Banco Santander SA (SAN) 2016 Q1 法說會逐字稿

Good morning, everyone, and thanks for joining for this Santander first quarter 2016 earnings conference call and webcast. As every quarter, our Group CEO will kick off the presentation addressing the key highlights of the quarter, followed by our Group CFO, who will cover this and business areas.

The presentation will finish with the concluding remarks by our CEO and obviously a live Q&A session at the end of the call.

With no further delay, Jose Antonio, the floor is yours.

Thank you, Sergio, and good morning to everyone. Thank you for attending to this presentation of the first quarter result. As Sergio said, I'm going to elaborate basically about the Group evolution. Later on, Jose will go through the units. As usual, you have all the units in the presentation, but Jose in favor of using better time is going to elaborate only the main ones. And finally, I will address a little bit where are we in relation with our targets that we established in our Investor Day for 2018.

So as introductory remarks, we are developing our activity in an environment that is not particularly helpful. We have a lower (inaudible ) in interest rates. We have had -- and you will see in the numbers -- a significant impact of the depreciation of the currency vis-a-vis with the euro, and at the same time, we have some regulatory pressures here and there, in some cases affect the fee income, in some other case affect more the tax side of the business.

So a challenging environment for retails banks, for the financial industry in general. But in this environment we've been able to produce a -- we have had a very good quarter, a good quarter taking into account the environment. Our profit in the quarter was EUR1.6 billion, roughly 5% lower than the previous year in current euros, plus 8% higher than the previous year on currency neutral basis.

Well, this growth was driven by commercial revenues basically -- commercial revenues are growing well. Net interest income at 6% and fee income that has an upward trend that we expect to continue in coming quarters is gaining momentum and is growing at a faster rate we see in the last -- probably in the last four or five quarters.

Balance -- in terms of quality of the balance, we continued good trends in non-performing loans and the cost of credit is more or less in line with our forecast. In terms of capital, the quarter has been very good. I will elaborate later on on capital generation. But we generate 25 basis points in the quarter, going from -- 22 basis points in the quarter, sorry, going from 10.05 to 10.27. This generation has different components that I will detail later on. And the return on tangible equity is one of the best among peers, 11.1% -- that is, as I said, one of the best in the industry in relation with our peers.

When we go to the commercial activity -- what's going on behind these figures on the commercial side, we are having, well, a growth that is in line with our expectations. We guide towards a mid single-digit kind of growth in activity -- that means loans and funds -- and we are around this. This is the final outcome of having a I will say successful year in terms our targets in terms of customers, in terms of loyal customers that are growing around 10% both in individuals and in companies. So it's a very good outcome for the very first year in which we are facing a significant commercial transformation.

And on digital side, the digital transformation is gathering pace. So then the total digital customers are growing close to 20% and mobile is booming, basically growing almost at 50%. So those are numbers that are behind the figures -- the financial figures I gave to you for the quarter.

When we look at the dynamics of the profit, you have on the left side in current euros, on the right side in constant euros, you see the last quarter, the very -- this first quarter has been the best in the last five quarters and we are growing 8% year-on-year and 19% more than in the fourth quarter, that, as you know, was affected by the charges to the deposit guarantee scheme both in Spain and in Poland that were made in that [scheme]. So good dynamics in capacity to generate profits in the business on currency neutral basis.

When we go to the income statement, as usual, we provide you the figures in current euros and currency neutral, so you have to assess how the business is developing on the ground. You see a fairly consistent P&L from the top to the bottom in constant euros, so that means that we are gathering -- we're growing all across the P&L. Good developments in net interest income and fee income -- I will detail later on -- expenses under control and net operating income growing accordingly with the previous.

Loans loss provisions, that was probably one of the -- taking into account the situation in Brazil, probably the outcome is very good. I'm going to elaborate later on, especially regarding this. And finally, we get 8%, as I mentioned before, increase in the profit in the quarter.

Going into detail of the numbers, the gross income, both net interest income grew 6%, fee income 7%. The net interest income, the main drivers are volumes and -- well, we reduced the yield on deposits, so accordingly we reduced the cost of -- sorry, the yields on loans and accordingly we reduced the deposit cost. But still in some markets some pressure on spreads on the asset side, particularly we've seen this in UK and Spain, particularly in mature markets we've seen some of this pressure that we have set with lower deposit cost and higher volumes.

In fee income, as I said before, positive developments in this particular line. And I'm really happy to see these developments, mainly taking into account that we have significant regulatory pressure here that this is still reducing our capacity to generate fees. But we -- as a result of our commercial policy, we've been able to generate positive developments in this particular field.

Financial transactions; the gains in financial transactions as a result of -- the volatility in the markets in the quarter came lower, 17% lower. When we look at the quality of those and we see that we're generating the dynamics in fee income, we're generating mainly in the commercial banking activities. If we split just to see the trends, the trends both in NII and fee income are particularly positive. And when you see overall how much of our revenues come from the most recurring items of the P&L, net interest income and fee income is 93% and more higher than our competitors and this give us a recurring capacity to continue to generate revenues.

On the expenses; well, this is a area of particular focus given the macro and the -- the macro developments on the other side, the lower level of interest rates and the other factors that I mentioned before, we were committed to grow basically in line with inflation. We are growing 1% above inflation excluding the perimeter -- and we are almost there.

It's true that we have a demanding target of reaching less than 45% gross income by 2018. We are right now at 48.1%. And as you know, we've been launching measures to be sure that we achieve this target by 2018. That this is a target that we remain committed to achieve and we remain optimistic in being able to achieve this target, I would acknowledge that this [demanding is driven] by the way in which we are investing in digital transformation and at the same time trying to -- in an environment of relatively weak revenues.

Credit quality; so good developments here. At the Group level the NPL ratio continues to fall. So both in year-on-year and quarter-on-quarter NPLs reduced in most of the units, particularly important is Brazil, where the NPLs were reduced by 5 basis points in the quarter. It's extremely good development given the economic situation in the country.

