Banco Santander SA (SAN) 2016 Q4 法說會逐字稿

Good morning, everyone, and thanks for joining to this full-year 2016 earnings presentation conference call.

So, we have today the opening will be addressed by the Group Executive Chairman, Ms. Ana Botin, who will address the delivery of our 2016 commitments as well as the progress we are making with regards to strategic priorities.

Then our Group CEO, Mr. Alvarez, will address the Group and business areas review for the full year, and our Executive Chairman will go [through] with our this-year, 2017, strategic priorities as well as concluding remarks.

Obviously, as always, we'll have plenty of time to take your questions live. So, with no further delays, Ms. Ana Botin. Thank you.

So, good morning, welcome to our results presentation for 2016.

I will first update you on our progress towards our 2016 commitments and strategic priorities. Jose Antonio will then cover in more detail our evolution during the year; and, to conclude, I will briefly review what our strategic priorities and goals are for 2017, before we pass on to questions.

First of all, we have delivered strong results in a challenging environment. In 2016, we have been able to offset a lot of the unexpected adverse conditions from Brexit to lower than anticipated rates, higher taxes and some others.

We have delivered an increase in net profit of 4% with a very strong underlying profit before tax in constant euros of 12%.

We have also -- and we are proposing to increase dividend per share and cash dividend per share, a growing earnings per share and growing tangible NAV per share again by EUR0.15 to EUR4.22.

We have delivered ahead of plan on our fully-loaded CET1 at 10.55%. Our customer revenues are up by 4%, our loans are up by 2% and funds up by 5%, all in constant euros.

Looking at the P&L, you can see here the performance along all the lines; again, showing good evolution of retail and commercial banking business activities.

If we look at total customer revenues growth, I'm particularly proud of the increase in our fee income at 8%, close, again, to the double-digit growth as a result of our loyalty strategy.

Prudent risk policies have also been reflected in the reduction of the provisioning charge. As you can see, all these trends are increasingly positive, as is evident in the performance in the fourth quarter.

You can see here our focus for the last couple of years is in per share growth in all our metrics. I had already described all these performance: intangible net asset value; cash dividend per share; earning per share; and also, on the CET1 ahead of target.

These results in 2016 are both a consequence and an enabler of our prudent financial management and risk policies. You can see here that most of our assets are loans to our customers, and they're our main funding sources of customer retail deposits, followed by medium and long-term funding instruments.

Our prudent risk policies also show an improvement in our credit quality indicators with the cost of risk improved by 7 basis points and our NPL ratio down by 43 basis points to below 4, at 3.93.

I'd like to spend a minute just saying why I and the team feel confident about the future. This is based on the strength of the Santander starting point, our business model, on three important factors.

First is that we have critical mass in retail and commercial banking in our 10 core markets with 125 million customers in countries and areas with 1 billion people. We are not in multiple lines of business or 50 countries. We have the scale to be competitive and profitable.

Second, very important, we have unique geographical diversification in Europe and the Americas. This is one of the key points for us: the predictability and sustainability of our earnings, which has been evident in the past and will continue, we are confident, into the future. Of course, this is important because it leads to, and should lead to, lower capital requirements or a low cost of equity.

And third and very important, our autonomous subsidiary model allows us to be more resilient. It also allows us to be local and close to our communities and our customer.

We are also getting better every day at working together in collaboration across country. And here, in this enhanced collaboration, which I will share some examples in a minute, lies our greatest opportunity.

As I said, there's 125 million customers, that's 4 million total customers more than a year ago, are a great opportunity. The size of this opportunity is evident when we look at the number of loyal customers.

We have met -- actually, we are ahead of our targets. We now have 15.2 million, up 10%. There's a direct correlation between this and the increase in revenues, growing at 8%, double last year. Of course, this is because a loyal customer is 4 times more profitable than an active one. This continues to be our strategy for the future.

Getting better at digital is, of course, key to improve loyalty and we're now at 20.9 million, almost 21 million, digital customers. But what's more important is that this loyalty strategy is still, as you can see, something which we can work on for many years, organically.

So, to keep improving our profitability, we'll keep our focus on growing loyalty and the way to do that is through, what we call, operational excellence. That is achieving, at the same time, better customer experience and doing so efficiently, the best service at competitive prices. Our 48% cost income is best in class, second best among our peer group, and this is what will allow us to deliver for all stakeholders.

Just as a reminder, in 2016, we went through a corporate restructuring at headquarters, and also in Spain, which means that the corporate center costs are, now, only at 2% of total cost.

Very importantly, in customer satisfaction we are ahead of plan. We now have three more geographies among the top three local banks, so 8 out of our 10 core markets are already in that category.

The second pillar I mentioned is, of course, our geographic diversification; roughly 50% in Europe and 50% in the Americas. Also, roughly 50% developing, higher-growth markets and developed markets. This is absolutely to deliver strong and predictable, and growth in profits over time.

We have the lowest earnings volatility over -- since 1999, measured in terms of quarterly earnings per share reported of all our peers. It is an essential attribute of the Santander investment case.

This model, together, and let me stress this, with a very strong focus on execution, which is not easy, but we are delivering on that, of our commercial transformation plans means we have delivered in 2016 top-tier profitability; 11% underlying return on tangible equity.

This profitability allows us to deliver on three things. First, we continue to lend more to our customers, so we're growing our lending. Second, we're paying increasing cash dividend per share; up by 8%. And, of course, we're accumulating capital organically, in 2016, EUR3 billion or 50 basis points.

I have shown that diversification has been key to deliver this key -- sorry, these strong and predictable results, and growing profits, but in itself diversification is not enough. What we need also is that, over time, all business delivers superior profitability.

You can see in this slide that we're delivering returns on equity at or above our cost of equity in each of our 10 core markets, which represent 97% of profit, except in one. Of course, it's not -- as a geography the US has different businesses and, in our Santander consumer business in the US, we are delivering 18% return on tangible equity, 15% ROE. We have de-risked the business. This is the main reason why profits are down.

We're making progress, also, in Santander Bank, which is the one business where we're not at the cost of equity. So, I'd like to spend a few minutes on the US.

As we've said, since we are in charge and since the change in management, we want to focus on essentially one thing as a top priority in the US, which is becoming regulatory compliant. This also means upgrading the way we manage to the Santander Group standards.

