Banco Santander SA (SAN) 2016 Q2 法說會逐字稿

I think we are ready to kick off. Morning, everyone, and thanks for joining today's Santander second quarter 2016 earnings conference call. We're going to proceed as usual with our CEO opening the stage, addressing the Group performance of the first half this year, as well as the concluding remarks. And our CFO, the Group CFO will address the main highlights of the different business areas for the first semester. Obviously we'll have plenty of time for your live Q&A session. With no further delays, Jose Antonio, the floor is yours.

Good morning to everyone. Thank you, Sergio 0:42. Thank you all of you for attending today's first-half results presentation. As usual, I'm going to elaborate [shortly] on the main trends at the Group level. Jose will elaborate in the main business unit, not all of them, just to give you time to the questions you may have. Finally, I will sum up and give you some looking-forward views of the environment in which we are developing our activity.

Well, the quarter we just finished, the environment continues to be very challenging for banking activity. The markets have been highly volatile during the quarter. At the end of the quarter, we had Brexit that created a new outlook, particularly in the lower for longer interest rates both in the UK and probably in the US. While emerging markets have better growth prospects and saw significantly better prospects for banking businesses.

Going into the numbers of the quarter, the first point is that the Group has maintaining the capacity to generate profits. The ordinary profit basically in the quarter has been much more in line with the previous quarter. It's true that at the statutory profit, we have several one-offs that I will explain in detail.

But I would say the quarter continues with the same trends, with minor changes both on the net interest income and fee income. The net interest income a little bit weaker than in the previous quarter, while fee income is significantly stronger than in the previous quarter. But if we look on a like-for-like basis excluding on a currency neutral basis and with our one-offs, the attributable profit is growing in line with the 9% that you have in the slide.

Naturally, we have significant one-offs in the quarter. Last year, I don't know if you remember well, but we had a positive one-off from Brazil, EUR835 million. This year we have several that I will explain [n the next slide to direct you through the numbers in the quarter.

The increase in the ordinary profit was driven by commercial revenues. NII grows 3% and net fee income grows accelerated -- is accelerating the growth and gaining momentum and growing more quickly than the previous quarter, based on Spanish retail and Latin America mainly.

Good news on the balance sheet side, both the NPLs and the cost of credit are trending down. The NPLs slightly below 4.3% and cost of credit around the guidance we gave to you, that is the expected cost of credit for the Group to 1.2%.

On the capital front, we accumulate 9 basis points organic generation in the quarter, very much in line with the guidance we provided to you of 10 basis points per quarter. The increase in 2016 has been 31 basis points. The return on tangible equity is 11.1%, is amongst the best or amongst the highest in the sector.

When it comes to the business, we continue to grow at a modest pace, 4% loans and 4% in funds from customers. While it is true that we are growing faster in the segments, we have specific targets we are prioritizing, like SME lending and demand deposits, we are growing faster in those.

In relation with the customers, the trends are pretty good. The loyal customers we are growing around double-digit both in individuals and in companies. The digital customers, the digital transformation is gaining pace and you see the numbers there, well, this growth is very likely going to continue. Even including, even too accelerating coming quarters. So on the business front, we see we continue to see good trends.

Let me now explain a little bit the one-offs in the quarter, just to guide you through the P&L. We have three one-off items in the quarter. The first one is related with the restructuring charge. The figure you have on the screen is net of tax EUR475 million, mainly related with restructuring done in Spain, around EUR400 million is related with Spain. The rest is a minor restructuring charge in the UK and the US.

The second one is the capital gain from the sale of VISA Europe, where we have a net positive of EUR227 million. Roughly speaking, half of this comes from the UK, half was Spain, Poland, and consumer finance is split between different geographies.

Finally, this year we account the contribution to the Single Resolution Fund in June, instead of doing this contribution in December. So it's a change from the fourth quarter to the second quarter, so you will see the opposite in the fourth quarter. This basically affects Spain and a lesser degree Portugal and consumer finance.

Including these impacts, the second quarter attributable profit was EUR1,278 million. The ordinary, without the one-off, as I said before, very much in line with the previous quarter, EUR1,646 million. Very much in line, as I said, with the first quarter. You have the numbers for the first half of the year that reflects pretty much the same as I said, with the underlying profit and the attributable profit excluding the one-offs being very much in line with the previous quarter.

If we look at the P&L, the overall P&L, you have here the comparison with the previous year in euros and in currency-neutral basis. We've tried to, in order to analyze what we see the currency-neutral basis, we see all the numbers from the gross income, loan-loss provisions, our gross income growing in line with the 4% that we were showing in the previous quarter. We still have some operational costs, although when we exclude, as we will do later, the perimeter and other things, we are very much in line with inflation.

The net operating income shows some growth. If I need to sum up, they show fairly recurrent revenues. The cost control. Loan-loss provision probably is showing the improving quality of the portfolios. Particularly you will see that this trend is fairly consistent all across the board and with the guidance we gave to you including the guidance we gave to you in Brazil where we were expecting cost of risk being between 4.5% and 5%, and we are in this range in a period of difficulties in the macroeconomic side in the country.

So overall, the P&L accounts show consistency and quality across the board.

The non-recurring results that gives you a big twist in the final numbers, you have last year EUR835 million positive from Brazil, remember the litigation in relation with provisions for fiscal matters. This year, we have EUR368 million negative that I explained before.

When we try to analyze the P&L starting from the gross income, starting with revenues, we see revenues, we see net interest income growing 3%, fee income accelerating and growing 8%, and capital gains -- gains on financial transactions and others being very much in line with the previous quarter.

In relation with the NII, the NII growth is driven by larger volumes and some margin compression on the asset side, offset by lower cost of deposits. I will say overall, customer spread is relatively flat, but we have margin compression on the asset side and some improvement in the cost of deposits.

Fee income grows 8% and continued to gather in pace. We were only 7% in the first quarter, we are now 8%. We are growing all across the board, both in retail banking as well in global corporate banking increased fee income. This is particularly important because we continue to have some significant regulatory pressure around fee income in several jurisdictions. Despite that, we've been able to show consistent growth in this.

The gains on financial transactions, we have had less gains on the ALCO portfolios, particularly interest- rate portfolios related with ALCO that were particularly high in 2015.

If we analyze the revenues by components, as I mentioned, the net interest income came a bit quicker. This doesn't show a trend for the coming quarters. Probably the coming quarters are going to be fairly flattish. We're going to expect still some margin compression on the asset side both in Spain decelerating, but still being there. Also in the UK, with a potential new Brexit scenario. While in Latin countries, we're going to be in a position to grow, that will probably offset or more than offset the trends we are seeing in more mature markets.

Fee income, as I mentioned before, is showing very good trends. Well, has been consistently growing in the last two years and we continue to -- we expect to continue to show good trends on the fee income. Financial transactions represent a fairly small amount and are fairly flattish compared with the previous quarters. We don't see any particular change going forward in relation with this line.