Well, as you know, we have a highly granular portfolio with very high diversification across countries and sector. And finally, the net NPL entries in the quarter went 17% down. That is a very good development that make us to assure that we are going to continue to see the trends we've been showing for in the last year in relation with the asset quality and the cost of risk that we set -- we guide to you towards a cost of risk of 120. That is where -- basically where we are around. We expect still some positive developments particularly in Spain.

So when it goes to the provisions, loan loss provisions accordingly with the developments we saw in NPLs grew 5% compared with the first quarter 2015. Lower provisions in Spain, UK and consumer finance as expected. And the higher provisions in absolute numbers came basically from the US, where we have two developments -- SC USA is nothing, is business as usual I will say, higher loan book with the same cost of credit basically produced higher provisions and we took like a $100 million provisions for oil and gas in Santander Bank in the US that has affected this number and particularly the numbers in the US, as Jose will explain later on.

In Brazil that may be a one or was one of the main areas of concern of the market. Developments are pretty good. Loan loss provisions are down compared with the fourth quarter in -- the third and fourth quarter 2015, although they are a bit higher than they were in the first quarter 2015. So in general I will say good developments and we expect this to continue going forward.

The cost of risk I already mentioned and -- well, the cost of risk in Brazil that we guided you, we are inside of the range we gave you for the cost of risk, 4.6%. May go slightly up, but inside the range we gave you a couple of months ago.

Finally in capital, a very good quarter. Let me do a split, the 22 basis points that we grew in the quarter. The ordinary generation is 14 basis points. This is, well, the result of a very good management of risk-weighted assets. On the right side we are showing you that the capacity to grow the loan book and not translating this 100% to risk-weighted assets due to the better capital allocation.

So the ordinary generation was in the quarter 14 basis points, although we continue to think that recurrent basis we are more in the region of 10 basis points per quarter rather than in the 14 basis points that we got this quarter.

The regulatory one-off that's mentioned in this slide is the result of two effects. One effect is the change in [operation areas] in Brazil from standard to alternative standard. That produced like 14 basis points. And on the other side as negative the prudent valuation that is the result of going to the big side of the equation in the market activities that reduced these 14 basis points to plus 4 -- so producing minus 10 basis points.

The perimeter is due to Metrovacesa and PSA business that we keep incorporating from in some geographies. And finally, the AFS, the available-for-sale that was -- in some quarters was negative, in this quarter came positive, plus 10 basis points. So overall -- good quarter overall, but our base has no change. And I continue to think that our recurring capacity is more around 10 basis points per quarter that put us in a path to reach our target -- remember in 2018 that we have of 11% Core Equity Tier 1. In the leverage ratio, well, we are in a very good position, 4.8%, growing from the 4.6% that we had one year ago.

Just to finish this part of the presentation, profitability metrics we are -- we showed some progress in return on risk-weighted assets from 130 to 133. Return on tangible equity, 11.1%, while our target here in 2018 is more than 13% and we are I think on track to get there; earnings per share basically flat; and tangible net asset value per share excluding the FX impact grew significantly, but the FX impact has kept this ratio stable in the quarter.

Now, with this, I hand over to Jose, that will -- is going to elaborate in the business areas and I come back with some conclusions at the end.

Good morning, everyone. I will comment on the main business units, I will make some brief comments on the others, before I turn it over back to Jose Antonio for his concluding remarks.

Our earnings continued to be well diversified. We are a retail bank that operates in 10 major geographies. In the quarter, 61% of our earnings came from Europe, 28% from South America, 11% from Mexico and the United states. And this explains amongst other factors the stability of our numbers and the robustness of our numbers in the quarter.

Starting with Spain, our priority in Spain is to increase the number of customers, develop longstanding relationship with these customers, deeper relationships, more transactional relationships and improve the quality of service. In other words, we want to increase the number of loyal customers with the Bank.

This is based -- in order to achieve these targets, we have the 123 strategy. We already have over 1 million 123 accounts and this is a very flexible strategy that we can adjust to different types of customers. During the quarter, we issued a new product for young people that has already attracted 50,000 new customers to the Bank.

As a consequence of this strategy, we are increasing retail fees by 8% in the quarter and we are also improving quality -- customer satisfaction. We are number 1 according to independent surveys reported during the quarter.

For the results, very good year-on-year fee income, cost control and provisioning that offset the fall in financial gains and net interest income. The weak net interest income is explained by stronger competition on the asset side of the balance sheet, although, as I will mention in a moment, the liability side has performed very well in the quarter.

The higher provisions that we had in the quarter relative to the previous one is due to a couple of one-off situations. In terms of volumes, we had strong new production in the quarter. Loans to individuals increased 30%, of these mortgages increased 25%, loans to SMEs increased 13%. So we have a very dynamic new production on the asset side.

This is not reflected in the growth of the stock because of the drop in the business related to public institutions and mortgages. Although the new production in mortgages is very strong, this is not sufficient to compensate the amortization of the existing portfolio.

SMEs increased and large companies remained stable. In this environment, our strategy on the liability side is to increase demand deposits and mutual funds at the expense of time deposits. As we announced in our Investor Day, the cost of deposits remained flat in second half of 2015. It has come down in the first quarter of this year because of the amortization of balances related to expense, time deposits that we had in the past.

Significant improvement in the risk profile. NPLs were down 89 basis points. Cost of credit 43 basis points lower at 54 basis points, which is in line with the target we announced in our Investor Day.

So looking forward, we continue to see pressure on net interest income, but good trends in terms of fee income costs and asset quality. And again, the strategy in Spain is driven around the 123 account, with which we expect to get 2 million new accounts by year-end.

Moving on to the UK, in the UK the focus is loyalty, increase customer loyalty, market share in companies and develop our digital strategy. In this sense, it's important to note the increase in the number of digital customers in the quarter that already are above 4 million, and also the significant improvement in customer satisfaction that put us amongst the top banks in the country.

Earnings were -- net income was GBP349 million, flat quarter-on-quarter and year-on-year -- and this is due to the increase in the taxes paid in the country associated with the 8% higher tax on banking profits. Pre-tax -- because of -- before taxes, pre-tax profits rose at 14%.