In 2016, we have delivered on this. The US team has done a great job. It's been recognized by our regulator in their press conference in June. But it's important that we've also made progress in Santander Bank in improving the business.

You can see here that the funding gap, we had higher -- much higher funding cost than our peers, has improved by 20 basis points at Santander Bank to only a gap of 27. The underlying cost income, there's still a lot of work to do, but has improved 10 basis points. And, we have more transactional customers in the Bank.

So, there's some green shoots, as we say and we, of course, expect to do better in the future. A lot of work to be done, but we're getting there.

I also would like to share briefly how we see our strategy in the US. In terms of meeting regulatory expectations, as I said, on the Bank the strategy is to simplify the business; increase profitability and customer experience; and, very importantly, increase the connectivity between our customers, SMEs especially, and other Santander Group companies.

Our goal for the business in the US going forward is to increase by close to 30% by 2018 our profits in the Bank.

In Santander Consumer, we're working hard on governance and control issues, as we now are, obviously, going to manage that as a bank, as part of the Bank Holding Company and we're making progress; and also, working on the Chrysler relationship. Our goal is to achieve 10% return on equity by 2018 for the business as a whole.

The third key business model pillar for us is the connectivity. The subsidiary model is crucially important, allows us to be local, close to customers, but we have -- we already do this, but we have much more to do to work better together.

The subsidiary model prevents cotangent risk, makes us stronger and local. Collaboration means opportunities where, because of our scale in 10 markets, as I said it's a reality, but it's also a great opportunity.

Just as an example, the Argentina/Brazil trade corridor has allowed us to achieve this year close to 50% increase in revenues during 2016. We're now working on other trade corridors. For example, the UK/Spain has plans where, again, in 2017, by working better together, we will generate EUR85 million additional revenues.

Of course, being part of a large Group with technology now available to us, means there's many projects we can do better together. This is only the beginning.

The Santander e-wallet; we're working together across our 10 countries. Brazil and Spain have already launched this. Mexico and other countries will come next. We will be doing this at a fraction of a cost and with better user experience than if we did this on a one by one, on a country basis.

We have made great progress, as you've seen, towards becoming the best Bank for our customers and our shareholders.

But we have also made great progress, and it's crucially important for us, in being the best Bank for our people and our communities. Because, I always say, for us, it's as important to achieve the results as how we get there. We want to do things in a way that is simple, personal and fair.

Today, this culture, the behaviors that we want to have in all our teams is embraced by most of our people. We have higher commitment across the countries and we are doing a lot of work on that going forward. We have ambitious plans, which we are putting in place over the next few years.

We also want to be the best bank for our communities. We're working on financial inclusion, on entrepreneurship, higher education.

I'm very proud, also, that we got -- in last year's Dow Jones Sustainability Index, we're the first European bank, and the sixth in the world, in terms of our sustainability policies.

As you know, and we've commented many times, we're number one in the world in terms of contribution to higher education. This is important for our communities. It's also for our employees, because it's a great source of pride.

I will leave you now with Jose Antonio Alvarez, our CEO, so he can share with you some more details on our results, before I do the closing on the outlook for 2017.

Thank you, Ana. Good morning, to everyone. Following the Ana comments, I will look to the performance of the Group, as a whole, and the main units. You have all the information in the packets, I'm going to elaborate only in the main units and make some summary of the smaller ones.

Starting with the -- Ana elaborate, we delivered a strong performance in a year that was not particularly helpful, in terms of the macro development. But having said that, we -- the performance of the Group was very positive, and we are making progress in our commercial transformation and, at the same time, achieving our financial results.

When we look at the activity, we keep different levels of activity in emerging and mature markets; we've been sharing with you this idea. We have a widespread growth all across: loans are growing at 2% in constant euros, and funds are growing at 5%.

Particularly important is we are -- the growth we are showing in the funds is concentrated in the most valuable items: demand deposits are growing at 10%; mutual funds are growing at [7%]; while time deposits are [falling 9%]. This is a reflection of our policy towards loyalty -- more loyalty -- developing more loyalty among our customer base.

Going to the numbers, first, starting with the fourth-quarter 2016, the attributable profit in the quarter was EUR1.6 billion. As you know, this was impacted by the contribution of the deposit guarantee scheme, mainly in Spain. The figure is, in Spain, [EUR160 million]. Excluding this impact, the quarter has been the best quarter in 2016.

Underlying profit before taxes of EUR11.3 billion for the whole year is up 3% in current euros, 12% in constant euros, with our PBT growing in nine out of 10 of our core markets.

We had a significant impact in the tax rate. Tax pressure was created in some units, mainly in the UK, we've been commenting with you already, Chile and, also, in Poland. For the Group as a whole, the tax rate went up from 28% to more than 30%.

We recorded one-off extraordinary items at the corporate center. I will detail those in the next slide.

For the whole year, the statutory profit, as Ana said, is EUR6.2 billion; up 4% compared with the previous year, and 15% without the FX impact.

Elaborating about the one-off items. Last year we charged a net figure of EUR600 million in the P&L; that is detailed in the left side of the slide.

On the right side, you have the impact -- the one-off impact in 2016. The total is a net negative of EUR417 (sic - see slide 23, "EUR417 million"). In the fourth quarter, we have had EUR137 million for potential future claims related with the PPI in the UK; and EUR32 million following the SC USA restatement in the fourth quarter.

And finally, for comparison purposes with 2015, taking into account that the single resolution fund contribution of EUR120 million charge in Q2 was reallocated from non-recurring items to gross income in Q4.

Now, let's take a more-detailed view in the results. We are particularly proud of the consistency of our results; this is very well shown in the NII and the fee income. The NII has been progressively improving. In the last two quarters the trend improved; we were growing 2% in the third Q, 3% in the 4Q.

Fee income, growing at 8%, is what probably is -- what probably represent, in a fair way, our policy towards working in a more loyalty in our customers. It's an increase for seven straight quarters, but backed by greater customer loyalty, as I said.

In other income, you have a significant drop in financial transactions, minus 24%, due to lower results and the cost of the hedges that we keep in the corporate center.

Q4 was impacted by, as I said before, the deposit guarantee fund and the resolution fund.

When it comes to cost, well, we remain relatively flat [in some markets]. If you look at the last three years, plus 1% 2015, minus 1% in 2014, and this year 1.7% lower, in real terms, on a like-for-like basis.