When it comes to cost, I mentioned before, excluding inflation and perimeter, we are [holding] costs 0.4%. So we are actively, as you know, managing costs. Brazil went down compared with inflation 4%, Spain 2%, Portugal minus 0.4%, the UK and Chile fairly flat. All across, we have still cost pressure in countries with high inflation, like Argentina, or in Mexico where we are investing and we continue to invest in developing the franchise. Finally, in US, although we are in a clearly decelerating mode in the US, we come from, well, in double-digits and the trend is going to go to a more normalized cost growth in the US. This is consistently showing the --

Overall, our cost/income ratio remains relatively flat in a difficult environment to grow revenue. Because it's a must to manage costs, to optimize the cost base is a must in this environment. In line with that, we took the chance for a restructuring cost that is going to produce a significant reduction in cost in the line of 3% or 4% in Spain, double-digit, around 10% or more than 10% in the corporate center. This is going to be the effect of the charge going forward, of the restructuring charge in the quarter.

Credit quality I mentioned at the beginning, good news here. The trends are consistent, we don't see any particular concern. We continue to be looking carefully the developments in Brazil, where we continue to see the portfolio behaving as we've been explaining to you and stating to you. The cost of this is in line with our expectations.

If you see the loan portfolio growth, you see the emerging markets but Brazil, due to the specific circumstances, growing very much in line with double-digit. That is a fairly substantial pace for emerging markets. While more mature markets tend to be more modest growth, or even in some countries like Spain and Portugal, decreasing. Although this quarter in Spain, for the very first time in a couple of quarters, we're showing a small growth of 1% quarter on quarter in the loan book. That is showing, if not a change in trend, it's showing what we've been telling you, that the leverage in Spain is coming to an end and we will see more, we are much more constructive in this line going forward, not to see the drops in the loan book that we saw in the previous years.

When it comes to, in this quarter, you will see net entries increasing in the NPLs due to the adjustments we've done in the Banif portfolio in Portugal, and some one-offs in other countries. But mainly it's the Banif portfolio we made adjustments. But the underlying trend, however, remains the same, net entries trending down.

In loan-loss provision, flattish in the quarter, lower in all units, especially Spain, Portugal, UK and consumer finance. They grew in Brazil and US. Jose will comment on this-- they decline over the previous quarters in those units, in Brazil and the US. The cost of risk continues to trend down, there is improvement all across the board.

Brazil, as I said before, because of credit is 4.7% fairly stable, we feel relative comfortable and continue to see good developments. The retail behaving probably better than we were expecting, while the corporate world is in line with our expectations in relation with given the macro scenario we have. In short, good trends in all the credit quality environments. We still think that we have some room for improvement.

On capital, developments in the quarter very much in line with our guidance. We guided you to 10 basis points growth per quarter, ordinary generation has been 12 basis points in the quarter. The other one-offs, regulatory, perimeter, AFS and other, took 3 basis points that end up in the 9 basis points capital generation in the quarter. That brings the ratio up to 10.36%.

This is very much in line, we continue to be more efficient in the capital allocation and the use of capital across the board. You have on the right that we are able to grow the loan book not affecting in a significant way the risk-weighted assets. This is something that we think that we still have some room to go in this direction. We're improving our way to match capital.

In short, I will say solid capital ratios, given our business model, the balance sheet structure, the risk profile and our pre-provision profit, that give us a significantly superior capacity to absorb potential shocks that come from the businesses. We continue to pay attention to the way we manage the capital in order to keep accumulating capital to reach our target of being above 11% core equity Tier 1 by 2018.

When we look at the profitability, the figure, the return on risk-weighted assets and return on tangible equity, we are among the best in the sector. Only American banks that for sure have better macro environment than in Europe are more profitable than us in these measures. Our return on tangible equity is 11.1%, in line with our expectations.

When it comes to the earnings per share, we generate EUR0.109 in the quarter, and the tangible net asset value per share came up significantly, because this quarter the impact of the currencies has been much less significant than in the previous quarter.

Finally, we announce our first dividend, which is going to be paid, the record date is today, it's going to be paid August 1, increasing by 10% the cash dividend. The Board approved yesterday the scrip dividend, that is going to be EUR0.045 per share, reducing the EUR0.05 per share we were paying the previous year. Our yield is now, with the current value of the share, our yield is around 5% for this half, an excellent return, given the level of current interest rates.

I pass now to Jose, that is going to elaborate on the areas . Finally, I will come back with some conclusions.

Good morning, everyone. As mentioned, I will comment on the main divisions of the Group. In the first half, 60% of our earnings came from developed economies and 40% from developing economies. This diversification, the one you see in the screen, helps explain the stability and the resilience of our earnings and our revenues in the current environment.

Starting with Spain, the strategic focus continues to be gaining loyal customers and improving the quality of service. We have reached already 1.2 million 1/2/3 accounts, improving the profile of clients and impacting positively on the fee income, as we will see in a minute.

We are gaining market share in payrolls, number of pensions and credit cards. We also have 100,000 1/2/3 SME accounts. As I said, this new added loyalty for customers explains the higher fee income in the retail banking unit, which increased 7% after negative growth in 2015. We have also improved our quality of service and according to a number of independent studies, we are now top three in the quality of service sustained.

Turning to the P&L, first half attributable profit was up 8%, excluding the charge of the Single Resolution Fund. We have good evolution in fee income of course and provisions will offset the fall in gains on financial transactions and net interest income. The latter was hit by credit pressure on spreads and lower volumes.

The greater loyalty of our customers helps in boosting activity and improving the risk profile of our business. New lending to individuals rose 25%, 18% to SMEs and for the first time in many years, we've had an absolute increase in total loans quarter on quarter. Still year on year we are down, basically because new production in mortgages is not sufficient to compensate amortization of the existing portfolio. But for the first time, we had positive quarter-on-quarter growth.

In the current interest rate environment, the focus in funds is to grow current accounts and mutual funds and reduce timed deposits. The cost of deposits dropped again in the quarter.

Credit quality continued to improve. The NPL ratio fell 30 basis points quarter on quarter, 85 basis points year on year, and the cost of credit declined by 39 basis points year on year. So in summary, we see pressure on net interest income, but with good trends in fee income cost provisions.

Turning to the UK, let me -- the first thing is to reiterate Santander's commitment to the country and our customers in the UK and to the UK economy. We continue to grow loyal customers, support companies and develop our strategy of digitalization. We already have 4.3 million digital customers, about 20% growth year on year.

First-half attributable profit was GBP656 million. This was affected, impacted, by the increase in bank corporation tax by 8%. On a pretax basis, profits were flat.

The main items in the P&L, stable net interest income, backed by growth in volumes that offset the reduction in new spreads in a more competitive environment and also the changing mix through lower SBR balances. Fee income was affected by regulatory impact, most important, the interchange fee.