We had stable net interest income, good volume performance, margin pressure and also a bit of pressure from a change in the business mix in the mortgage portfolio because the SBR balance has continued to decrease.

Fee income, up 10% excluding regulatory impacts, mostly the interchange fee. Costs almost flat, but if we exclude the cost associated with the banking reform, cost would have been 3% lower. So again, as Jose Antonio said, this is a strategic goal in all banks -- in all units of the Bank, which is gradually develop a more efficient business. Provisions fell sharply. We provisioned very little in the quarter. That's basically associated with the current macroeconomic environment.

Moving on to volumes, the number of 123 accounts increased in the quarter. 131,000 new funds captured every month in the region of around a billion pounds, which in line with what we've been seeing in the past quarters -- and fee income also increased.

Lending rose 3%, companies up 14% in a stable market, so again here in line with our strategic goal of increasing our market share in this segment.

New mortgages increased 13%, total stock up 3%. But again we had a reduction in SBR mortgages and tough competition, which is what explains the evolution of net interest margin, which decreased slightly in the quarter, as you can see, a couple of basis point from 180 to 178 -- and we think this trend will continue in the next few quarters.

In terms of our commercial success, we're developing the multichannel strategy with very good numbers. We are activating on average 1,400 new mobile banking users a day and 43 -- of those mortgages that we've retained in the Bank, 43% were done so through digital channels. We are the first bank to introduce voice technology in SmartBank mobile app and we have established an alliance with Kabbage, an innovative platform for lending in SMEs.

So same trends; we've started the year with the same trends that we finished the last quarter. Some pressure on spreads, but very good performance in terms of fee income, costs and credit quality. We are aware, however, of the uncertainty over interest rates in the coming quarters and also the uncertainty associated with the EU referendum.

Moving on to Brazil, here the strategy is to improve the Bank to create a better bank, to have a better bank with more loyal customers through our commercial transformation. We are making significant strides. We are now the bank with the lowest number of complaints amongst the largest private banks in the country. We are already approaching 5 million new digital customers after having launched a specialized channel for the upper part of retail customers.

In terms of results, 7% higher commercial revenues, with a good performance in net interest income and fee income. Costs under control, were below the inflation rate, which is remarkable taking into account the effort that we did last year, you remember was flat in actual nominal terms. So we're still improving upon the achievements of last year.

Provisions were lower than in the third and fourth quarters, higher than in the previous quarter. Attributable profit was EUR359 million, unchanged relative to the first quarter of 2015 and higher than in the third and in the fourth quarter of last year.

We continued to change our business mix in the country. We've been doing this for many quarters already. We are, as you can see here, growing in the lower -- lowest risk segments in individuals, mortgages and loans to individuals.

Part of the drop in company related lending is associated with the fact that a portion of our portfolio is denominated in US dollars. The exchange rate evolution in the quarter accounts for around 2 percentage points of this drop.

So excluding the exchange rate in US dollars, loans would have grown at 1% -- still in nominal terms that's a very low figure taking into account the inflation in the country, but the recessionary environment, as all know, is very important.

We were able to keep our margins flat despite the change in business mix. All our segments are increasing spreads, in some cases quite significantly. In the case of rural lending, up 180 basis points; consumer, up 110 basis points, et cetera, et cetera. So all segments including [sic - "increasing"] spreads significantly because of the business mix. Spreads though remained stable. Spreads on deposits also are improving.

Our asset quality, as you can see on the right hand side of the slide, is better than those of other banks, other private banks in the country. And the cost of credit is stable -- practically it's more or less stable, 4.6%, relative to 4.5% -- and this is exactly in line with what we said in our Investors Day last September, in which we said that the cost of credit we thought would go gradually to around 5% in 2016.

So although again we cannot isolate ourselves from the economic situation in the country, we think that the improvement in our franchise and the way we have managed the asset side of the balance sheet are sound foundations for this year, for 2016.

In the United States, we continued to invest to improve our business and to meet regulatory requirements. Our intermediate holding company will be created on July 1st. This obviously -- on top of everything else, this is having an impact on cost, and as a result of its incorporation on July 1st, we think cost will come down in the coming quarters.

We are also improving -- investing to improve our banking franchise to be closer to our customers and improve profitability. We have higher provisions year-on-year, as Jose Antonio mentioned, explained because of Santander consumer, with provision more or less in line relative to the balance sheet, very much in line with previous quarters. But also we provisioned -- we decided to make a prudent provisioning for oil and gas. Right now we have 8% of the loans in this sector in the US already provided for.

In terms of the P&L, commercial activity is improving. We are beginning to see the results of some of the measures that we've taken. For example, Santander Bank is growing its loan portfolio, loans up 5%, funds up 6%, mostly in commercial and industrial and global corporate banking and Santander consumer is also growing.

The evolution of this is reflected in the revenue growth. Net interest income is up 4%, fee income also up 6%. In addition, costs, which still remain very, very high given the variables that I mentioned, are starting to show some signs of deceleration and we think that in the next quarters these will become more evident.

So in short, lower results than unusual because of one-off factors and we continue to again invest to improve our profitability and the quality of our business and to meet regulatory expectations going forward.

Santander Consumer, same trends as in previous quarters, significant growth associated with its leading competitive position in Europe and the incorporation of the PSA units. These, by the way, are performing slightly better than our plan.

New lending was up 24% in the quarter, 14% without PSA, basically driven by auto finance and in countries -- by countries basically in Spain and in Germany. Attributable profit was EUR251 million, 17% up year-on-year. And the countries that contributed the most to this were Germany, EUR76 million; the Nordics, EUR62 million; and Spain, EUR51 million. In short, solid organic dynamics and good execution of the agreement with PSA give us we think solid grounds to continue growing the business in the next quarters.

Let me go through the rest of the countries very quickly. Now, you have all the information obviously in the presentations that we have uploaded in the website.

In Mexico, our commercial focus is on the most profitable segments; select SMEs and companies, digital banking and quality of service. We are gaining market share in assets. Lending was up 14% and funds also up 12%. Attributable profit, up 10% year-on-year, 18% higher net interest income.