When we go the countries, we are investing significantly in Mexico to improve our operations and to improve our commercial capabilities. In the US, we are still investing in addressing some of the weaknesses that were identified in the previous years.

Well this, as Ana said this -- we are in a good position in cost-to-income thanks, partially, to our good management in cost.

When it comes to the quality of the balance sheet, I will say good trends here. Provisions are going down 2%. These are, clearly, improving all across: in NPLs; the coverage ratio; cost of credit, that is going down 7 basis points in the year. Excluding the SC USA, that is a special unit in this regard, the cost of risk is 0.82%.

Let me to -- particularly to focus in Brazil, where the cost of credit we commit ourselves to remain below 5%. We are on our target, and this we are particularly proud of this, to this achievement, in a very difficult macro environment.

In capital, we are making progress. We guide you to a 40 basis points CET1 growth per year; or, on average, 10 basis points per quarter. We got 50 basis points in the year, slightly ahead. But our commitment, our expectation, remains in generating 40 basis points a year.

All our capital ratio is well above regulatory minimum. And, we are doing an exercise that is quite demanding: that is to fund business grow, pay increasing cash dividends, and accumulating capital organically.

Going to the units, you have in profit before taxes nine out of 10 units growing. Some of them, a significant number of them, were in double-digits; so, good results all across the board.

The US was the only unit where the pre-tax profit declined. As Ana mentioned, was due to the Bank, SBNA. We have plenty of work to do still in the Bank. While the SC USA, after a significant improving in the operations, and after having a higher [cycle] in the underwriting we are doing in the market, it's performing pretty well.

Most of those increases in profit before taxes were [under strain] to attributable profit, with some exceptions. I already mentioned UK, that -- where tax rate went up, and also in some other countries.

Going through the main units, Brazil has had a very good fourth quarter. Probably, the volumes we were able to grow in the fourth quarter are not sustainable. We grew the loan book 5%; deposit funds 1%. 1% is probably below the sustainable rate, but the 5% is probably sustainable. But was a very good quarter.

The spreads went up. This is, in part, reflection of the growth and some spread widening all across the board. As a result, gross income grew in the quarter and in the year 7%.

The costs rose in the quarter as we reach a new agreement with unions with a salary increase and one-off payment in the fourth quarter that was done in October that represents EUR40 million.

The profit before taxes grew double-digit during the year, 15% up in constant euros; and in the quarter, quarter on quarter, 2.6% up.

So, in short, I think our franchise has behaved exceptionally well, in an environment that was quite demanding. I'm particularly proud that this is -- that is showing what we told you: that our franchise was much more predictable, sustainable, than it was before.

In the UK, we made significant progress in the strategic targets: growth in loyalty of the customers; growth in digital customers. Now, we already got 4.4 million -- 4.5 million (sic - see slide 30, "4.6 million") digital customers, plus 25%. We continue to enjoy robust business flows in corporates and SMEs.

And when it comes to results, attributable profit, as I mentioned, was impacted by the increase in the tax -- in the corporate tax.

If we look at profit before taxes, rose 8%. NII recovering in the quarter as a result of our -- the new conditions of the 123 account; a very good performance in NII.

Net fee increased in the year 7%, although in the quarter went down, because the third quarter was exceptionally good; and credit quality remained pretty strong all across the board.

In Spain, as you know -- sorry, consumer finance, we are here the European leader in consumer finance. We finished the integration of PSA. All the joint venture with PSA were integrated in a successful way.

The loan portfolio increased by 14% year on year, supported by new lending agreements.

Attributable profit grew 18% year on year, and the figure was EUR1.1 billion.

Well, this business has been a consistent outperformer all across the last seven/eight years: best-in-class profitability level and historical low level of risk. Return on equity is 15%. We are working with a return on risk-weighted assets north of [2%].

The fourth quarter was a little bit weaker, impacted by seasonal effects, mainly in Germany.

In Spain, well, we continued with our strategy, our 123 strategy. That, as you know, our aim is to build a deep and lasting relationship with our customers. This remains at the core of our strategy.

Customer loyalty is increasing by 32%. 50% of the new production comes from 123 customers. The risk profile is improving. We are overall happy with the developments we are seeing in the market -- in our operations.

The results, well, naturally fourth quarter was affected by the deposit guarantee scheme contribution, EUR155 million. Without that, the Q4 the profit after taxes was the highest of the year.

The resolution fund contribution was reallocated as I said before from non-recurring items to gross income this year.

The profit grew 5% to EUR1 billion, with positive impact from our strategy. Lower loan-loss provision, this is a trend supported by improvement in the credit quality. The costs went down 4%.

Fee income rose 6%, and this reflects probably the best in retail group faster than that. This is what reflects probably the best our strategy.

NII was affected by low interest rate. We are close to the end of mortgage repricing, probably some -- one quarter to go still. And, we got less revenue from the ALCO portfolio.

Finally, the stock of loans decreased, because lending to institutions and mortgages. New lending increased by 18%, but still not enough to substitute the amortizing mortgages.

The other units, good performance across the board. Mexico, the main driver has been NII; high rates; a strong volume growth. The franchise is -- we are investing in the franchise as I said before. And we are growing the cost in the franchise, but net-net, at the bottom line, we are growing profits 18%.

In Chile, we made a significant improvement in the quality of the customer retention. We closed the gap with our competitors in satisfaction indices, jumping to a top one position. We come from the back and we are proud to say that we are at the top. Good performance in volumes, gaining market share, and this is reflected in the 16% rise in profit.

Portugal, very good execution. The Banif integration, extremely good execution. The results speak by themselves. We are getting almost EUR400 million net profit in a difficult environment, while our competitors are struggling to remain profitable.

In the US, we have two components here. SC USA is performing pretty well in line with our expectations. While in SBNA we are still having a significant work to do. But I remain optimistic, absolutely optimistic, that this is one of the sources in which we're going to improve significantly in the coming years.

In Argentina, we are upgrading our franchise. We reached an agreement to buy Citi operations that are going to be integrated after the end of the first quarter. This addition will extend our existing franchise that is the best in the country.

In Poland, well, we were affected by the tax -- the banking tax. Excluding that the profit was up 14%. We are progressing; we are the most profitable bank in the country and we're showing good progress on a like-for-like basis.

In short, positive evolution across the board in all the main franchises.