Costs are almost flat. If we exclude the cost associated with the banking reform, costs would have been down 2%. Loan loss provisions fell year on year. The cost of credit remained at very, very low levels.

Quarter on quarter, we see an increase in the level of provisions but at extremely low levels. Cost of credit in the quarter was just 3 basis points.

The business momentum continues to be good.

Number of 1/2/3 customers continued to grow. We added 276,000 in the first half. We also captured good amounts in current accounts. Since we launched the 1/2/3 account, the average is around GBP1 billion per month.

We continue to grow above the market in loans to companies. The banking net interest margin declined a little bit over 2015, but it kept flat quarter on quarter at 1.78%. So in summary, good business momentum.

With regards to the referendum, I think it's too early to forecast the future evolution. What we've seen in these 30 days since the voting, we have no impact on deposits, consumer loans or credit cards and a very limited impact on mortgages due to the drop in housing purchase and sales.

It is important to reiterate the high quality of our mortgage portfolio, which is geographically very well diversified. The average amounts are very low, GBP200,000, and we have very low LTVs on average, 44%, and income multiple ratios. In the commercial real estate that we have is also of much better quality than the average of the system, with much higher loan-to-value ratios. As time goes by, we will obviously be able to assess better the impact of the voting. We will provide more details in our Investor Day in September.

Turning to Brazil, we continue to improve the bank and develop our commercial transformation. The strategy is reflected in more recurrent revenues, more customers, more loyal customers and more satisfied ones. We have already 5 million digital customers. That's up 36% over the last 12 months. We already have over 2 million of clients with biometric features.

In terms of the results, commercial revenues were up 6%, fee income growing at double digits. Costs remain under control, increased well below the inflation rate. Loan-loss provisions, also under control, and were the lowest of the last four quarters.

Second quarter attributable profit all in all was EUR429 million, EUR788 million in the first half with substantial growth rates in both cases.

The increase in the tax rate in the second quarter is normal. We had an abnormally low tax rate in the first quarter. The average tax rate in the first half was around 30%. That's more or less the tax rate that we should expect for the year, maybe a bit higher, 31%, 32%, but the normalized rate in the first half is what we should be looking at.

So in short, very good quarter in results, confirming the good expectations that we had been talking about in the past.

In terms of activity, the recession is affecting the activity. We have slightly lower loan portfolio quarter on quarter again. Remember, 13% of our loan portfolio is denominated in US dollars, so the appreciation of the real mostly explains this 2% drop. Without that, the evolution would have been stable. We're growing in payroll-based loans. We launched Ole Consignado, which combines the experience of Bonsucesso and Santander to improve the position in this market.

The spread on loans increased to 8%, both through a combination of higher spreads in every single one of our units and also helped by the changing mix associated with the appreciation of the real.

Lastly, in terms of asset quality, much better than the other private banks in the sector. In the second quarter, nonperforming loans using local criteria remained stable, and our cost of credit was almost unchanged. This is basically the result of the strategy that we commented in the past of improving the quality of our loan portfolio.

So in summary, we are improving the franchise in Brazil and the work that we've done in the last few years is enabling us to maintain solid profits in an environment that is tough but is starting to show signs of improvement.

Moving to the United States, the intermediate holding company was created on June 30. All of our activities in the US, Santander Consumer, the bank, etc., all of them will be incorporated under the intermediate holding company.

We continue to invest in improving the banking franchise, enhancing customer relationships, improving commercial activity and thus resulting in underlying better profitability. In terms of profitability, the bank continues to grow in loans and deposits. The focus here is retail and small- and medium-size companies. Santander Consumer maintains its focus on autos, up 4% and servicing up 9%.

Second quarter profit was double the first quarter at $178 million due to lower provisions at Santander Consumer and at the bank, as well. The first half profit was lower year on year because of cost and provisions. Remember the first quarter, we've had substantial provisions for oil and gas, which didn't happen at the bank, which didn't happen in the second quarter.

Net interest income was unchanged in an environment of still very low interest rates and high liquidity. Fee income rose -- a very, very good figure, 8% per year, 6% quarter on quarter.

Let me make just a couple of additional comments. The first is in terms of the stress tests published by the Fed shows very strong capital ratios remain in stress scenarios well above the minimum required and we ran second of all banks in the exercise. The Fed raised qualitative objections but also at the same time appreciated the improvements that we are making.

Second comment I want to make is on Santander Consumer. We are working with our incoming, our outgoing auditors, trying to reconcile different interpretation of certain accounting criteria in relation to the discount accretion and reserve methodologies. We are confident that they will not have either positive or negative impact on Group's results.

So in short in the US, first-half results were lower year on year but very, very substantial increase quarter on quarter in terms of profits. Return on equity was 6% in the quarter using local criteria, which is in an intermediate position amongst our peers. We continue to work on improving our business, enhancing profitability and complying with regulators' expectations.

Moving on to Santander Consumer, in an environment of consumer recovery and pickup in car sales, Santander Consumer maintains its positive trends of previous quarters. We continue to be the leader in the European consumer market. We have a very good, diversified portfolio of businesses in Europe. The integration of PSA is evolving according to plan and the credit quality remained excellent and the efficiency ratios also were very, very good.

First-half underlying profit was 21% higher year on year at EUR544 million. The main drivers were net interest income, which rose 12%. We had 24% new production, 13% without PSA. Production in all countries was higher year on year. And also, we improved the cost of credit at already excellent levels, given the type of business.

So in summary, good organic dynamics, good growth, organic growth dynamics and again, in line with the integration of PSA. This has given us the potential to keep growing at good rates in the future, gain market share and maintain our profitability and efficiency.

Let me now go very quickly over some of the other geographies. Mexico, you have all the details of these geographies in the appendix of the presentation. In Mexico, double-digit growth in volumes and deposits, double-digit growth in attributable profit. Clearly, the push that we are making in Mexico commercially, the launch of Santander Plus, [Aydo] Mexico Card, 256 new ATMs, 45% rise in digital customers, we are enhancing the quality of service. Clearly, all these trends which are underlying commercial recurring trends help explain these very positive results.

In Chile, the focus continues to be gaining clients, gaining customers, loyal customers and enhancing the quality of service. Profits amounted to EUR248 million, up 9% year on year.

Argentina, the business environment is improving in Argentina. We are expanding and modernizing the network, pushing increasing market share in loans and deposits. Net income increased 41%, with growth in all revenue lines. Provisions were in line with the growth in lending.

Poland, we are a leading institution in innovation and digital channels. We see good trends in loans and deposits gaining market share. Year-on-year profit was affected by the asset tax. Excluding that, profits would have been up 2%. In general, very good performance in all items of the P&L.