In Chile, the focus is to improve the number of loyal customers and quality of service. In the results, you can actually see this strategy is yielding very positive results. Attributable profit was EUR122 million, 26% higher year-on-year, both based on higher revenues -- commercial revenues and lower provisions.

In Argentina, we have a very [transactional] bank. We are expanding and modernizing our distribution network and this -- as a consequence of this, we are gaining market share both in loans and deposits. Profits grew due to higher interest income, net interest income, fee income and lower provisions.

In Poland, we have a very good performance relative to competitors. We continue to be leaders in online banking, cards, et cetera. We are growing in SMEs, which is a strategic target for us and we've gained in market share. These greater activities reflect in better numbers, in better revenues. However, profits were down year-on-year mostly because of the introduction of the bank levy, the 44 basis points tax on assets, which for the Bank represents a charge of around EUR7 million a month.

Finally, in Portugal, double digit attributable profit growth. I believe year-on-year growth is partially due to the incorporation of Banif, but it's mostly due to the fact that the result -- the Bank is doing very well, gaining market share and also we sold some ALCO portfolios in the quarter.

Finally, turning on to the corporate center, in the Investors day we announced that we wanted to decrease the weighting of the corporate center relative to the total of the Group. And at that time it was 25%. It was below 25% last year at 23%. In the first quarter was 19%.

We have reduced losses this quarter mostly due to improvement in all P&L items. Revenues; the financial margin improved year-on-year because of lower cost of wholesale funding. Costs were also lower, in line with our strategy to simplifying and streamlining the corporate center structure.

And other results that include provisions and other contingencies registered a figure which is lower than the rank rate -- we think this is not obviously recurring. We continue to work to develop a more agile corporate center that really adds value to the rest of the units.

And with this, I would like to turn it back to Jose Antonio for his closing remarks. Thank you.

Thank you, Jose. Just to finish, a couple of comments in our progress in executing the drivers for the goals we established in -- by 2018. Those goals were related with the commercial transformation -- I gave you numbers about the execution of this goal -- operational excellence, that, as you know, is a combination of cost, income that we already elaborated; plus customer satisfaction; the quality of the balance sheet; and the accumulation of capital; and the value generation for our shareholders.

On the commercial transformation side, as you know, we established specific [OGTs] for loyal customers to reach 18.6 million loyal customers by 2018. We are progressing towards this goal. I mentioned that we are growing around double-digit on this.

In digital customers, I already mentioned the numbers. In this particular field the growth is going to be exponential in the next couple of years because the clients are behaving -- are adopting more and more the relationship with the Bank via digital channels.

When it comes to financial figures, we are overall renewing market share in loans, well, almost in every country -- only Brazil that we are very much flat and Chile we reduced a little bit, but overall we are growing. And also in fee income that probably reflects -- is the line of the P&L that reflects better the loyalty of the customers or the transactionality of the customers with the Bank, where we are growing -- we are showing significant growth, as I said at the beginning.

On the operational excellence side, as I mentioned, we are facing here two processes at the same time, adopting our existing distribution capabilities and the same time generating new distribution capabilities through digital means. So we have plenty of initiatives all across the board. Well, in this regard, we are progressing -- our cost income is 48.1%. We are still going to reach the 45% in 2018, but we remain comfortable that we are heading towards this.

At the same time, we are improving the customer satisfaction. We have a clear metrics on this. In five countries we are already top-in-class, but our target is to be in 8 out of the 10 countries, while we have good developments both in Spain, in UK and in Brazil, where we are -- our main markets where we are reaching already in the top -- at the top of the range or between the top -- between the peers.

In terms of balance sheet, two sides here. One side is the quality of the balance sheet in terms of NPL and coverage and all of these things. In terms of NPLs, we are -- NPLs are trending down, the cost of risk is around 120, where we said we expect to be. Still some positive developments will happen particularly in countries where we come from a very high level of cost of risk and probably we will see some overshooting compared with the average expected losses in the coming quarters. We are developing significant programs here. Particularly important is the advance risk program in order to [strengthen] the risk culture across the Group.

In terms of capital, I already comment, we are building capital at a pace that allow us to be positive on our capacity to achieve the goal we establish by 2018 both in core equity fully loaded and on the other items, return on tangible equity, return on risk-weighted assets as dividend per share that we commit to have an annual growth of dividend per share.

And finally to finish, to establish -- to reiterate again our priorities, growth in earnings per share, dividend per share and tangible net asset value per share. And we already announced in our AGM growth in the total dividend by 5% and cash dividend around 11 -- sorry, 10%. And our tangible net asset value has been affected this quarter by the FX, but we are on track to meet our goal. And the cash dividend is growing as we were telling to you in our Investor Day.

And finally, only to remember you that we plan to have by September 30th in London an update on our strategy -- that we expect you to be there and the top management of the Group will be there in order to address the questions you may have.

And now we are ready to take the questions that you may have. Thank you.

Ladies and gentlemen, the Q&A session starts now. (Operator Instructions). Jose Abad, Goldman Sachs.

I have three questions from my side, the first one on Brazil, a very good certainly credit quality development. However, could you explain a little bit how it is possible that the NPL is actually going down given the sharp deterioration in activities that we still see. And my understanding also for your presentation is that you reiterate your guidance for cost of risk of 5%. Please confirm if I understood you well?

Second, on the US, how does the Bank think with regard to cost of risk for the US going forward with particular focus on [SC USA]. Related to this, we know that they failed the CCAR. This imposes a number of restrictions. One of them being the acquisition of other banks or assets in the country. Does this restriction also apply to the potential disposal of assets in the country?

And the last one being, given the good start of the year on the NII side in Spain with plus 5%, how do you see NII by year-end in Spain? Thank you very much.

Okay. Starting with the first question around credit quality in Brazil and NPLs going down or basically flat with the previous quarters, we have had -- we continue to see in Brazil two developments here. On one side retail is behaving much better than expected. Don't forget that we changed dramatically the composition of the portfolio here.

