weighted assets, that is enough -- or more than enough to offset the cost of equity.

So we have a clear improvement in all the risk metrics, being cost of credit; being NPLs; being new entries in NPLs. So there is good trends in this regard.

Even in markets, in Greece, the environment is not particularly healthy like Brazil, but we feel comfortable that we're going, due to the [current] change in mix, as Jose has been -- elaborated on this, we're going to be able to handle the situation without having significant increase in those metrics.

Well, as a result of this, we improve our profitability; the book value per share is growing. Well, we continue to gain in confidence in our capacity to deliver in line with the targets we told you back in February.

Let me to elaborate a little bit with the different initiatives we are taking in relation with the commercial activity.

We're launching plenty of initiatives and products in -- that you can see, in several markets, the initiatives we are taking.

Probably less visual to you is the streamlining we are doing in the processes. That is very important, so it's not -- it's very important, in order to increase the productivity and to keep the costs well under control.

I said before that we have a tension between, on one side, the higher regulatory costs, higher investments to make our digital proposition -- to improve our digital proposition.

On the other side, we need to offset these with increase in productivity in the traditional business lines, and we are streamlining the process in this regard.

We're launching a specialized solution for companies. Some of them are [now] Advance, Santander Trade!, Santander Passport.

The SME business is our -- is one of our key targets and we have a specific target there in relation with the number of customers and also revenues.

In multichannel we continue to develop, all across the board, plenty of initiatives.

Let me to finish, this -- to focus a little bit on operational excellence that is a combination of cost/income ratio. The cost/income ratio, we enjoy a significant advantage of our -- vis-a-vis with our competitors. We want to keep this advantage, and if possible to -- even to increase the gap.

At the same time, this is more demanding, we try to improve -- or we have specific targets to improve the customer satisfaction. So the operational excellence is the new target in the sense that we want to reduce the cost income, at the same time, the customer satisfaction improved all across the board.

In relation with this, we are launching initiatives that also affect the way we work: initiatives that affect employees, and initiatives have affect our relation with the customers.

So the -- when we look at the progress we are making in relation with the targets for 2017, we have -- the targets are in the slide. We are progressing well in lending; we are growing faster than our peers in volumes. That's clear.

In operational excellence, the side of the efficiency ratio, we are progressing, and now it's below 47%. It's still above our target to be below 45%, but we are going in the right direction.

In risk management, we are already below the 5% that we have as target. Probably, we'll see more progress here, but remember that we expect to grow faster in emerging markets than we grow in mature markets that normally tend to have higher NPL ratio.

In capital, I elaborate before. Our target 10% to 11%; we are 9.8%. We will be around the low end of the range at the end of this year.

And profitability we are, at the same time, progressing towards the 12%/14% target.

We are at 11.5% EPS growth this quarter, due to the scrip dividend was flat.

But we expect to show significant progress there, and we give you an update about these targets and this specific target on the next Investor Day we want to have at the end of September. We expect to have you there to clarify what is, in much more detail, our strategy -- overall strategy, as well as the operational side country by country, and you have the opportunity to ask our local managers the questions you want to make.

Thank you, and we remain at your disposal for questions now, yes?

Thanks, Jose Antonio. Indeed, we open now the Q&A session and, if possible, a gentle reminder, no more than just two questions per analyst/investor.

(Operator Instructions). Alvaro Serrano, Morgan Stanley.

Yes, two questions. First of all, can you elaborate a bit more about the outlook in Spain NII? In particular, can you touch on what you think the impact of the 123 account might be over the next couple of quarters?

Also, why you think the loan growth is not coming through? I think you had a 3% to 5% loan growth target for this year and it's almost flat at the moment.

And the second question is on Brazil. Can you just comment on what the early NPL indicators are, what deterioration you're seeing? Thank you.

So I'll look for Spain. In Spain, two questions, one about the outlook for Spain and potential impact of the 123 account.

Well, the trends we show in the presentation are pretty clear. There is still some reduction in the funding costs, so in deposit costs, that largely are done. There are some to go still, but limited.