In the corporate center, me to make brief comments. As you know, we did a restructuring in the corporate center. As a result of this, the costs went down 18%. You see the revenues -- as you know, the revenues reflect mainly both in net interest income and capital gains, the effect of the hedges that were significantly costly -- more costly in 2016 than they were in 2015.

We record here the non-recurring items. It's the last time we're going to do that. After the first quarter in 2017, our idea is to put the non-recurring items in the units that incur in those items.

For these reasons, I split those non-recurring items at the bottom. You have the main non-recurring items come from Spain, the main negatives, Spain and corporate center, due to restructuring charges; the US, due to a SC USA restatement. UK is the net of the positive from BIS and the negative from the PPI charge I mentioned before; and the positive in Poland; and others comes mainly from BIS. But as I said, starting in the first quarter 2017 these will be reallocated to the units.

Now, I hand to Ana to make the final comments of this presentation.

Thank you, Jose Antonio. I would now like to close by briefly sharing with you our 2016 (sic) priorities.

I'd like to start by reminding, because this is very important for us, what our purpose is. Our purpose is to help people and businesses prosper. What we aim for: we want to be the best retail and commercial bank that earns the lasting loyalty of its people, its customers, shareholders, and communities. And, we want to do things in a way that is every day more simple, and personal, and fair.

This guides everything we do. It determines our priorities and it determines how we manage our business.

So, what is our goal? You've seen this before. It's a simple, but ambitious goal. We want to be the best retail and commercial bank in every market where we do business; and this is virtuous circle.

As you can see, all our stakeholders benefit because it begins with our people, who take pride in their work, who are key to our success and our transformation. Their alignment with our culture and their pride of being part of the Santander delivers the best outcomes for our customers, who benefit from and grow their relationship and loyalty with us.

This in turn, combined with reinforced management and a strengthened focus on operational excellence and prudent risk management, produces better results for you, our shareholders, growing earnings per share in a sustainable way, so we can then reinvest in our communities.

I'd like to spend a few minutes on our people. I can tell you that the most -- or one of the most rewarding projects that both Jose Antonio and I co-lead in the Bank is a cultural transformational program. And, as I've said before, this is not marketing or PR; it is the essence of our transformation.

Our new management teams embrace and believe that our values, simple, personal, and fair, are at the base of the successful transformation of our model. Of course, it is very important that the executive and the senior team lead by example.

It is this cultural transformation which allows us to attract the best talent. Embedding the right behaviors is our number one management goal.

Our plans on communities are also fundamental to us. It's part of the culture. It is driving employee and customer engagement, as well as being aligned to our business goals.

I've mentioned before our universities' program. It's a key element of our communities' engagement. Santander is the biggest giver to higher education in the world. Our goal is to support 80,000 entrepreneurs in 2017 and 2018; and support 3.1 million people in our communities.

In 2016, we also made good progress on our strategic goals with our customers to improve our value proposition by improving customer experience, we've shared the numbers with you, and, of course, increasing our loyal and digital customers as a result.

We have seen that customer loyalty is good for the business. It drives higher fees. It results in a more capital-efficient model. Our targets are to reach 17 million loyal customers in 2017; and, of course, to achieve our fee income growth, reaching a cumulative growth rate by 2018 of close to 10%.

So, to grow loyalty among our customers, best customer experience is a must and, of course, to do so efficiently so we deliver also for shareholders. To achieve this, we're working on three different levels.

One is very crucially important, it's the business-as-usual transformation. A good example of this, and there are many others, is the Brazilian Conta Super, where we have launched a very successful digital account and card for the unbanked, fostering financial inclusion.

The second line of work is Openbank. It's an entirely digital bank that we will relaunch in the coming months.

And we finally and very importantly through our innovation division, which includes our (inaudible) funds, working with other partners and looking at new sources of revenues and other ways to improve our business, I mean our core business, in the future.

Our 2017 targets are to reach 25 million digital customers, together with keeping a stable cost income at 48%, and maintain leadership, hopefully improving our customer experience across countries.

For our shareholders, the priorities are what we told you in September. Of course, to continue to accumulate capital, 40 basis points CET1, after growing dividends per share and growing our business.

We also aim to maintain -- continue to maintain loan growth and profit growth above risk-weighted asset growth. I want to say that we have improved. One of the priorities is to continue to improve our capital management discipline across the Group to achieve these targets.

Finally, as we said last September, for 2017, we aim to grow EPS, DPS and tangible NAV per share in 2017.

To conclude, as both Jose Antonio and I have said, let me stress we said this at the Group strategic update in September, 2016 has been in interesting year. Plenty of unexpected, frankly mostly worse than expected, external factors affecting banking sector in general.

In spite of this, we have delivered on all our targets, in some cases ahead of plan.

I am proud of the resilience and hard work of our teams that have made this possible. And, as I said, the best is yet to come. We are delivering on all our targets, as you can see here on the screen for 2016.

We are also on track to deliver for 2017 and 2018. 2017 targets are here. We are confident that we will, again, deliver in 2017. Even though, as I said in our comments in the press release, we do expect volatility and there will be headwinds in some cases, foreign exchange in some countries. But we are confident, in spite of that, we'll continue to reach our targets. Again, these are the same as we shared with you in September 2015 -- 2016.

Here, again, are our longer-term targets, all the way to 2018, for our people, customers, shareholders and communities; again, our business model, our strategy and the fact that we are executing.

I'd like to stress, the sustainability and predictability of our earnings combined with profitable growth, this is the essence of the Santander model. The milestones -- the strategic milestones in executing our strategy gives all of us confidence we'll continue to deliver.

To sum up, the key takeaways, our vision is to be the best retail and commercial bank in Europe and the Americas, in the countries where we have a presence.

We have delivered in 2016, again, in some cases ahead of plan, on our strategic goals, but also on our 2016 targets.

We reiterate our commitment and goals for 2017 and 2018. We have been consistent and predictable. It encourages us to continue working in that same direction, to keep delivering for all our stakeholders.

What is more important, we have delivered in the right way, helping more people and more businesses to prosper; and building a bank that is, every day, more simple and personal and fair.

Thank you very much. We are now open for questions.

Plenty of time to take your questions; so, operator, please we can take the first one,

(Operator Instructions).

Congratulations again for your results. I have two questions, one on Brexit and the other on in America.

On Brexit, first of all, we are just a month and a half away from actually the UK Government activating Article 4 of the Treaty on European Union and the Prime Minister has already outlined her plans for a hard Brexit.