The overall portfolio is basically going down, but internally we reduced significantly our exposure to the product that produced the majority of the losses -- that is a product called personal check, where our market share was 18% two years ago and now is 12%. This explains the majority of this. And we are growing now in what is called payroll based lending through the -- last year, you remember, we acquired Bonsucesso, that is a payroll based lending company in which we are growing very nicely. So what explain the most of the what you call surprisingly weaker qualities, the good behavior of the retail due to the change in mix.

When we go to the corporate side, we have a cost of risk that is in line with our expectation and reflects the economic situation of the country. So no surprises in this side.

The second question in relation with these, in Brazil the cost of risk, if we feel comfortable with the guidance we gave you to be between 4.5% and 5%, if I do remember. Well, we feel comfortable with this. We think that we are going ahead closer to the 5% than we are right -- than we are today. But we remain absolutely comfortable with the guidance we gave to you in relation with this.

The US, the cost of risk in SC USA -- well, at SC USA, as you know, we have two kind of business there. Well, it's the same business -- it's motor finance all of them. But we have the subprime piece, the near prime and the prime. Well, we are not seeing significant changes aside from the volatility on month-to-month depending on how much we are generating in each space, means subprime, near prime and prime. And we are not seeing any particular trend compared with what we had in the previous year. So I don't see any changes in this regard.

In relation with the CCAR, you mentioned, well, CCAR, not been able to pass the CCAR, you cannot do capital actions -- and capital actions means any kind of capital actions, including acquiring other banks. I don't know -- you are specifically for this function, yes? The capacity to dispose is not in our mind.

As we said to you, US is core for us and we are addressing, as Jose mentioned, the regulatory issues we have on the table. And this explain why our cost grew significantly last year, although we are in a decelerating mode after we did significant investments there. And this business remains core for us, so we are not contemplating any kind of disposals of this core business.

It's true that, as we said to you in the third quarter I think, with this continuous activities on lending through third parties, but not in motor finance. To focus in the motor finance that is our core activity there.

NII in Spain, where the numbers this quarter came significantly better than the fourth quarter due mainly to the deduction in deposit cost. Looking forward what I do see is a limited capacity to reduce deposit cost. Although on the other side, we are seeing a better trend on the [GLM] of the asset side. You look at the GLM of the asset side, the margin compression that was intense last year. And I was showing you a relatively pessimistic view about this trend and becoming more constructive in this regard and probably we see a different book -- a trend of not to reduce additionally the spread that are already relatively low.

Thanks, Jose. Next question please?

Alvaro Serrano, Morgan Stanley.

I have a follow-up question on Spain and then a question on cost. Is there any difference in terms of the profile of the 123 account customers during Q1 because the cost of deposits, you've explained, has come down. But given the growth there it seems a bit odd. Obviously, you had minus 7% NII in Q4, now plus 5%. So I just want to get a feel of how the balance is changing the 123 account, a bit more color on that. And should we expect NII flat from here, down or up? That's the first one.

And then the second question on cost. In general, in the developed markets it seems like costs have been down. In particular, I would be keen to know what do you expect for cost base in Spain this year and in the UK. Thank you.

Okay, two questions; one on Spain and one is deposit costs in the quarter were reduced because there were some expensive time deposits maturing and we re-priced all these time deposits. This explain the majority of the reduction in cost this quarter. So I do -- as I said before, we see limited room to reduce -- to further reduce the deposit costs in Spain, as I mentioned before.

General expenses and expenses in general, well, you saw the plans we announced one month ago. We tried to reduce -- to achieve a cost income by 2018 below 50% in Spain. We are still far away from this and we continue to work in order to achieve this target. This is about -- there is a tension between investments in the digital transformation and accommodating the distribution network to what we perceive the customer needs and this is where we are. And I remain relatively optimistic about our capacity to reduce the cost income and to achieve our target in 2018.

UK cost, I (inaudible) this. In UK -- well, as Jose mentioned, we have there a -- we are implementing the non ring-fenced bank that increase the cost. But at the same time we are reducing the cost in the traditional operations and we think that we're going to be relatively flattish on costs in the UK this year.

Thanks, Alvaro. Next question please?

Daragh Quinn, KBW.

I had a couple of questions please. Firstly, just on capital, if you could just go through again the organic capital generated in the quarter and particularly just the euro amount of fully-loaded CET1 remaining flat, and just if you could go through the dynamic of that relative to the retained earnings in the quarter?

And then a second question on Brazil. You've commented on the asset quality outlook for this year. But thinking further ahead and looking at 2017, if Brazil was to remain in recession, what would you expect your cost of risk to do? Do you think it could deteriorate further from the 2016 level or could it remain at those levels? Thank you.

You want to elaborate on --

The absolute amount of capital was affected by the exchange rate, but also the denominator. So the reason why the ratio actually went up is a combination of these two factors. So the absolute amount of capital in euro terms was affected by the exchange rate, but also were risk-weighted assets.

In relation with the cost of risk in Brazil, you asked for 2017. I will say we think that we have -- on the corporate side, as I said, where we were expecting to be in line with the macro environment -- the condition -- we do not expect an increase of the cost of risk in this side.

In retail side, we're keeping a focus on the auto finance, where we think is -- where we are facing potential pressures of higher cost of risk, although as of today, as I said to you, we don't have any reason to believe that we're going to be outside the range we -- in 2017 the range we gave to you between 4.5% and 5% cost of risk. But you asked me for a specific area in which we are looking the developments in a daily basis is the auto financing, which we think it may be some pressure going forward.

Thanks, Daragh, for your question. Next one please?

Stefan Nedialkov, Citigroup.

Three quick ones from me. On capital, the operational risk benefit from Brazil, you've not gone on to the advanced measurement approach, but Basel has come up with new risk proposals -- is that benefit going away at some point?

And staying on the capital topics, you mentioned the RWA optimization that lets you grow loans faster than risk-weighted asset. Can you just give us an example or a couple of things that you may have done in 1Q that lets you do that?

My second question on the US. Other costs have come down Q-on-Q quite significantly. I'm guessing this is because of lower regulatory costs. Is this a one-off? Are we going to see an uptick in regulatory costs going forward for the rest of the year or is this a new normal for the US costs?