What -- the trend that is going to prevail in relation with the overall trend of the net interest income is going to be the asset spreads. The asset spread, the environment is really tough in these days, so the spreads went down significantly, both in SMEs and in mortgages that are two main business. Probably in SMEs, we saw in the front book somehow like 60 basis points year on year. In mortgages, you are seeing the offers in the market.

So I'm not optimistic about this, because there is a fierce competition in the market in these days. Every player try to grow with plenty of liquidity there, so I'm not optimistic in relation with this. So I will see this as a continuing trend, at least for some time.

In relation with the 123 account, naturally, this has to impact. The 123 account is -- first, let me to remember what is the 123 account is about. It's a strategy to gather more loyal customers in Spain and as the strategy is not that much growing deposits, that the proposition is not about to grow deposits; it's about to have more transactionality with existing and new customers in Spain.

Naturally, this is going to have some effect in the deposit costs that largely will be offset by higher fee income and higher business with those customers.

The effect on the P&L, the first year, maybe marginally negative and, going forward, we don't expect to be negative at all. At some point, probably, I think, the second year to start to show some positive at the P&L level.

Loan growth, well, we were guiding to 3%/4% growth; probably we are now basically flat. We are seeing better moment, probably not enough to get in the 4%/5% or 3%/4% growth, but not far from there. Probably we're going to be able to show some growth at the end of the year, not far from what we were saying.

NPLs in Brazil is the second question. Well, I elaborate in the presentation, NPLs -- we show some NPLs ticking up. Partially it was due to denominator.

In the quarter, the loan book went down 1% and went down, because exchange rates; 8% or 9% of the portfolio in Brazil is US dollars. We were saying, in previous quarters, when we saw a growth of the loan book of 16% that the 16% was around 11%, due to the real growth and 5% due to exchange rates.

Now, these quarters came the other way around and, as a result of this, the loan book decreased by 1%. If you analyze this, probably the NPLs went up, but we don't expect a significant [buildup]. Probably, they're not going to go down, but it's not going to be significant -- don't expect a significant uplift on the NPLs in the coming quarters; probably some, but not significant and we are not expecting to change the main message we gave about Brazil in the previous quarters.

Thank you, Alvaro. Next question, please.

Raoul Leonard, Deutsche Bank.

I wanted to ask a question about potential Basel IV impact on your CET1 ratios. In particular, this is about operational risk proposals on the table right now that appeared to be revenue driven, with some kind of scaling up effect, so that effectively the bigger you are, the more you have of up-risk RWAs.

Can you give us some guidance on what RWA inflation might be coming from this?

Perhaps put differently, do you think the regulator's going to look at you as a Group or break this down into separate countries, so your operational risk impacts are just not quite as big? That's one question.

My second question is around just Santander UK. Can you give us some guidance on the Bank levy P&L impact and how the tax rate will work going forward? So an easier one there. Thanks.

Okay. In relation with operational risk, it's true that we have a significant -- as you said rightly, operational risk in the standard model is largely related with revenues; and in countries, in our case, particularly a country like Brazil, where the revenues are quite large, due to the spreads. On the asset side, you end up having a higher capital consumption due to operational risk.

Well, you can work on standard model, you can work on advanced model for risk management and, at the same time, we may end up with some kind of new standard for the industry. So it's not -- regulation is far from clear here.

What is true is we have a significant capital consumption higher than our peers, due to operational risk, mainly due to Brazil, as we are in the standard model and the advanced model is going to take for a while, but we are not sure that the standard model is going to play in the industry or if regulators come with another standard that will apply to everyone else.

I don't know if you want to elaborate more on this. In UK, you've got the numbers, the levy.

Yes, the combination of the higher tax rate and the Bank levy means, in aggregate, from here 'til 2020, GBP500 million.

Thanks, Raoul. Next question, please.

Carlos Garcia, Societe Generale.

A couple of questions. The first one is again on the 123 account. I would like to know, what is the volume of active clients that you have in Spain What percentage do you think will migrate?

And if you cannot give us that figure, at least what has been the experience in the UK, so what percentage of your client base is on the 123 account?

The second question is on Brazil. Could you explain what could be the impact of a downgrade in the country in terms of risk-weighted assets, whether it could have a substantial impact on risk weightings or not? Thank you.