In light of this, how are you thinking strategically about your operations in the UK going forward, particularly across three layers. First layer would be across the mix between secured and unsecured lending going forwards. Second layer would be about the mix between organic and inorganic growth in the UK. And the third layer would be across potential plans for relocating staff based in the UK, which may report functionally to Madrid rather than to London.

My second question would be on Latin America. In light of the potential changes in the trade and immigration policies by the new US government, how are you thinking about on the impact this is going to have on your operations in Latin America? I would be particularly interested in a comparison between your activity -- or your expectation for Mexico and Brazil.

Also, I was wondering whether actually in light of these meaningful changes, you've revised your guidance for these two economies. If I remember well, you've been talking about double-digit loan growth in Mexico until late last year. I'm not sure whether this has changed. Thank you very much.

Yes, so let me start with Brexit. There is no plans to relocate. Our bank in the UK will be affected as much as the UK economy is, if there's less growth, obviously, we won't do as well.

However, until now, the economy has performed quite well. We are not revising our estimates. We did some revision in September, because we were not expecting this to happen. Of course, there is some impact on exchange rates.

We're still anticipating growth in both the secured and commercial lending market in the UK next year and we will continue to grow probably in line with the market. So, we are, at this moment, keeping our estimate and our guidance for the UK.

In terms of secured and unsecured, we've been gaining market share in companies. We expect to continue that, maybe at a bit slower rate, but still growth.

In terms of inorganic, we've said many times we will consider add-on acquisitions in our core markets. We will be very disciplined as we've shown in 2016, return on investment being above the cost of equity after year three and EPS accretive, and that will continue to be the case.

In the case of Latin America, there is no question that there will be an impact and there has already been an impact on foreign exchange rate on the peso.

Brazil and Argentina and -- but the Mexican economy is actually doing quite well. There have been structural reforms in energy and infrastructure. We've announced we're investing in our own bank, MXN15 billion over the next few years to make it better. We'll continue to invest.

I'd like to say that in the same case as Brazil, Mexico has a lot of room to grow our business. For example, on the liability side, on the loyalty strategy where we've grown at very good rates, 20% loyal customers, close to 60% in digital customers. So, we expect to continue to do well in Mexico, in spite of a more challenging environment.

The rest of Latin America, frankly, Brazil and Argentina, actually, buy more from the US than they sell and the numbers are actually not that significant. So, we do not expect in as much as it affects world economy, yes, but not directly. They should be among the least affected economies from whatever policies, we still don't know, come out of the US in that regard.

One of the more important opportunities for us is, actually, to do more across countries. I gave some numbers in Argentina, Brazil, this year, and that's just the beginning.

So, yes, there will be a more challenging environment in some economies, as I said. The main impact to us is from the actual growth in those economies and, in some cases, from exchange rates, as we've said.

Thanks, Jose. Next question, please.

Sofie Peterzens, JPMorgan.

I had a question on Spain. Could you just give some guidance on what you expect from net interest income going forward, loan growth?

And also, how you see cost of risk developing in Spain?

Also, remind us of your ALCO portfolio, the size, the average yield and how much of -- or much it is going to be (inaudible) to NII?

My second question is going back to Mexico. Quarter on quarter, I saw your loan book was down and it was largely driven by corporate. Could you just discuss what happened in Mexico and was it more a one-off, or how should we think about it going forward? Thank you.

In terms of Spain, net interest income we expect broadly stable for next year, but probably maybe still some slight decrease in Q1 as the repricing of the asset side ends. Actually, if rates stay where they are, there should start to be some improvement in the second half of the year.

Cost of risk. There is some room for improvement, but probably not much. We're at very low levels historically already. So, I think that is something which should -- could improve a bit more, but not much more.

We expect to continue to improve on loyal customers. We are at 2 million loyal customers, which will drive good growth in fee income. We're gaining market share in many segments in Spain in a profitable way, so that should be more the driver next year. But I'd say broadly stable net interest income for the whole of the year with still some -- maybe some slight decrease in Q1.

Maybe on the ALCO, you want to say something about the ALCO? I think there's not much left there.

As I said in the presentation in -- the reduction in NII partially is due to the [low] ALCO revenues, so the size of the ALCO you know and we haven't changed our stance in relation with our view in relation with the interest rate risk.

On the -- in terms of Mexico, in terms of the reports, it's quarter on quarter. I don't think there's anything significant there.

No, it basically comes from global corporate banking. It's not -- nothing that affects the retail and commercial businesses, mainly due to several operations in global corporate bank.

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

Ignacio Ulargui, Deutsche Bank.

Just have one question on the US. Would you say that the recent exemption of the qualitative SICAT, could give you some additional potential in terms of cost cutting or reducing the cost expansion that we have seen in the US business?

Also, linked to that on the provisioning line, how do you see the cost of risk going forwards for the US operations?

Yes, qualitative exemption which we believe will happen for all smaller banks, and that's us in the US, will help us. I still believe we can do better, even if that doesn't happen.

You've seen that our cost income ratio, it's not where we want to be, but has come down 10 points in the bank so we are expecting to do better on cost in the US.

As you've seen in my slide, from here we should start growing profits in a significant way, especially at Santander Bank NA, as the team has really been working for one year; they've done a great job. But, yes, that should give us some additional upside. We're not really counting on that for the moment.

On provisions, we've had a few one-offs on energy. That should continue -- that should do better in the Bank, but maybe, Jose Antonio, you want to comment on it?

The Bank I don't see any particular development on provisions. Probably when it comes to SC USA, as I said in the presentation, our underwriting has been more towards higher [cycle] than it was in 2015.

So, it's reasonable, other things equal, to expect that the cost of risk, likely, is going to stay or go lower than the one we have had in the previous quarters. Also, the yield. Naturally the higher [cycle] this affects also the yield.

Thanks, Ignacio. Next question, please?

Rohith Chandra-Rajan, Barclays.

I've got three questions, please, if I could. It's, obviously, a solid set of numbers and solid returns already being generated.

But, as you acknowledged in the earlier part of the presentation, that could be better if you're able to improve the profitability of the US business; and you've got some quite ambitions targets there to grow earnings: 30% in the Bank and 15% in consumer finance.

Just wondering if you can break down a little bit more how you expect to deliver that profitability improvement through a combination of, I guess, rates; rate rises; improved customer activity; and also, cuts, which you've touched on slightly. So, that was the first one.