And lastly, on Spain, provisions were higher Q-on-Q. I was personally looking for something better. Is there a specific part of the portfolio that's not performing or are you just being cautious? Thank you.

Okay. The first question in relation with operational risk, if at some point this may go away. Naturally, there's developments in the operational risk. We don't have advanced model for operational risk and at some point this may become a standard model. Well, this is still work-in-progress. Before this alternative standard model goes away, probably we still have -- still some subsidiaries in which we can go from the standard to the standard alternative.

So we will see later on if this goes away -- I mean what may go away based on what the regulation -- the future relation will be. But in operational risk, before it turns or if it turns, we should have still some positive news in line with the ones we had in Brazil.

Cost, US -- well, in US, we mentioned regulatory costs and we mentioned extra effort we are making on this. This is I will say -- you asked me if this is a one-off. This is not a one-off. We are in a deceleration mode in the US cost for regulatory reasons and also for -- once we get closer to the incorporating -- the incorporation of the intermediate holding company, we're going to be able to capture some efficiencies and we are on track to get those efficiencies.

So last year we grew the cost in the States double-digit. Probably this year we should be able to be -- not to grow double-digit, probably to be quite flattish in relation with the previous year with different developments in the holding and the Bank and in SC USA, but a significant, very significant deceleration on the costs growth in the US.

In provisions in Spain, you mentioned that we increased the absolute level of provisions in the quarter I think, if some part of the portfolio -- no, credit quality in Spain retains at the same than in previous quarters. Even I mentioned in the presentation that at some point we expect some overshooting in cost of risk. The cost of risk -- expected losses, I mentioned several times, is around 60 basis points to 70 basis points. We are now 50 basis points. More overshooting is expected. And the quarter was more due to specific cases, not portfolios -- yes, more specific cases than portfolios.

Thank you, Stefan. Next question please?

Robert Nobel, RBC.

Morning. I was wondering in Spain if you could give us the average balances of 123 accountholder and what that cost is actually to you?

And secondly, in the US, what ROE do you see the Bank making in the US for 2016? Thanks.

Okay, the 123 is going very well. We have more than the 1 million 123 accountholders. Well, let me to not to disclose specifically the cost of this. But the significant balance is that at zero cost, because typically the behavior of those customers tend to have a balance, on average is at the EUR15,000 in which we pay the 3%. The balances are significantly higher than that.

And let me to emphasize that part of this exercise is reflected in the good trends in the fee income. The fee income in retail in Spain is growing in the first quarter at 8% and we expect this year to be around 10% fee income growth in retail in Spain, thanks mainly to the evolution of the 123 account.

In terms of return on equity in the US, well, we're going to show what -- I'm pretty sure we're going to show significant progress, yes. So we are probably at the lowest level I foresee for the return on equity in the US and from here we expect to keep growing significantly going forward.

I don't have a specific number in mind because it depends a lot on the level of interest rates. But assuming that the interest rates behave according to the forward rate, you will see significant improvement in return on equity going forward year-on-year.

Thanks, Robert. Next question, Operator, please?

Sofie Peterzens, JP Morgan.

So congratulations on your good results. So I was wondering if you could quantify how much cost savings you expect from the recent branch closures and also (inaudible) reductions in Spain.

And then my second question is around the loan growth in Spain. When should we expect mortgage amortization to kind of stop weighing on loan growth and actually when do you expect to see loan growth picking up in Spain?

Thirdly, could you remind us what your sensitivity in Brazil is to a potential rate cut by the Central Bank of Brazil? Thank you.

Okay, savings in Spain, well, I already elaborate on this. Well, we haven't -- we expect, as we mentioned, to reduce the number of branches by 450. This is not -- the percentage is not -- those are small branches, so the reduction in cost is compared with -- is not proportional to the number of branches we closed because those are branches with mainly one or two employees or are small branches.

But we expect to reduce the cost base in absolute terms going forward in order to reach our target of having a cost-to-income less than 50%. The reduction in cost maybe in the region of EUR100 million. We haven't closed yet the agreement with the units, but maybe in the region of EUR100 million per year.

Loan growth in Spain, aside from the institutional lending -- institutional lending is decreasing quite significantly due to the policy of the Spanish treasury to fund the regions directly. Aside from the institutional lending that is continuing to decrease, I do expect [at some point] this year to be able to show a -- to stop the decrease in the volume of the loan book. We already stopped and we are growing in SMEs -- still deleverage in the large corporations, but we do think that maybe at the third, fourth quarters this year we may be in a position to have a stable loan book aside -- not taking into account the institutional lending.

The third question, I don't know if I get properly -- sensitivity to interest rates in the case of Brazil. You have the number?

Yes, we have --

Yes. Yes, increasing 100 basis points. It's negative EUR100 million, roughly speaking EUR100 million NII negative.

Thanks, Sofie. Next question please?

Mario Ropero, Fidentiis.

Two questions on Spain. The first one is on the NPL coverage, which I saw continued to go up despite the ongoing positive macro and credit cycle. So is there any attempt to reach conservative levels in advance of regulatory changes coming soon or shall we expect this level of coverage to remain stable going forward?

The second question is on fees on DDAs covered by Spanish guarantees, if you could tell us how much you booked and where in the P&L?

And the final question is, if you could tell us how many of the 1 million 123 customers are upgrades? Thank you.

Okay, so NPLs coverage going up, this is more an outcome than anything that we have a specific target for this. As you know, provision in Spain in some cases is a timing issue. And as you don't -- the generation of new NPLs is very low and all NPLs become -- the coverage keeps growing. That's the reason why the NPL coverage is going up, not because we have a specific target of having a given coverage for NPLs in Spain.

Fees for DDAs, I don't have the number, but we mentioned --

It's around EUR43 million, EUR44 million a year. So it would be around EUR11 million or so in the quarter. And is accounted for --

Other provisions.

-- in other provisions, below loan loss provisions.

The switchers is around one-third, a little bit more than one-third -- it's around 35% the number of switchers with the 123 account. Well, you can see we are growing our market share, mainly in the number of payrolls we have in the Bank and the turnover in credit cards and in debit cards that is growing significantly.