Finally, in Portugal, we have the best bank in the country. Attributable profit almost doubled year on year. Most of this is explained by the commercial recurring trends of the bank and also we had some positive impact from the perimeter change due to the incorporation of Banif. But again, in Portugal we are gaining market share and improving our competitive position.

Finally, let me make a very quick comment on the corporate center. We're working in the corporate center to make it more value added to the rest of the Group. As Jose Antonio mentioned, the processes at the corporate center have been optimized and digitalized. Function and position has been restructured in order to become more productive and effective.

These measures are helping us achieve the target of reducing the relative weighting of the corporate center to the Group. In the first half, it was 22%, down from 29% in the first half of last year.

Costs were down 16%. Gross income was down mainly because lower gains on financial transactions -- that's currency hedging -- while net interest income remained stable. Also, the provisions normalized in the quarter after an abnormally very high number we had in the first half of 2015.

With this, I'll turn it over to our CEO for his concluding remarks. Thank you.

Thank you, Jose. Let me to finish quickly to give you -- to have time to answer the questions you may have. Well, when we look at the figures we provide to you, let me to sum up. The first point I'm going to make is our dynamics are good and we are making good progress to achieve our commitments for 2016. The second is commercial transformation is gathering pace. While we have strong franchises in the markets, in nine markets plus pension and finance, our strong commercial model is working and this is allowing us to expand our business.

When you look at the numbers of the customers, the number of customers, loyal customers, we are progressing well. We are accelerating and compared with the already high rates from the previous year.

As a result of this, the best -- what reflects best this progress is the fee income and that goes into the P&L. That is gaining momentum and is growing at significant pace. We are growing now at 8%, double that we were growing in 2015.

The third, and I am particularly proud of this, we are in a -- as I mentioned to you several times, in a process in which we are making significant investment for the digital process in order to improve the quality of service for the customers. At the same time, keep our position being best in class in efficiency.

We are basically flat in cost/income in a difficult environment to generate revenues. But at the same time, we are among the top three in customer satisfaction in seven countries in [which we work]. Those countries are Argentina, Brazil, Spain, Mexico, Portugal, Poland and UK, that I am proud of being in this position, at the same time keeping our cost/income in line with our expectations. So operational excellence that is reflected in these two variables, cost/income and customer satisfaction means we're in good track to get there.

The fourth is the strength of the balance sheet. We continue to strengthen the balance sheet. You saw the trends in NPLs. The cost of credit remains well under control and we are generating capital in line with our expectations.

The fifth is shareholders' profitability. We have a higher level of profitability than the sector. We have improved the tangible net asset quality per share and we have already announced the payment of the first two dividends that are growing dividends as we commit with -- in the Investor Day. Remember that our target is a 5% rise in total dividend and around 10% in the dividend in cash.

To look forward and elaborate a little bit how we see the development in the business in the coming quarters. So we are facing different macro environments; particularly the main difference is the level of interest rates. We are seeing in the emerging markets plus Poland where I would say the interest rate (inaudible) is more or less a normal one. We see some economic and business growth and we see a significant potential to grow revenues in this environment.

Brazil, that was and still is in recession. It's starting to confirm our prospects of a significant economic improvement that makes us more optimistic about the future in Brazil. So in this environment we think that we can grow revenue significantly in those countries and we can make a case for -- a business case that is appealing for investors.

The same can be applied to consumer Europe where we are in an environment of extremely low zero interest rates for this business. While this business in this environment is very profitable, although the competition is increasing, there is room for improvement still here and we are positive on good developments here with a consumer and credit market that has some recovery and auto sales are behaving well across Europe.

On the other side we have Eurozone where we face difficulties to grow revenues. Negative interest rates, economic slowdown and low lending volumes makes a difficult business case. We are working here on the cost side and probably we have some room on the reduction on the cost of risk still, particularly in Spain, not that much in Portugal where we are very low level but we still have some room. In this environment, we think that we can match to keep our business going.

In the UK, we face a different environment than the one we were expecting definitively. The lower-for-longer interest rates changed the dynamics -- the future dynamics. There is plenty of uncertainty; what does define the situation right now is uncertainty. We are making our assumptions and our look in the developments in the market and we -- as Jose said, we provided you with the specific view of how this is going to affect the business going forward in the UK, the referendum -- the last month referendum.

Finally, the US. The US is somehow affected also by this economic slowdown. Probably interest rate hikes are going to be not -- they're going not to happen so quick and probably with less intensity than expected. And we see a moderate economic growth. Also our franchise, it's starting, particularly the bank, from very low levels, and we see improvements in terms of the financials in the US.

Well, this is an environment in which we definitively can take advantage of our diversification and basically compared with our peers our unique portfolio gives us an opportunity to differentiate even more than our competitors, particularly in Europe.

Finally to invite you, we have an update on our Investor Day in September in London, so I invite you to this presentation which will clarify some of the streams that I just mentioned in these final words. Thank you.

I think we have enough time for Q&A so please Operator, we can proceed to take questions now.

(Operator Instructions). Jose Abad, Goldman Sachs.

Yes, hello, good morning. Thank you very much for the presentation. Three questions on my side. The first question on the UK, we've seen a relevant pick-up actually in cost of risk from 1 bp in Q1 to 10 bps in Q2. Could you please elaborate on what is behind this? And apologies if you've explained that and I just missed it.

And second question regarding the stress test. Yesterday evening El Pais published -- seems to have leaked the stress core equity Tier 2 ratios which are going to be published on Friday and in the article El Pais assigned a range between 8% and 9% for Santander, implying basically that probably this year's -- the impact of the tests are much harsher than in 2014, something that we probably expected but probably even harsher than we expected. And could you please tell us whether this is probably right and if you can actually whether you are more in the upper part or the lower part of the range.

And the third question regarding Pioneer. There's been a lot of noise lately and it seems this morning that UniCredit made some announcement regarding the transaction. Maybe you could actually comment on this? Thank you very much.

Well, the first question, provisions in the UK, well, the first quarter the number was so low that probably in comparison it doesn't make sense. The number we are talking about is EUR60 million or something like that.

EUR68 million.

Yes. For the quarter it's a very low number and the cost of risk continues to be -- there is no news in relation with this. So in comparison the previous quarter was almost zero.

In relation with the stress test and with the news published in some media, well, a couple of comments. The scenarios and the conditions under which the stress test was developed this time are significantly different than the previous one, in the sense that some assumptions were tougher, in the sense that management actions were very limited. So as a result of this, probably we will see different results than the previous quarter. I don't know if the comparison makes a lot of sense. Probably the impact is going to be higher. I do expect an impact that is going to be higher across the board due to the assumptions of the stress test, not due to any other particular item.

In relation to Pioneer, we are calling off the deal. UniCredit, our partners and ourselves, we try as much as we can to meet regulatory expectations without harming significantly the strategic goals of the deal. We were not able to do so. Finally, we are calling off the deal. Now we're going to focus again in developing Santander as a management with our partners and our goal from here onwards is to have an outstanding asset manager that serves well our customers.