The second one was on fees. Up 8% year on year is a strong performance, but looking at the chart that you showed that growth, I guess, has slowed significantly since -- over the past three quarters. Just wondering about the momentum that you see and what's changing going into 2017 there.

Then my final question was coming back to the UK business and, really, the outlook for credit quality. You saw a net write back in this quarter. I guess what we've seen, actually, is some improvement in consensus expectations for the economy of the UK over the next few years.

I'd be keen to understand what your expectations are for macro drivers, like GDP, unemployment and property prices and how you see the cost of risk evolving over the next couple of years. Thank you.

Let me start with the US. First, it's important not keep things in context, because US is 5% of our net profit and Santander Bank, which is where we really need to improve the profitability, is about 6% of our investment.

SC USA has an 18% return on tangible equity, 15% ROE, because we have de-risked the business and there we're expecting still double-digit growth and to be above our cost of equity.

In the Bank, we are aiming to simplify the Bank, make it profitable. It's the same loyalty strategy. We have a Simply Right Checking account, which is doing really well. So, it would be on the revenue side, on the cost side and, of course, higher rates in the US will help us as it will help other banks.

We're pretty confident. But, let's remember, the US is only 5% as a whole of our total P&L and the most significant contribution is from SC USA, where we still expect 15% ROE.

US should help us, as we think of creating long-term customer value for our shareholders. This will come four/five years down the road.

On the fees, my understanding is it's mostly GCB. We still expect strong underlying growth in our fees, reaching that 10% cumulative growth rate over the period, by 2018; very much focused on retail and commercial banking, transactional banking, trade finance and so on.

I understand -- I know the last quarter is a GCB few bigger deals, so you should not read too much into that.

UK. UK, we were quite pessimistic at the beginning. We are less pessimistic now. As I said, I believe, in my presentation the fact that we've had a good second half means that the first half should be good.

Now, obviously, a devaluation has a positive short-term impact, but over time that should lead to higher inflation, which could impact consumers. So, we are being quite cautious still on GDP growth for next year, especially the second half.

We are following -- I believe, in our numbers we're around 1.6%, something like this, 1.7% -- 1.2%, Sergio tells me. 1.2% GDP growth is what in our estimates for GDP growth in the UK.

I think that's it, yes.

Thanks, Rohith. Next one, please?

Stefan Nedialkov, Citigroup.

Two questions. The first one on Mexico. Yes, I can see that corporate lending drove the decline in loan growth in 4Q. Could you just give us color, in terms of how the larger Mexican domestic corporates are approaching lending, and, specifically, US dollar-denominated lending versus peso lending?

And the second question is on the US. Would you be open to M&A, over what timeframe and, I guess, how much time would you give yourselves to fix the US business before considering M&A? Thank you.

On corporate lending in Mexico I understand the question is what will drive it going forward? What's our expectation? Well, there's still a lot of positives in Mexico. There are some negatives. Uncertainty, of course, might delay some business investment.

But Mexico has made some very fundamental reforms in energy, as you know, infrastructure. We're seeing a lot of interest from many companies. There's just been a very interesting auction on the communication side, which was very highly subscribed by many investors.

We still expect investment in certain key areas to continue. Mexico is a market of 120 million people where they have highly skilled labor force and very strong positives. So, the higher end of the market should continue to grow. There could be some delays in investment until we have clarity, but I wouldn't say anything special at this time.

Again, for us specifically, we have a lot of room to improve against ourselves on the other side of the balance sheet, on transactional customers, digital customers. That's why we've announced this MXN15 billion investment in our own business.

For the US, again, we're not considering M&A. In all our markets, we've said small add-on acquisitions. We are making progress. We're meeting all our strategic milestones, and if that continues we can give you a very good sense that from here it should be going up.

The US, the biggest part of our business is doing well. We have de-risked. We are taking less risk, as Jose Antonio just said. Also, 15% ROE; growth in profits of 15% for the next few years; and a significant growth in profits in the Bank in a very attractive banking market, where we believe we can add value.

There is a lot of strategies once were in -- the regulatory side is totally where we want it to be to grow, for example, with digital strategies. So, there is no M&A and we expect to continue to give you good news from here on the operating side.

Thanks, Stefan. Next question, please?

Carlo Digrandi, HSBC.

Just two questions, if I may. On provisions, it proved to be, as Jose Antonio said, that the trend is very favorable; coverage is improving. Overall, I was wondering if you can give us an indication if this trend will continue. We have seen write-backs in the UK. Probably these are not sustainable or eventually they are.

So, can you give us an indication if you expect, for 2017, more or less overall provisions to run alongside the same trend with the similar impact on coverage, etc?

Apologies, again I have one more question on the US, since it has not been asked. Do you have additional visibility on SICAT, when eventually you would expect to pass it? Thank you.

Well, I'll let Jose Antonio answer the question on provisions, but I'd say we're on target towards our cost of risk average. I think it was, over the three years, 1.2% and below. We're at 1.18% cost of risk across the Group.

But, definitely, we are expecting, UK, for example, which is a 2 basis points cost of risk, to have some higher charges next year.

Again, within our estimates, keeping our commitments, but we're at historically low, and that is one of our biggest markets in terms of lending.

In terms of the US, so, as you know, we've passed our quantitative SICAT, we actually have a lot of excess capital in the US. I think one of the signals that we hope to give you soon is that we'll be allowed to pay dividends again.

I want to stress that if we normalize our capital in the US, we have an ROE in the whole country, including the Bank, of 4%. It's not great, but regional banks are around 6%. We're really in a place, again, we need to fix and do better in the Bank, and we're making progress.

SICAT, what we know, it's not in writing, but we've been told, and we expect this to happen, is that we will not be subject to the qualitative SICAT. Because, remember, that us and other small regional banks were being asked to be at the standards of JPMorgan and the very big money center banks.

Now, Santander, we have our own standards, and that's going to be applied anyway. We've made huge progress towards managing in the Santander Group way all our businesses, including the consumer finance.

I'd say that it's very likely that the qualitative SICAT we expect to pass this year, if we have to. But as I said, we probably won't have to.

I don't know, on provisions, do you want to give a bit more visibility.

Well, in general, we see -- sorry, in general, we see relatively benign credit scenario in which, as Ana mentioned, in absolute numbers we're going to have higher provisions, for sure, in the UK, because the present level of [the existing] is not sustainable any more.