Thanks for your questions, Mario. Next one please?

Andrea Unzueta, Credit Suisse.

Most of my questions have been answered, but I just have a follow-up on Brazil. I understood that you reiterated the 500 basis points guidance for provisions and I understand the mix changes that are going on. But the loan growth seems to be coming lower as well. So are you sticking to the mid single-digit growth guidance for Brazil?

And secondly, I'm going to give it another try on Spain and NII, can you maybe walk us through your expectations going forward? Thank you.

Well, in Brazil, as I said before, our guidance that we gave you between 4.5% and 5% in the cost of risk remains there. The growth probably in the quarter -- and, Jose, elaborate on this -- when you are looking in euros in the quarter the loan book rank by 1%, but this is mainly due that a portion of the global corporate banking portfolio is denominated in US dollar.

At the beginning of the quarter, the US dollar vis-a-vis with the real was 3.90 or around 4 and at the end of the quarter was around 3.60. Due to this drop, the loan book got reduced in the quarter. This is a pure FX effect.

Aside from that, the environment in Brazil is -- our capacity to re-price assets and liabilities is still remarkable and for that reason we remain relatively optimistic and we feel comfortable with the guidance we gave to you to be able to generate at least the same profits in local currency that we generated last year and to grow somehow above this level.

In relation with NII, is specifically -- as I said, volumes may remain relatively sluggish, but the capacity to re-price both assets and liabilities will give us some room to be in line with what we told you before.

Thank you. Next question please?

Rohith Chandra-Rajan, Barclays Capital.

A couple of follow-ups actually, please, one on Spain NII and then, sorry, back to Brazil again. So Spain NII, can you just clarify exactly what you are indicating by expecting some further pressure on net interest income? So just breaking that down I guess really in terms of margin and volume, if I understand correctly, margin relatively flattish from here because you don't see much deposit re-pricing opportunity and some slight volume decline as some of the book continues to roll off. So number one, I just wanted to check if that's the correct understanding.

And secondly, on Brazil, I just wondered if you could give a little bit more detail in terms of the NPL ratio dynamics in the quarter, so inflows, recoveries, that type of thing, because it's obviously a positive slightly -- surprising that that ratio has come down a little bit. And also if you can elaborate on the chart on slide 22, where it shows a very different NPL evolution for Santander versus the local peers, where I guess all of these have been de-risking their loan book. So what's so different about Santander in Brazil? Thank you.

Okay, NII in Spain, margins and volumes, as I said to you probably before, we do not see there's much room on the deposit side. We see still some margin pressure on the asset side. So probably on the margin side best we reduce a little bit the margin on this. The volumes, they don't going to help, so we are going to keep -- we are going to have a -- for sure we don't going to have the uplift we have this quarter in the next quarters. But we don't going to have either the situation we had the last year where the margin was going down significantly.

So those are -- I already elaborated on volumes that probably going forward we are going to be more constructive in volumes, not to keep going down 3%. The impact of the institutional lending in terms of margins is lower than in terms of volumes -- that is the one who is going to get reduced significantly.

On the asset side still re-pricing the mortgage book downwards, yes, and this is an exercise that we usually can do. And in relation with NPLs in Brazil, well, I already elaborate on this, positive surprises in retail. In the corporate side we are I think in line with our expectations.

In relation with the local peers, probably we had a significant change in mix that is much bigger than the one they had. And I already mentioned that we lost significant market share in the product that was producing -- the personal check, where we had 18% market share and now we have 12% market share. This product has a cost of risk in the 30s, in the 40s. So relatively small changes in market share produced bigger changes in the cost of risk. And the reduction in NPLs is due to these changes, yes. So you see the market -- the segments in which we are growing is basically mortgages -- that by definition is a low NPL certainly.

And I don't know, you want to elaborate more?

No, no, no.

Give some details on this?

No, we don't have the details of the recoveries, et cetera. We can get back to you on that.

Thanks, Rohith. Next question please?

Carlos Peixoto, BPI.

Just a couple of questions. The first one would have to do with the mark-to-market of the available-for-sale portfolio, which had a positive impact of 10 basis points in your fully-loaded core Tier 1. My question here has to do basically -- when I look at the balance sheet, equity adjustments of valuation were actually down or more negative in the quarter by an additional EUR1.5 billion. Nevertheless, there was a positive impact from the available-for-sale on the floor of the core Tier 1.

And this means that the duration in the bonds that are at eligible -- or that are at mark-to-market was much stronger than in the sovereign bonds, which were [faded] for the quarter. Thank you for that.

The second question is on fees income and -- particularly in Spain. My question is on whether -- this quarter whether there was any changes in the accounting of FX related commissions or whether these numbers are fully comparable with the previous quarters, and if so, is this improvement driven by the 123 account? Thank you

So I will elaborate on the second question. I pass to you the first question, Jose. Accounting now changes in the accounting of fees. As I mentioned to you, the 123 is the retail fees and particularly 123 has a relatively high financial cost and relatively high fee income. And the fee income this year in the retail I already elaborate that we are going to have a number that is close or around double-digit growth. Already in the first quarter was 8% growth in retail. So this is -- we see this evolution being sustainable in the next couple of quarters.

And the portfolio, Jose?

Yes, the improvement in valuation comes mostly from Brazil, where the portfolio experienced a significant improvement. Now, when you look at the absolute number of securities in our balance sheet, obviously it was negatively affected by the exchange rate again. So it's not because we disposed of significant amounts of assets or because we changed the composition of the portfolio. It's basically explained by the exchange rate. And again, the improvement in the valuation of the available-for-sale portfolio was mostly due to Brazil.

Thanks, Carlos. Next question please?

Alex Koagne, Natixis.

A few follow-up questions if I may please. The first one is on the cost of risk in Brazil. Could you please split the cost of risk with the corporate and the retail base was?

The second question is on your oil exposure in the US. Can you just remind the outstanding? Is it [$1.5 billion]? And also can we expect more provision going forward on that exposure?

The third question is linked to the TLTRO 2.0? What is your thought about that? Are you going to use it and what could be the impact on your net interest income in Spain?