Okay, starting with the second question, as we have the majority of the book in Brazil in the standard model, a downgrade doesn't have a significant impact on risk-weighted assets.

In relation with 123 account, we will elaborate more -- in more detail in -- by the Investor Day when we can have more numbers to give you. Now it's four/six weeks in -- we launched six or seven weeks ago.

Well, initially, what we are expecting and what is happening at the beginning and it happened in the UK at the beginning. Normally, at the beginning, you have more active customers, translating into a loyal customer or customers with more products with us; and later on the new customers are progressing. This is the experience we got in the UK. In Spain the first indications go in the same direction.

Well, to give -- the emigration is going to continue. So the experience in the UK is not very much unlike to Spain.

Keep in mind that in the UK the position we had in current accounts in the UK is not comparable with the existing position we had in Spain, so probably in Spain -- in UK we were translating savings accounts into current accounts.

In Spain it's not going to be the case, because our position in current accounts, remember that our booking current accounts is the largest in the industry, and probably we have, at the beginning, active customers being translated into more loyal customers, assisting active customers unless coming from [those side].

But to have an indication what's going to happen in the 123, probably we need to wait.

We'll give you all the figures in the Investor Day, but even in the Investor Day going to be limited to extrapolate.

So, remember that in UK we've been for three years in a row with the same proposition. At the beginning, started very slowly and now we have a -- as Jose Garcia Cantera said, we are gathering EUR1 billion per month and 100,000 customers per month. This is the current running rate.

I don't know the running rate in Spain we expect to be achieved and this was at least our plan, after six months the account was launched.

Thanks, Carlos. Next question, please.

Francisco Riquel, N+1 Equities.

Wanted to ask also about the net interest income in Spain; two questions here.

If you can give more details on the loan spread, front book versus back book dynamics by the -- for the main loan categories, so that we can assess -- better assess the impact of the repricing going forward?

And second, an update on the bond portfolio in Spain; I mean the size, duration and the contribution to NII? Thank you.

As Jose Antonio said, if we look at businesses, these are loans with a short duration, they're coming in at, on average, 200 basis points relative to 160 basis points a year ago.

In mortgages the front book is coming in at 150. The back book is around 90 basis points. Those are the two main categories in the P&L.

In terms of the ALCO portfolio, we have a total of close to EUR30 billion in Spain. The contribution to the net interest income in the quarter was around EUR130 million.

Thanks, Paco. Next question.

Carlos Peixoto, BPI.

My first question would be regarding the UK, particularly on the level of provisions that was witnessed this quarter.

Also, I saw in the release that you mentioned that there was a release of provisions in there. I was wondering if you could elaborate how much was this effect and how much -- what level of provision should we expect going forward?

The second question would be more on the M&A front. There are some press reports regarding a possible interest in HSBC's operations in Brazil. My question would be, whether this could be something of interest to you and how would you consider to finance this acquisition? Would it be through a capital increase in Santander Brazil or at the parent company level? Thank you.

Okay. In the UK the loan-loss provisions in the quarter, well, overall the credit quality in UK is very good, both in mortgage and non-mortgage book. In the quarter we sold some portfolios and those portfolios have some provisions, very small. But this is the only exceptional item.

You can give more on this, yes?

No, they're very small number though. We sold some loans in the aviation sector; and we did some restructure and some sales in GBM as well. These are relatively small numbers with a small impact on the cost of credit in the quarter. It would have been -- instead of 8 it would have been probably 10 basis points or something like that; not significant.

And in relation with Brazil, I'm not going to comment on this as this is still an ongoing process as far as I know.

Thanks, Carlos. Next question, please.

Johan De Mulder, Bernstein.

Two questions. One is about the, one of the P&L lines, other income. So we that other income actually has come down quite significantly by 33%, since the first quarter. That seems to be mainly driven by Brazil, Spain and especially the corporate center.

So maybe if you could give a little bit more color about why the losses there were actually higher in the other income line? I know that you mentioned provisions to strengthen the balance sheet, but maybe if you could give some more color as to what exactly happened there, as well as in Brazil and Spain in that other income line?