Thank you. Next question?

Alvaro Serrano, Morgan Stanley.

Good morning. A couple of questions from me. In Spain -- the NII in Spain was down in the quarter. You explained very well in Q1 there was a rollover of expensive deposits that explained why it was up in Q1 and now it's down. You mentioned the asset yield compression. But going forward, should we expect it to continue to come down quarter on quarter, the NII in Spain? Is there any -- apart from the lower rates that will feed and fall into Q3, is there any other rollover exceptional item that we should expect? If you could give us a guidance basically on the NII going forward in Spain.

And the other question is around the UK. In particular fees were down 6% quarter on quarter. Clearly interexchange fees had to do -- were taken out at the beginning of the year but I understand you also increased the 1/2/3 account fees. So I'm a bit surprised the fee was down in Q2. So anything going there?

And if you can comment as well on the loan production in the month of July in the UK. If you can give us a bit of color on what you've seen so far in July?

Two questions. The first one was related with NII in Spain. Well, I need to elaborate on this. What we have in Spain you saw in the numbers and we commented in the previous quarters is we have a limited room to reduce deposit costs, although we showed some decrease in deposit costs. We are applying, as you know, the majority of the portfolio EURIBOR-based, not only the mortgage book, mainly the mortgage book but not only the mortgage book, and this is rolling this portfolio is affecting the trends. There is no growth in volumes. This creates a difficult environment to generate net interest income.

Going forward we see the pressure on the margin on the asset side decreasing a bit, still a very competitive and dynamic market in a market that has relatively low credit demands although we were able to grow the book in the previous quarter. So volumes relatively flat going forward, still some margin compression on the asset side that we have limited capacity to offset with deposits.

Having said that, 1/2/3 certainly is going to continue to provide us with good news on the fee income side. So overall revenues, probably NII is going to behave worse than fee income. We expect significant gains there, as we show in the previous quarter. Probably I think as you see in Spain, it doesn't reflect in full the positive developments in retail because the figures include also the corporate business that the growth is less significant than in the retail.

In relation with income in the UK, well, as you know, we have here a positive coming from the 1/2/3, a negative coming from the interexchange fee that you mentioned. And finally in the quarter what was -- what makes the difference in the quarter was global corporate banking fees were lower in the quarter than they were in the first quarter and this explains the difference. There is nothing special on the more recurrent fees, interchange fees and the fees coming from the 1/2/3. It was the global corporate bank.

Thanks for the questions, Alvaro. Next question please?

Ignacio Ulargui, Deutsche Bank.

Hi, good morning, gentlemen. I have two questions for you. One is on Brazil. Do you see real estate to expect local currency net profit growth in 2016 versus 2015 given the pressure we have seen in terms of provisions and revenues in the first half of the year?

And the second one is linked to the consumer finance unit. You have seen a very good progress this quarter in terms of net profit. I just wanted to see your -- to get your feelings regarding what would be the contribution from this unit going forward, whether we have seen selling] close to the EUR300 million net profit or there could be further additional (inaudible) with PSA? Thanks.

Okay. The first question relates to Brazil. First of all, as Jose mentioned and I mentioned in the presentation, we are happy with the developments we have seen in Brazil. Our franchise, I told you several times, has improved significantly. We are in line with our expectations and going forward we are quite optimistic about the outlook of our unit in Brazil just because we are gathering pace with the customers. When you look at the numbers of loyal customers, when you look at the numbers of the progress we are making in different businesses, like the payroll-based lending business, when you are looking at the progress we are making in acquiring business, we are becoming more optimistic about the outlook of Brazil.

Well, the exchange rates naturally may go up and down. Now it's going up against the euro, last year it was down, but the message I want to relay to you, we are expecting good developments in Brazil in the franchise going forward. And the contribution for the Group very likely is going to be higher than the current one.

In relation with consumer finance, well, probably this is one of the few -- the very first time someone has asked me about consumer finance after presenting the results I don't know how many years. This is a very important unit. It's showing a good and consistent, very consistent progress over time. We have I would say an exceptional franchise in consumer finance all across Europe. We make -- the EUR500 million, EUR600 million we are making is well diversified between the north, Nordic countries, where we have an operation that is close to make -- this year it's going to be close to the mark of [EUR200 million] net profit. We have an operation in Central Europe basically Germany of EUR400 million -- north of EUR400 million and we have an operation in South Europe, Spain, Italy and Portugal that's going to make EUR300 million.

This unit is performing. It's the market leader clearly in Europe and has a very good position, top position in auto financing and a top position in longer - in installments -- in installments in the finance in the point of sale, the financing in the point of sale.

The contribution for the Group, we expect good developments. I mentioned in the presentation when I was looking forward, giving a forward view, we have good expectation for this unit to continue to grow along with the market, gaining some market share, as we are doing, and trying to reach more agreements with retailers, carmakers, in order to keep the business loan. So very likely contribution is going to stay where it is or going to go high.

Thanks Ignacio. Operator, next question please?

Carlos Peixoto, BPI.

Hello, morning. My first question has to do with the adjustments you mentioned on the NPLs both in Banif but also in Spain and Brazil. Would it be possible to quantify them and also in Spain and Brazil? To what are they related with?

Secondly, regarding SCUSA, so the operation in the US, I was wondering if you could give us any further details on what are the points being debated and why this delay in the accounts release? What are the main points of the discrepancies or where you and your auditors are not in agreement regarding the methodologies being used in the US? Thank you.

Okay, the first question, NPLs. I mentioned Banif. There is adjustments done in Banif and there is some one-off specific case in Brazil and Spain that are more these one-offs than anything else. So I would say -- and I say also in the presentation that we expect the trend of new entries -- in this quarter the new entries does not reflect a new trend there.

In the US, I think Jose will elaborate on this but basically the discussion is about the fee we charge to the car dealers when we fund sub-prime business, sub-prime buyers of cars in the US. The discussion is about if this should be accounted upfront or we should accrue over time. We were accruing over time and the discussion is if this is the practice or not. This happens to other companies also in the US but in our case it's more material because, as you know, we have a large EUR25 billion loan book of sub-prime business.

Thanks, Carlos. Next question?

Stefan Nedialkov, Citigroup.

Good morning, guys. It's Stefan from Citi. I've got two questions. On the restructuring charge in Spain, could you give us more color in terms of number of employees involved here? I'm assuming most of them are in the headquarters rather than the branches but if you could confirm that. And any branches being optimized, numbers reduced etc., that would also be very helpful.

I didn't quite catch the guidance on the savings from the restructuring charge. I think you mentioned it in the beginning. Is it basically 10% contribution of the corporate center, that's what we should be expecting forward, or is it 10% of the costs within the corporate center coming down? So that was all about the restructuring charge.