And last question, just want to be sure about what you say on cost guidance in Spain. Are we looking for a flattish cost base in 2016 compared to 2015? Thank you.

Okay, the cost of risk in Brazil, you HAVE the numbers between the split between corporates --

No, we don't have the breakdown.

Yes. We give you the numbers -- we will come back to you and we give you the numbers, the split between corporates and retail.

Exposure in oil and gas in the US is -- our exposure -- our commitments are in the region of $1.5 billion and drawn exposure is $300 million or something like that and we took provisions for in the region of 89%, as Jose mentioned before.

The TLTRO, you want to elaborate on the TLTRO?

Well, until we have the technical details, we cannot make any assumption or we-- it's too premature to make any comments. So we need to wait till the technical details are out and then we will analyze the options that we have.

Thank you. Next question please?

Britta Schmidt, Autonomous.

Yes, I've got a question on SC USA. Could you please update us on the pending deal of the stake acquisition and what capital impact that will have and when you expect to close that deal?

Could you -- we couldn't hear you.

Could you elaborate the question?

We couldn't hear you well. Could you --

My question is could you update us on the SC USA share purchase that you agreed last year, the stake acquisition, when is that expected to be closed and could you update us on any capital impact that this will have?

Good. Thank you.

Good. The agreement -- I think we gave the numbers. if I remember well was -- 8 basis points was the impact on capital of this acquisition, yes. They are correcting me. How much? 5 basis points is the impact of this acquisition.

Thanks, Britta. Next question please.

Ignacio Cerezo, UBS.

A couple of questions from my side; first one is on the tax rate for the Group, if you can give us your best estimate of the tax rate in 2016 and 2017?

The second one is a reminder on what have you been doing to cover yourself for currency volatility ahead of the referendum in the UK and what kind of impact are you expecting if the pound continues to weaken in terms of earnings and capital? Thank you.

The tax rate is approaching 30% at the Group level. This is the number we have in mind for this year and for the coming years.

In relation with the FX, you know our policy -- we have the policy to hedge always the capital ratio and in some cases we do hedge expected profits. In case of the pound, we haven't hedged expected profits due to the fact that we are -- we expect the pound to recover after the referendum.

Thanks, Ignacio. Next question please?

Marta Romero, Merrill Lynch.

I have a couple of questions on capital and follow-up on the US. On capital first, your target of generating (technical difficulty) of capital quarter. Does that include any negative impact from regulatory changes that you are seeing in the immediate future?

And second on capital as well, on (technical difficulty) you stick to your target of [8.5] billion over the next three years and what was (technical difficulty)?

And a follow-up on the US, I don't know if I -- I'm not sure if I asked your answer on when do you expect to get the transaction closed. And on an underlying basis, how much of the earnings of today of the franchise you expect to -- expect to fade away over time once you implement all the regulatory changes that you are being required to implement basically (technical difficulty) if you could give us some numbers on earnings, negative impact and return on equity? Thank you.

The sound is very bad, sorry.

Yes, sorry, Marta, but we couldn't hear you. I guess you were -- the first question was regarding capital and potential impact due to regulatory changes and our 81 issuances ahead - but the second one was quite inaudible.

Okay, what part of the cost may go away in the US due to the regulatory -- yes, so in the 81 our policy is to reach the 1.5%. So we already issue around 1%. So we plan to be there. So we have two years, yes.

So to get to the 100% is between EUR4 billion and EUR4.5 billion.

And the second question is, if I get it right, in relation with the costs that -- the potential reduction in cost when we pass the CCAR and when we have all the regulatory issues behind us in the US. Let me give you a number that may indicate you the kind of effort we're doing. Last year consultants related cost with this regulatory issue were $180 million.

Yes, this gives you an indication of the size of the cost reduction we can have once we pass not only the CCAR -- we address all the -- not only the CCAR, it's the OCC heightened standards and there are other regulatory issues we have there. But this is the size in external cost. On top of that, we have naturally internal cost related with this.

Just on capital, you ask if we have included any estimates for future regulatory changes in the quarter. As what Antonio said, we have the positive from the advanced standard in Brazil that was partially compensated by the prudent valuation, which is slightly less than 10 basis points in the quarter.

But we haven't made any estimate for future regulatory changes. As you know, this is very fluid. We are starting to get the quizzes from the Basel community on regulatory changes. And I was in a meeting on Monday in London and this is still very fluid. This will -- these proposals will suffer significant changes in the next few quarters. So it's too premature to make assumptions with regards to that.

Thanks, Marta. And we have time for one last question please.

Andrea Filtri, Mediobanca.

What do you expect the impact from negative rates will be and when do you see this emerging?

And secondly, I'm afraid it is on potential regulatory changes. What are your expectations on the revision of operational risk standards and what would you estimate to be your 10-year internal losses according to the latest consultative document? And what would be the large corporate exposure defaults to be migrated to standardized models according to the latest consultative document on credit risk? Thank you.

Okay, the first question in relation with the negative rates impact, the main one is going to affect the mortgage book in Spain, that, as you know, is euribor 12 month plus spread. This is the main impact we expect to have on this side.

On the other side, naturally we have some positives coming from the portfolio of sovereign bonds that we found in negative rates in the repo market. The second question -- but overall it's negative due to the size of the mortgage book.

Operational risk standards, well, it's too early to say. As you mentioned, we have keys. The keys has something that -- in our case has a multiple point of entry, single point of entry, has an over -- that if we have, it needs to be on a consolidated basis or an aggregated basis, huge variation depending on that. So it's too early to say the final outcome of this change in operational risk when and if it happens.

In relation with the large exposure to standardized model, the effect for us is minimum or almost non-existent. Remember that our density is much higher than the average of the industry in this given the fact that our (inaudible) in these portfolios in our approved model was significantly higher than the industry. So we do not expect impact if it remains as it is from the standardized model to the large exposures.

Okay, we'll leave it here. Thanks very much everyone for attending this earning call. Obviously, the IR team is at your disposal for any follow-up you might have. Thank you.

Thank you.