Then the second question relates to capital. We see that in the end RWA contribution comes to 3 basis points of fully-loaded core equity Tier 1, so we actually see that there's a little bit of a disconnect. On the one hand, you have your RWAs going down on a quarter on quarter, while on the other hand your loans actually go up by about 0.6%. So it looks like this is especially the case in the US, Spain, Brazil and Chile.

We were just wondering basically what is happening there. Is it that there is a lot of the loans sitting on advanced versus standardized? And is there actually more migration towards advanced expected in the future? These are the two questions. Thank you very much.

Good questions. Well, the first question was around other income. As you said, the other income came significantly lower than in the previous quarter; and as you so rightly said, that it's Brazil, Spain and the corporate center.

Well, I will say overall, I said in the presentation, well, that the main purpose of this is to strengthen the balance sheet with a prudent policy, particularly important in Brazil, due to the current macroeconomic situation. It's not related with the loan book, but that's the reason why it's accounted in other income.

In relation with the capital, well, the risk-weighted assets this quarter decreased a little bit and the loans went up by 1%. Naturally -- let me to remember a couple of points.

Our transformation between assets and risk-weighted assets stay at the 40 -- high 40s, [46, 47]. That compares with the average of the industry that is around [30] of our average competitors. Well, it shows that we should have some room to improve in relative terms, vis-a-vis with our competitors.

Risk-weighted assets coming from the loan book is only part of those risk-weighted assets. As I said before, inside the loan book, we are growing strongly in Latin America in mortgages. I said in the presentation, you can see mortgages, we are growing in Brazil 34%, while we are decreasing in other lines. We are growing 14% in Mexico, while decreasing in other lines. So the composition of the loan book matters.

Also, we have significant room to improve. There is no significant change from the standard to advanced model in -- significant change. There is always some portfolios that go from standard to [internal domestic volume], but it's not significant.

And on top of that, the exchange rate. The exchange rate when we translate into euros naturally affects this.

Thank you. Next question, please.

Stefan Nedialkov, Citigroup.

Two questions. Number one, on the 123 account. Which countries are next, and over what timeframe?

And the second question is on capital, with respect to deferred tax credits. There has been some change in Portugal regarding deferred tax credits, as they refer to loan-loss provisions. Potentially, the credit status could be removed from the DTAs that relates to loan-loss provisions.

Do you see this as -- potentially as a negative read-across to Spain, down the road? And overall, how much of your capital is -- benefits from DTCs? Thank you.

To launch a new 123 proposition. Well, the 123 is one idea that's in line with our target of having more loyal customers, and we established this specific target to grow the loyal customers.

The way the proposition is made in the different geographies is different, based on the current procedure in those geographies.

We -- for sure, we're going to launch new initiatives, not necessarily the same initiatives all across, just to improve our customer base, the loyalty of our customer base, given the fact that, as we said to you several times, loyal customers is three, four, five times more profitable than an active customer. We continue to work along this line in every geography in which we are working.

If this is relating to the kind of strategy, not product that may translate this into reality, it's going to be different by geographies. We're asking all the geographies to come with propositions to increase the loyalty of our customer base. The propositions will be elaborate at the local level, not necessarily the same proposition all across the board.

In relation with the DTC, I'm not -- I don't know what has changed in Portugal. What I know is, well, as you rightly said, we have DTAs and the DTCs. As far as I know, there is no news in this regard, in relation with a potential change on the way the DTCs -- you referred to the DTCs are accounted on the capital base. The DTA, as you know, in the fully loaded, are already deducted. But I don't know the change you mentioned in Portugal.

[I don't know either]. I'm not aware -- in terms of the DTCs in our --

In Portugal. Well, what people is telling me that it doesn't affect us, because last year we didn't take those DTAs in Portugal, so it doesn't affect us the change done in Portugal.

Thanks, Stefan. We might follow up with you with more details after the call. Next question, please.

Ignacio Ulargui, BBVA.

Two questions. One is on the Chile NII. There's plenty of volatility always linked to inflation, but what should we expect going forward?

And the other thing is on the cost of risk in the US, and especially in Santander in SCUSA, what we should expect out of the unit in the coming quarters? Thanks.