And my second question on M&A. If you could please remind us what your M&A criteria are? I think last year when you refreshed them you were talking about accretion within the first three years on an EPS basis at capital neutral. And if you could just refresh those. And also let us know does capital neutral mean capital neutral after a potential capital raise? Or is it capital neutral without raising capital?

Okay, leave me to elaborate in the first question about restructuring in Spain and I pass the second question in relation with our criteria with M&A to Jose. In the first one, restructure I mentioned the figures, the charge was around EUR400 million. We gave already numbers were affecting around 1,000 of these at the net were around 400 at the corporate center.

I also mentioned in the presentation going forward I mentioned specifically 2016 that we expect the impact of this in costs -- in the cost line as minus 3 -- around minus 3%, minus 4% in the Spanish business and minus 10% in the corporate center. This is what I mentioned the impact of this restructuring that we are executing full, yes, this I would say is 90% already secured. So we close [350] branches already and we're going to close another -- around 100 around this month or in the coming months. Jose.

M&A our main objective is organic growth. We -- obviously we look at the opportunities that appear in the countries where we operate. Not outside the countries what we operate, only in those countries we operate where we look at opportunities. Like we've done in the past and we will only look in more detail at those that make strategic sense and meet our financial criteria. So we had opportunities in Brazil and Portugal for instance we looked at. We didn't do anything because these criteria were not met. So again only -- I mean the main focus is organic growth but we will look at the opportunities that come up in those countries what we operate.

Thanks for your questions, Stefan. Next one please.

Mario Ropero, Fidentiis.

Hi, good morning, my first question is if you could please tell us the evolution of the ALCO portfolio maybe in respect with the average duration on yield.

The second question is whether you expect or whether you have booked already any impact from the new circular after that respect.

And then the final question is you mentioned the kind of cost reductions you are expecting in Spain on the corporate center. (Inaudible) Spain now. I would like to know what kind of guidance you could give on costs for next year. Thank you.

The portfolio in Spain, well, the impact from the new regulation coming from the Bank of Spain is not going to be material at all for us. So this is not going to have a significant impact. What you mean if I understood you well, the second question was more related to the impact in 2016. You mean -- so in 2016 we're going to have, well, the impact -- the numbers I gave to you in the previous quarter we were expecting between EUR750 million and EUR100 million impact in Spain. You're going to have in the second half of this year less than half of this because not 100% has been executed already. In the corporate center is approximately the same. So you're going to see the kind of same impact this year. But the figures I gave you was more for 2017 than for this year.

And I don't know if I answer the portfolio in Spain was -- the question was this one. Well, the -- I don't expect a significant impact from the new circular of the Bank of Spain.

Thanks, Mario, next one please.

Ignacio Cerezo, UBS.

Hi, good morning, I have four questions actually. First one is on the capital ratio. The numerator of the fully loaded CET1 seems to have gone up by a couple of billion I think quarter on quarter. So considering that you have now EUR1.2 billion profit and I think you have paid EUR600 million of additional dividends this quarter actually the retained earnings are about EUR600 million so if you can actually walk us down the rest of the impacts on the CET1?

Second question is on Brazil. In a scenario where rates actually can potentially go down, how do we need to think about the revenue generation actually of the bank if you combine volume and margin? Thank you.

The capital ratio, well, on top of the ordinary capital generation you have a significant strain on available for sale during the quarter, particularly coming not only from Eurobonds but for the portfolio we had -- we still have in Brazil. So this is the main explanation of the change in the numerator view I mention. The second question was about?

Interest rate sensitivity in Brazil.

Oh, interest rate sensitivity in Brazil, it's not an important variable there. As you know the amount of money we make on the liability side is slowing but it's not significant. So when interest rates go down probably we're going -- if they go down as the market is suspecting we're going to profit more on the ALCO portfolio that I was mentioning before in the previous question than for the ordinary commercial activity in which the sensitivity of the balance sheet is not that high.

Normally the lending is quite short run and fixed rate. And the liabilities as you know the requirements -- the reserve requirements are so high that there is limited impact from a movement of interest rates. This is more volumes and spreads that moves the net interest income than a significant impact of the sensitivity of the yield curve other than the one we have in the portfolio.

Ignacio Cerezo. Thank you.

Thanks Ignacio, next question please.

Rohith Chandra-Rajan, Barclays.

Hi, good morning. I've got three please if I could. The first one on fees. Obviously a strategic focus and a very strong performance in the quarter. I was just wondering if there was anything unusual that we should be mindful of in this quarter in terms of customer switching, customer acquisition or activity levels or seasonality? So really the degree to which the 6% quarter-on-quarter growth might be thought of -- as I say a sustainable level or whether it actually should be lower than that going forward? So that's the first one.

Secondly, just on the UK business. I note your comments on the quality of the mortgage book and also the CRE portfolio. I'm just wondering if you could give us some sensitivity on the NIM in particular if base rates were cut to zero. And also any changes in customer behavior or appetite you've seen from SMEs which has obviously been a particular focus of growth. And just following up on the M&A question, any comment that you might have on Williams and Glyn at the moment.

And then the final question was on Spain where cost of risk down to 45 basis points. I think you mentioned it could go lower. Just wondering how low you think that charge could go. Thank you.

Okay, the first question related with the good performance in fees. Well, I would say probably the quarter was extraordinary good due to -- you look at the numbers due to Brazil. There is some adjustment -- remember that Brazil is a country with a relatively high inflation when we adjust the fees in -- some fees are adjusted once a year. With inflation maybe some overshooting there in this particular quarter. But overall when I look at the fees country by country and unit by unit including those who face a more difficult environment, we continue to see good momentum in fees. And we are growing the fees, we are putting our emphasis in having more loyal customer and the best reflection of this is in fee income.

As long as we have more [transnationality], with the customers we are going to be able to gather- - to increase our fee income and this is probably the 6% you mentioned quarter on quarter. There is some overshooting due to (inaudible) with the fees in Brazil to adjust accordingly with inflation.

So in the UK you mentioned the CRE portfolio, the commercial real estate portfolio. We have a portfolio of around [EUR10 billion] I think, [EUR10.5] in the UK. We are not -- we don't see particularly new developments there. I don't know if you want to elaborate in this Jose.

Just to mention again that the -- our loan to value relative to the average of the system is much, much better, much higher.

So in relation with M&A, you understand that I am not going to make comments, our general policy you know. We look at opportunities more add-ons that anything else in the market we already are in. The type of fund you mention and others they are for sale we may look at it. But is something that I'm not going to make a specific comment on a specific institution.

The third question was about the cost of credit in Spain that was 45 basis points. Well, as you know I would expect it across the cycle I mentioned I couple of times it's around 60 basis points. But I also mentioned that after a crisis like the one we have had in Spain, it makes sense that we have overshooting on the other side. And probably we are in the trend now for going into this direction. So the 45 basis points is likely going to go lower. So, but this is -- I will not qualify, this is the overshooting when you come to a cycle as harsh as the cycle was in Spain in the last two or three years -- four years.