But, probably, we have -- on the opposite side, it's reasonable to expect that the cost of credit in Brazil will start to trend down, and probably is the one that is more important for us.

I already mentioned SC USA, where it's not due to the credit scenario; it's more due to our underwriting policy that we expect credit costs to go down, also.

In the other units, I don't have any special to mention. Probably in Spain, although we are very relatively low levels, we still expect some kind of overshooting in 2017.

Thanks, Carlo. Next one, please.

Ignacio Cerezo, UBS.

A couple of questions from my side. On Brazil, if I remember correctly, I think in Q3 you had a one-off impact. Actually, you have explained the sequential increase. The number, actually, in local currency this quarter has been similar to the one in Q3, so there has not been a recovery actually from that number. If you can explain if there is anything specific this quarter.

And in the UK, in terms of the top line, if you can quantify, of the GBP40 million, sequential increase of the top line in pounds in the quarter, if you can give us some color, basically, in terms of the impact of the 123 account cost decline? Thank you.

So I'll answer the UK, but I think on Brazil, I -- frankly, I think Jose Antonio or maybe Sergio can -- do you want to answer?

No, there's nothing --

Nothing.

That comes to my mind as extraordinary item in Brazil. Do you remember anything else?

We had high a trading gain resource from financial operations, but there was nothing -- no (inaudible). That's why maybe, bottom line, you see that it doesn't grow that much in local currency. So, we had EUR152 million in Q3 and, now, we have slightly negative. That's the difference, nothing more than that.

So on the UK, yes, the net interest margin has done better in the year than we had guided or we had expected.

Yes, in Q4, you do have already an impact of the repricing on the 123 account, which is where we have a lot of upside. This is exactly the strategy.

For four years, we've been growing very -- at a very high pace. We've grown EUR11 billion in current account balances, just in this year. That should slow down, and that's as expected.

There's a huge amount of room to grow with 4 million loyal customers and 123 customers in the UK. This, again, should be driving fee income growth, as we have now a new online investment platform; we have many new services and better services, and that should continue to drive revenues, including net interest margin, for the next year.

Of course, on the asset side, the low rates would continue to impact on the SVR. So, I think we're guiding towards stability maybe slightly down -- stability, a flattish margin for next year in the UK. But a very good fourth quarter; again, on plan.

Thanks, Ignacio. Next question, please.

Alvaro Serrano, Morgan Stanley.

Just one question on costs, and then a follow-up on Brazil. On costs, both in Spain and the UK, I think the performance has been pretty good; costs down quarter on quarter, certainly in Spain.

For 2017, should we take the fourth quarter cost base as the recurring cost base? Do you -- should we expect more cost cutting? What -- if you can give us some color on where you stand on costs there in both regions.

And then, on Brazil, you've given some color. But just can you talk -- give us a bit more explanation on spreads in the quarter? You mentioned they improved. Would you -- is that expected to be ongoing?

And if you look at the levers of the P&L for 2017, would you say that there's still more margins than volumes for 2017?

Also, in the provisions for Brazil, do you expect them to come down in absolute terms? You mentioned the cost of risk would be down, but I'm not sure if there's room for provisions to come down in absolute terms. Thank you.

On costs, I'll give you the general picture. Our target, as this year, is to keep a flattish cost income around 48%. We're not planning on any, let's say, large cost cutting exercises. We will continue to manage cost, so we can then invest in the future.

Balancing short and medium-term growth is crucially important. In countries like Mexico, I said we're going to invest a lot. MXN15 billion is a big investment. In other countries in Europe, we're going to continue to try to manage more efficiently, so we can dedicate more investment for the future.

Very importantly, we're going to do more and more of investing jointly. So, an e-wallet for all of Santander countries together, working on certain projects across countries. This is a huge opportunity for us, which allows us to keep the stable cost income, but also invest for the future.

I'd say the country Brazil we're also investing; Argentina we're investing. So, in some of the higher-growth countries, we're doing quite a lot of that.

In terms of visibility for Brazil, I think we're anticipating the cost of risk to peak around 5%. There might be some slight deterioration on that for next year, but nothing major, or coming down?

Coming down.

Okay, so coming down. Maybe you want to comment on that. And volumes, I think volumes are starting -- are more -- going to be more volumes than margins next year.

Well, in Spain, you do restructure and you don't -- probably in nominal terms will go down; in the UK more flattish costs; while, in Brazil, we expect to grow probably in line with inflation or a little bit higher, due to the fact that we have two businesses that are booming, that are growing a lot, they're acquiring business. And the payroll based lending that the Company (inaudible) [get net annually] that we're going to have costs growing in the region of well in double-digits, just because those businesses are growing a lot. So, this is what you should expect.

In relation with the spreads in Brazil, you -- what you saw in the quarter, you probably focus too much on the asset side.

We've done a very good year on the liability side in Brazil in the spreads. Probably in the fourth quarter it's a combination of higher spread from the liability side and, also, a mix. If you look at the quarter, we grew significantly more in consumer lending we're growing in the more -- in the corporates and large corporates, and this has an effect on the mix, but look also to the liability side, yes.

Okay, thanks, Alvaro. Next question, please.

Andrea Unzueta, Credit Suisse.

My question is on Spain and on margins specifically. Are you now accounting for the negative cost of the TLTRO in Spain, and if so, what is the impact?

And if you could comment a bit on your expectations for Spain, both in terms of volumes and spreads.

I'm going to go back to the question on Brazilian cost of risk. I think, in Q3, you did mention that you had a one-off case impacting provisions in Q3 in Brazil and the levels in Q4 are similar.

Going back to Ignacio's and Alvaro's questions, do you see room for the absolute level of provisions going down in the next years? Thank you.

Yes, in terms of volumes in Spain, we believe that, for the first time, net lending should be slightly positive next year. That is good news.

We are, actually, gaining market share based on the loyalty 123 strategy and to our 123 customers. We are gaining share in consumer lending, for example 200 basis points, and that's doing pretty well.

We expect, for the first time, next year, that volume growth, so the front book, will grow more than the amortization in the back book in mortgages, so that also should provide some positive in volumes in Spain.

The cost -- TLTRO unit, it's accounted in Spain as part of the country, so that is included.

In Brazil, yes, there was I think a one-off that is what explains that Q3 uptick.