Chile, as you know, our net interest income has been fairly volatile. Well, it's always fairly volatile, depending on inflation.

As you know, particularly the mortgage book in Chile, that is a significant part of the loan book in Chile is -- the [yield] is establishing what they call UF, that is inflation plus. Inflation has been pretty high in Chile last year, and relatively high this year. Quarter on quarter, there is plenty of volatility there.

Going forward, well, I not -- I don't have in mind the kind of expectation the market has for volatility for inflation in Chile, but it's a factor that you should take into account, and apply mainly to the long book.

We tend to be long inflation, [short] nominal rate in the range of $4 billion to $7 billion in Chile. As a matter of fact, you can do your own numbers, base it on your expectations on inflation.

SCUSA cost of risk. Well, we said that, quarter on -- basically, our policy is to have a provision for expected losses in the next 14 to 16 months. So this is the policy.

Largely, the cost of risk -- the number, the provisions, you see in the P&L depends on the retained assets, the kind of assets we retain, and the volume we retain, if we retain more subprime or less subprime assets, and the volume we retain.

Normally, this is going to be fairly volatile, depending on the securization. So if we securitize more in one quarter, we have less assets, and we're going to have less net interest income, less cost of risk at the same time. On the other side, we're going to have some fee income, due to the securitization.

So -- but basically, in the end of line business, we haven't seen any significant change in the cost of risk in the [car] -- in the subprime, near prime, and prime [car] lending in the US.

Thanks, Ignacio. Next question, please.

Sofie Peterzens, JPMorgan.

I was wondering if you could give, a little bit, an outlook for Brazil, how you see NIM continuing. You had NIM down quarter on quarter, but if you look at Bank of Brazil data, it looks like some of your competitors are actually seeing quite attractive NIM expansion.

Also, how we should think about the social contribution tax from Brazil, and (inaudible) overall, how you expect cost of risk in Brazil to move?

And my second question is around the senior management changes, and all the new appointments we have seen in Santander US. Could you just elaborate what the rationale for these changes are? Thank you.

First question about NIM, net interest margin outlook in Brazil. We've been, in the last couple of quarters, changing the mix of our loan book. As you review the numbers, we grew significantly faster than large corporates and corporates, and we reduce our exposure to the consumer -- unsecured lending to consumers.

This translates into -- naturally into higher -- into lower net interest margin. And the difference in Brazil, the gap in Brazil, as you know, is very, very large.

This process, well, is mainly done. You saw in the last quarter, we were able to increase by 10 basis points, if I remember, the net interest margin in the loan book. Probably, we're going to see a more stable NIM outlook going forward, knowing -- or slightly trending up, knowing that the front book spreads currently are higher and the spreads are trending up in Brazil.

So probably this should translate into higher NIM, combined with not significant growth. So in this environment probably the growth is going to be -- well, probably in line with inflation, no more than inflation or even less than that.

So changes in senior management in US, we've been doing significant changes there, it's true. We are improving our governance standards there. We changed the Board, both in the holding company, the Bank and SCUSA, and the senior management, to try to strengthen our franchises there.

We have a plan that includes not only the commercial side to strengthen the franchise, mainly the banking franchise, also to comply with the higher expectations from the regulators.

As you know, and I elaborate in previous quarter, we are building from scratch a holding company that was non-existent, in terms of -- an operational holding company, not a holding company that is just a legal holding company -- an operational holding company from scratch and we are hiring people there, and to create a new organization, but taking into account that we have a holding company and all the business in the US, not only the current two operating subsidiaries, below this holding company that will, effectively, match all the business.

The hirings are due to this, to build this structure, this organization in the holding company.

Thanks, Sofie. Next question.

Ignacio Cerezo, Credit Suisse.

A couple of questions on my side. Sorry for going back to the Spanish net interest income, but given all the factors actually you have mentioned through the call, when would you expect net interest income to bottom in the next three to four quarters?

And in terms of provisions in Spain as well, as the quality actually seems to be improving a little bit faster than we anticipated, so are you basically changing your guidance on provisions on the back of the last couple of quarters?