Thanks, Rohith. Next question please.

Andrea Filtri, Mediobanca.

Yes, good morning, two questions from me. The British press is suggesting that Santander is considering decreasing the remuneration on 1/2/3 accounts to 2%. Can you confirm this and will this be rolled out elsewhere?

Secondly, should the market expect capital requirements to go up in the year-end following the new [strep] process and the closing of the credit risk file in Basel? Do you reiterate therefore your 11% full loaded CET1 by 2018? Thank you.

Okay, I'm not going to elaborate on potential movements of 1/2/3. I don't know if you referred to Spain or to UK or Portugal. But in any case I'm not going to elaborate about future movements in the -- in our policy in relation with the way we acquire new customers and we make the customers loyal. So I'm not going to make comments on this. We're going to pursue the strategy, that's for sure. This is a strategy of acquiring new loyal customers and we're going to pursue this strategy. And those -- this strategy is extremely important for us. So we're going to keep the attractiveness of these products.

In relation with the second question is highly -- if I understand this well this is speculative of what if. So we are assuming that in the current scenario and with our current view of new potential regulatory requirements, the 11% core equity Tier 1 for 2018 is enough or more than enough for our business model. This is our current stance. You -- we start to elaborate if this happen if this new requirement comes or this goes, well, we need to talk on another basis. But as of today with the current regulation plus our expectations for future regulations, the 11% is where we should be or where we think that we should be to be in a good position given our business model.

Thanks, Andrea. Next question please.

Andrea Unzueta, Credit Suisse.

Hi, good morning. My questions are on provisions. First in the US, as you mentioned, the cost of risk improved significantly at 350 bps coming from 450 bps levels. So I was wondering if you could give us your view about that -- those levels going forward?

And also in the consumer finance business the cost levels was as low as 35 bps in the quarter. How do you see that line evolving in the coming quarters? Thank you.

Okay, provisions, I think already -- Jose already mentioned what are the reason of the reduction in provisions in the US the last quarter. We took a provision for oil and gas in the first quarter and this quarter was let's say more normalized. But as a general comment, provisions in the US will depend a lot in the business mix we originate in SCUSA. Naturally, we have the majority of the provisions as you see go to the SCUSA and the origination between subprime, near prime and prime and the retention development is what makes the difference in the provisions going forward. But quarter on quarter the difference comes from oil and gas.

Consumer finance, it's true that the credit environment is benign right now for consumer finance in Europe. But we are not seeing particular signs to worry about about this. The level of leverage between -- among European consumers is relatively low in the countries we operate in. They deleveraged significantly in the past years and we are not seeing any sign that lead us to worry about this cost of credit going up any time soon.

Thanks, next question please.

Carlo Digrandi, HSBC.

Yes, good morning. On slide 51 you provide the coverage ratio analysis and it's quite clear where the drop comes from. So I'm wondering because if this drop if there is a deliberate policy or it's just because it happens and then we should expect a bounce? You have been accustoming us to some good quarters of continuous growth. So I was wondering if you were to provide for more eventually capital buildup would have been less. Or maybe there is a policy behind it. So if you can please provide us some colors on this one.

And the second question is on CCAR, you've been very explicit on CCAR so what it is that we should expect next year in the US? Do you think that you plan to pass CCAR or there will be further delays in this respect? Thank you.

Okay the coverage, definitively there is no policy there, Carlo. So probably is more an output than an input. It's a result of -- the coverage depends very much where the NPLs are generated i.e. if the NPLs are generated in let's say in kind of high collateralized business like mortgages or things like that the coverage tend to be relatively low. If the NPLs or the doubtful loans are generated in kind of consumer lending with no collateral at all the coverage tend to be relatively high. The blended coverage all across the business reflects more the mix of the NPLs on the doubtful loans than a given policy that we have to increase or to decrease this.

You look unit by unit you see the units with significant consume- related business where the coverage tend to be 100% or over 100% or significantly over 100% while the units with highly collateralized portfolio like the mortgage then the coverage is significantly lower. Definitively, there is no policy and no change in policy.

CCAR, Jose elaborated, we improve significantly. Unfortunately, I'm not the one who is saying if we pass or not. But definitively we feel much more comfortable going forward of our prospects to pass.

Thanks Carlo, next question please.

Britta Schmidt , Autonomous.

Yes, hi there, thank you very much for taking my questions. On the topic of NPLs there was a significant increase in non-performing loan ratio in Santander Consumer USA in the quarter. The ratio still remains quite low but the delta was quite high. Can you give us a bit of an insight as to what has driven that and whether the full impact you're provisioning outlook in the US?

My second question will be on the TLTRO. Could you just give us a number as to how much TLTRO you've -- TLTRO2 you've taken and whether you think this will -- how the ECB action will impact the loan growth outlook in Spain?

And the third question is just a clarification. Could you give us an updated interest rate sensitivity for the UK?

Okay, so the first question NPLs in SCUSA being relatively low, the delta in the quarter being relatively high. This depends very much on the retention. As you know in this business, we are in a business and the majority of the prime business goes to third parties. We retain subprime, some near prime not all of them. So the NPL depends on the mix we retain in the balance sheet and it changes for a quarter on quarter.

I don't know any particular development in the auto business we have in the US. I know that there is some comments about potential deterioration in the business. We are not seeing any potential deterioration across the board in the businesses if you are referring to these questions. We are not seeing that and the NPL depends more on the retention we are doing.

I don't, do you want to elaborate on the TLTRO?

Well, we don't have all the details with regards to the TLTRO. I mean there are still issues very important for us pending like the treatment of our equity participations, how the excess TLAC in the subsidiaries is going to be treated. Finally, what type of instrument will count as Tier 3 if it is going to be a new instrument, if it's going to be a subordinate -- senior debt is going to be a statutory subordinated. So in any case for us TLTRO -- meeting TLTRO targets is a question of optimizing what we have. We have a --

(Inaudible - microphone inaccessible)

Oh sorry - yes, I thought you were referring to TLAC. Well, let me finish TLAC. Then it's just a question of optimizing with a debt that we have outstanding. It's -- we will meet our targets.

TLTRO we have substituted what we have in TLTRO 1 for TLTRO 2. Half of what we have -at the parent company in TLTRO 1 was substituted for TLTRO 2 in the first of the issuances. Our target is to exchange the rest in the coming opportunities. The total TLTRO 2 relative to the TLTRO 1 that we had would be very similar. Maybe a slightly higher but it's going to be the similar amount.

Finally, the sensitivity to interest rates in the UK from a parallel movement of 100 basis points is 250, is it?

(Multiple speakers)

EUR70 million. So if interest rates go up 100 basis points, earnings would go up EUR380 million.

Yes, next question please.

Sophie Peterzens, JP Morgan.

Yes, hi, here it's Sophie from JP Morgan. A quick one. In terms of Brazil when do you expect NPLs to peak in Brazil?

Second of all, could you give some guidance on where we should expect cost of risk in the UK in 2017?

Your leverage (inaudible) leverage ratio improved in 10 basis point quarter on quarter. Should we expect a similar improvement in the leverage ratio going forward? Thank you.

So NPL peaking in Brazil probably our expectation for Brazil next quarter in relation with the economic growth is the economy we think that can grow 2% is our internal economists basically that is what they think. I know that this is significantly above what the IMF have just said a couple of days ago that it was 0.5%. But we are expecting a significant recovery there.

Normally the NPLs will peak once we start to show -- NPLs absolute number normally it's going to take two or three quarters after the economy start to grow. So maybe the second half of next year if we are right in our assumption of GDP growth for Brazil. And referring to the ratio, the absolute number naturally if we start to grow the book in Brazil may continue to go up but the ratio will peak two or three quarters after the Brazilian economy start to grow.

The second question was UK, the cost of risk probably it's too early to say. So we are under the -- now under the shock of Brexit. We need to still to elaborate internally what are the likely developments that are going to happen in the near future. We will provide you our thoughts probably in the September update in the Investor Day. Now we don't have an elaboration about this specifically this. But what we are seeing is not different and the consensus is probably lower rates, probably lower economic activity but we don't have the specific numbers at this stage for this.

Leverage ratio?

Yes, the leverage ratio -- Nothing particular I have in mind, yes.

Thanks Sophie, next one please.

Daragh Quinn, KBW.

Hi, it's Daragh from KBW. Just a question on Brazil and the fee growth in the quarter of 14% in local currency. You flagged that some of that growth was due to inflation adjustments. If you could just quantify the magnitude of that 14% growth. Is it due to that inflation adjustment? Given your expectations for significant economic recovery in Brazil, the current minus 2% loan growth in Brazil, do you expect that to be the worst? Do you expect it to grow in the second half of the year? Just your outlook for loan growth in Brazil?

Finally, loan growth in Spain, you indicated loan growth was positive in the quarter; still negative year on year. Given the significant reduction we're seeing year to date in new corporate loan volumes, larger corporate loan volumes, what is your outlook for loan growth in Spain in the second half of the year? Thank you.

Okay. Loan growth both in Brazil and in Spain. In Brazil, definitively, we are more constructive going forward. We don't expect the loan book to keep shrinking in the coming quarters. Probably we will now be able to show some growth, not significant growth yet but some growth.

As you know, this depends also on the exchange rate, because we provide the numbers to you, the numbers in reals. There is a portion of the book that is in dollars. So the exchange rate between the real and the dollar matters when we provide the numbers in reals. But over -- in the ground I do expect a better behavior of the loan book in Brazil in terms of volumes going forward.

In relation with Spain, in Spain we have a situation in which productions are keeping very good, new production are keeping good momentum. The figures are very fine, we have figures (technical difficulty). We are growing 37% in origination of new mortgages, 17% --

The loans are more than doubling, mortgages are close to 50% up, SMEs up 25%, so new production is very high.

But we are rather more constructive. We're going to see a significant growth. But as I said before, we're operating more in a flattish environment, so maybe slightly up, maybe slightly down, is my best guess for the next two or three quarters, and probably going forward a little bit more positive than that.

There was a question on fees in Brazil. There is a one-off in the fee income in Brazil in the quarter. It's a one-off associated with credit cards of around EUR15 million. So excluding that, growth would have been lower and for the year as a whole we would expect fee income to grow double-digit, low double-digit figures.

Now fees in Brazil, there are several business that continue to feed the growth, particularly the acquiring business. The acquiring business is growing in Brazil at 30%, 30% plus. So this business, we are gaining significant market share (inaudible) probably those of you who are more familiar with this is this company that is growing at 30% plus. Probably our expectation is to be growing. The market has opened up in Brazil. You know that before the market was you have a gadget for every credit card. You had one gadget for Visa, one gadget for MasterCard, one gadget for American Express.

The market changed, you can operate going with one single machine all different cards. This market opened up back in November. But there is a process that finishes I think next February in which the market is going to be absolutely open and this plays very much in favor of the newcomers like us. For that reason we expect a good momentum in this business going forward.

Thank you for your questions, Daragh. Any additional question?

Marta Sanchez Romero, BofA Merrill Lynch.

Hello, good morning. I've got two follow-up questions on the US and Spain. First, regarding the US, how should the changes Santander needs to implement in order to pass the [SICA] affect the earnings of the franchise? We keep seeing attrition in the earnings power. I was wondering how much pain is left? You're more or less running at $600 million this year, last year was $800 million. So if you could give us some color there, that would be very helpful.

The second question is about NII in Spain. How much loan spread do you think there is left? How is the blended front book spread coming compared to the back book? What you think needs to change in order to bring in some pricing discipline? Do you think the new regulation from Bank of Spain will be effective or we actually need M&A to bring in more rational pricing and dynamics in Spain?

On your cost of deposits, obviously in your 1/2/3 accounts you're running on high cost here. You're at 48 basis points. I know it's difficult to give guidance but if you were to keep your 1/2/3 account as it is and based on the volume growth you expect for the next couple of years, where do you see cost of deposits evolving in 2017/2018? Thank you very much.

Okay. So SICA in the US, as you see, naturally we now elaborate several times above the costs related with a guide to pass SICAR. But the maximum costs, the peak on cost is behind us. So we make significant progress this year with the SICA and you mentioned paying is still left.

So the main area in which we should invest more probably is in the SCUSA compliance area in which we're going to have additional costs in order to improve the compliance area in SCUSA. But this is not going to make a significant difference in this area. So on the other side the bank should improve the delivery going forward.

So in Spain, how much is left in on the spread? Well, if I look at the book, currently at the book, the front book, back book, the numbers is positive. So now when I look at the new production compared with the book, it is (inaudible) in the new production and in the book but we continue to re-price the book downwards to adjust to EURIBOR.

You elaborate about the cost of deposit, 48 basis points. I make some assumptions. If we give the 1/2/3 2017 and 2018, well, I give you the overall picture, I give you the loan side. I think that it's limited scope to reduce the cost of deposits from where we are. Going forward, assuming the retail rates remain the same, naturally interest rates remain, change we will take the appropriate decisions based on what we see.

But the dynamics, we are not in the position we were one year ago, where the front book was significantly -- the spread of the front book was significantly more than the back book. This is not the case as of today. We still have EURIBOR applying to a significant portion of the book and this is the main effect you are seeing in NII.

Okay. I think there were no more questions in the pipeline. So thanks, everyone, for attending this call and see you, all of you, in London next September 30 at our Group strategy update. Thank you.

Thank you.