And specifically on the real estate run-off book, actually, when should we expect that to give a zero cost of risk or around zero cost of risk?

Okay, two questions, the first one is you're asking me a forecast for the NII. Well, this depends largely not only on me, it depends on the competition in the market.

I said in the presentation that I am not optimistic about this for the time being. Probably the timeframe you established, three or four quarters, if I may -- I will expect a fierce competition in the market on the asset side; probably not so much on the deposits. But the NII probably is going to [suffer all].

I'm referring to the commercial NII, not including here potential ALCO strategies that may play with the (inaudible).

But commercially speaking, probably there is little left on the funding side, on deposit costs. Well, the pressure coming from the asset side is going to continue, but in mortgages. As Jose said, the front book/back book mortgages still works in favor of the NII.

Provisions, well, you saw the numbers. I'm fairly optimistic here. So we were elaborating in the past that we were expecting this year around 90 basis points -- 80 to 90 basis points. We are there. Probably we've been telling 60 to 70 basis points is what we should expect over the cycle; probably overshooting is something that is going to happen.

So I'm not able now to put a number for next year, but probably some overshooting is going to happen anyway on the positive side in provisions. We will go probably significantly be below the average across the cycle.

Thanks, Nacio. Next question, please.

Robert Noble, RBC.

Two, hopefully, small questions from me. What's your exposure to Swiss franc mortgages in your Polish business and the potential impact on the government proposals?

And finally, your Puerto Rican exposure as well? Thank you.

For the Swiss francs, mortgages is slightly less than -- including everything, including what we have in Santander consumer and what we have in the Bank, it's less than EUR4 billion.

Well, the proposal, as you know, it's a new proposal that is coming from the government. It is still in the works. Before that it's converted into legislation; it takes a very long time. We are starting to analyze that.

The cost for the system -- the government is estimating that the cost for the system as a whole is in the region of PLN9 billion. In our case, it will very much depend on the people that actually go for that. But in any case, it's going to be a very manageable cost. As you know, it's going to be spread over time.

But, again, it's very premature to make guesstimates, given the very early stages in which this proposal is at the moment. It's going to take quite a while before it is turned into legislation.

In Puerto Rico, Puerto Rico made $90 million of profit last year. We have a capital adequacy of 26%/27%; it's extremely well capitalized. We have very limited exposure, not direct exposure, very limited exposure directly to the Puerto Rican government.

We have some exposure to municipalities, which is very well hedged. The guarantee is very well collateralized. And we some exposure to individuals as well, but we don't think we're going to see significant losses in Puerto Rico anyway.

Thanks, Robert. Next question.

Mario Ropero, Fidentiis.

Two quick questions, the first one is on the 123 account. Could you please give us some color on the time lag that you expect to go between the time you gain a loyal customer to the 123 and the time you offset the negative profitability impact through higher fees and higher transactionality?

The other one is simply if you could give us some guidance on cost evolution in Spain, because it seems like the cost base has been stable over the last couple of quarters.

Okay, well, the 123, as I said, it's a proposition. Normally, there is a lag between a customer opens or translates an account into a 123 account, and there is a lag between this time and when the customer translates the other products to us. We are gathering momentum on this.

Normally, you have 123 accounts that they open and it takes for a while before they bring the bills to this account, in order to remember that the 123 account only pays interest if you have certain numbers of bills with us.

So this is a process that normally -- the experience in the UK is a couple of months, two or three months the customer is bringing to us the 123 -- the bills to the account and getting the loyalty required to get pay -- to get the interest rate that we offer to pay a fee or [have].

And the second. Could you repeat the second question?

Mario?

If you could give some guidance on the cost evolution in Spain, if we can expect some further cost savings?

In Spain, well, naturally this is an important question after the merger we've done. We've been reducing the cost base in Spain and now we face what I was referring in the presentation.

We are, on one side we are investing -- we are already investing in our front office. What we'll have is, in our IT infrastructure, we have extremely good, extremely high-quality, datacenters. The front office, we need to invest in in the coming years, because to improve our digital proposition and to catch up with the market.

The question in the digital proposition is time to market, because time to market in the way that we -- there is a process in which we should reduce cost on the traditional channels.

At the same time, we invest in the new channels, and this is -- having this done properly is the key question here. The question is not if you invest or you don't invest in multichannel strategy in your strategy, every bank is going to do that.

The question is, how and when? And, at the same time, how do you get a reduction or an increase in the productivity in the traditional channels? We're going to be in this process in the coming years.

We are already in this process and it's very likely that we're going to optimize not only -- it's not only about closing branches or having more or less branches. It is about the processes you run, what we call the customer journeys, and having a real electronic process in all of those common processes, from opening a current account to having a mortgage.

All these processes we need to review, review. Not only because the front we need to offer a digital proposition, also because we need to have more streamlined processes, in order to make efficiency gains on that side, because we need to offset the cost on the other side.

Overall, our target, as I said, is to keep the costs growing in line with inflation, or slightly below inflation overall, and this includes Spain. But this I don't want to -- this requires a significant offer because, on one side, we have significant regulatory costs that are coming.

Particularly on the risk side, we have the risk data aggregation program that we're going to invest [EUR500] million. Overall, in three years, EUR1 billion with regulatory related costs or investments; some of them will be investments. And we need to offset this with increasing productivity in the traditional business, but is -- and this applies to Spain. Probably, in Spain we -- after the merger, this is the next frontier for us.

Thanks, Mario. We have time for one final question, please.

Britta Schmidt, Autonomous Research.

I think you briefly touched on what I wanted to ask, which is, on regulatory costs, there are changes in the structures in the UK with the ring-fencing and also in the US, by creating the intermediate holding company.

Can you give us some guidance about the cost increases that you expect for that vis-a-vis where we are today? I think you mentioned something about EUR1 billion of regulatory costs. Maybe you can put that into that context.

And the second question is, can you please just elaborate a little bit more as to why you are so confident that the Brazilian weaker macro situation is not going to impact your asset quality significantly? What is driving that comfort level that you have?

On regulatory costs I already mentioned some numbers. We have overall a cost/income ratio that we have targeted to be below 45%, so everything is included there.

As I said, naturally, we have the ring-fence -- increasing cost due to the ring-fencing. In UK, increasing cost due to the regulatory requirements. In the US, to the regulatory expectation.

And also the ECB, not only the US and the UK, the ECB one is also a regulator that required us to -- has demands on us.

The same apply to the local regulators; are less known, but in Mexico and in Brazil the regulator is asking for -- have their own regulatory demands that put pressure on cost.

Overall, I mentioned the EUR1 billion that we expect to invest in regulatory-related requirements in three years. And on the other side, we have two sides that demands more cost. That is regulatory related and also it is the digital -- the multichannel approach to the customers.

On the other side, the business as usual, we should increase the productivity to offset this and be able to grow in line with inflation, or slightly below inflation; and to be able, and we hope that we're going to get there, to be able to grow revenues above inflation, as we are doing today and having positive jobs that translate into a better cost/income ratio.

Not only a better cost/income ratio, better customer satisfaction, as I said before. We are focusing now more in operational excellence than just one side of the cost side.

In terms of asset quality in Brazil, I understand your question perfectly. The situation is the economy is in recession, the macro is difficult.

Having said that, well, we're being -- we are very well provisioned in Brazil. Our book that we keep reviewing is still, in some portfolios that traditionally were the most prone to have higher credit losses, we reduced significantly those portfolios.

So let me to remember you that in some products, particularly the special check that is kind of overdraft, that we used to have 21% market share. Now, we have 14% or 15% market share.

This portfolio was a portfolio that would show high volatility in the provisions. Now, we have more exposure to segments, including the consumer side that we are growing, in payroll-based lending now is the only side we are growing.

And in large corporates and corporates that being the situation worse, they are not -- we do not expect, at least significant increase, some increase naturally, and you show in the quarter. So in the quarter we increased the provisions, but not significant; no material increase in the NPLs, even taking into account the current macro situation in the country that, well, we expect this year to be in recession and next year to grow slightly; the country to be able to grow slightly.

Okay, I think we need to leave it here. Thanks, everyone, for joining. We'll meet in London at our Investor Day next September 23 and 24. Thanks.