What we said before that was not -- certainly, not in the sense of it was a one-off provision for a large customer. In that sense, I said it's extraordinary, okay?

But it's exceptional.

It's a specific provision, exceptional in the third quarter, yes.

And the limits of NPL cover has gone up Q on Q by 4 [percentage] points up to 93% as you know.

Thanks, Andrea. Next question, please.

Adrian Cighi, RBC.

I have two clarification questions, one on Brazil and one on Mexico.

On Brazil, just a follow-up on the loans spread this quarter, you said -- obviously, you've shown an improvement. But what's the outlook in light of the reduction in the benchmark rates in Brazil at the beginning of January?

And then on Mexico, you just mentioned again the MXN15 billion investment over the next three years. How much of this is incremental over the current run rate of the MXN26 billion in 2016? Thank you.

Actually, I couldn't hear the first question. Could you just repeat the first question maybe? I think we haven't really --

Could you repeat the first question, Adrian?

On Brazil's increase in loan spreads this quarter, how do you see the outlook of this developing in light of the reduction in the benchmark rates in Brazil at the beginning of January?

Well, as I said the impact of the decrease in our spreads, the balance sheet is long so that means the lower rates normally to -- our NII tend to increase, so in that regard the position is good.

We don't see in the short run, maybe in the long-term, we have more impact in the corporate and global corporate banking business. But in the short run, probably, this will lead to an increase in the spreads on the consumer lending and a decrease on the liability side.

As I mentioned before, this year was a very good year on the liability side.

Mexico is quite a significant investment for us. Mexico has a very strong cost income this year, it closed at below 40%.

We're anticipating growth. As I said, a good profit growth over the next few years, so we are able to invest and continue the trends -- the positive trends that we've had, even in the context, although it'll be harder, but we believe also in the context of a more challenging economy possibly with some, as I said this morning, modernization of the NAFTA agreement, which will have some impact.

But overall, the positives outweigh the negatives. Again, we believe the country has huge potential and that's why we're investing in a very significant way; in Brazil also, by the way, and Argentina.

Thanks, Adrian. Next question, please.

Britta Schmidt, Autonomous Research.

Could I ask a clarification question on Spain? Could you give us any sort of guidance as to how much TLTRO-II benefit was included in NI?

And can you also comment perhaps on the lending increase on the volume in Q3? Is that a mixture of change or do you see anything improving in terms of competition?

And then I've got another question on Poland. There were some comments on the ticker from the BZ WBK CEO talking about maintaining profits flat in 2017.

Can you give us an outlook statement there from your point of view and do you have any indication what impact the discussions around the -- surrounding the Swiss Bank loans have on BZ?

I think the question on Spain was the TLTRO is -- yes, it's accounted -- it's in the numbers of Santander Spain as a country. I think we answered that previously.

On Mexico and Poland, no? So, the team here is telling me that TLTRO will be in Santander Spain as of January 1, 2017, and it will be on an accrual basis as of Q1 of next year. Sorry for that, a clarification.

And Poland, there is apparently a flattish guidance.

I don't know what they were referring to, because in Poland, excluding the potential impact of the Swiss franc, that is not still clear, so it's still under discussion. Excluding that, as I said, we expect the profit to grow in Poland.

Probably the conversation -- or the answer to the question probably was referring -- including some impact from the Swiss franc. Excluding that, we expect to grow profits in Poland.

Thanks, Britta. Next question.

Daragh Quinn, KBW.

Just a couple of questions, one on loan growth; I just want to follow up on Spain and the outlook for positive loan growth in 2017, as it looks like in Q4 the pace of decline has actually accelerated.

Certainly, looking at the sector data, the decline in new business volumes also looks to be picking up. So, if you could just provide a little bit more color about your outlook for growth in 2017 and where do you see -- which segments do you see that growth coming from?

And then sticking with loan growth, just a comment on Brazil and I think you touched on the growth in Q4, but do you think you'll be able to generate a positive loan growth in Brazil in 2017?

And then finally just on the 2018 EPS targets -- sorry, the growth rate in EPS, does that include the coupons from AT1s, both in issue and that you plan to issue over the next two years? Thanks.

Yes, the EPS target does include the coupons from AT1 and we are reiterating our guidance to double-digit growth by 2018.

On Spain loan growth, so we had a lot of, let's say, payback on the public administration side, which we expect to not have an effect going forward as you -- but that came down in the quarter by 9.5%.

But, we already have positive trends in consumer lending by 2% and corporate side by about 1% in the medium-sized company. So, the net is minus 1% compared to an almost minus 4% for the year. We do expect that to change sign in 2017.

Possibly, of course, mortgages could -- is now at minus 1%, mortgage, compared to minus 4% for the year. That's a significant part of our balance sheet, EUR46 billion in Spain.

We do expect this trend to continue. The economy is doing well. Exports are now 33% of the economy; that's much higher than a few years ago. We are expecting that trend to change.

In Brazil, I understand we are expecting positive loan growth for the year, for next year, and the quarter-on-quarter trends are good also.

Indeed, as you know --

As I said before, it's, quarter on quarter, we grew 5%. This is not sustainable. Probably, in 2017, we're going to be in a range between mid to high single-digit growth -- loan growth in Brazil. This is our current expectation, based on our view about the macro economy.

It's flat in Spain. Yes, in Spain this year, we may grow 1%/2% this year. We have institutional lending going down, as Ana said. At the same time, doubtful loans fell significantly; that is good. But those were the two main components of the decline in the loan book, although also in the mortgages, we are still declining but very little now. While in corporates and SMEs and consumer lending, we are growing.

So, going forward, we are a little bit more constructive on the trends on the loan book in Spain.

Thanks, Daragh. Next question, please.

Marta Sanchez Romero, Bank of America.

I've got a follow up on the TLTRO. If you could give us the volumes that you've taken in Spain.

And then on top of that, I have three questions. One about provisions in Spain; the second one about the NII in the UK; and the third one about capital.

On provisions in Spain, your cost of risk of less than 40 basis points seems quite low relative to your peers, particularly when over half of your book is SME and corporate, and your rate seems a little bit lower. So, maybe you could give us some color on what is the through the cycle cost of risk in Spain, particularly concerning the impact of IFRS 9.

The second question on NII in the UK. I don't know if you've been opportunistic this quarter and increased your ALCO portfolio, given the move in rate expectations and gilts, and if you're still guiding for a flat NII in 2017.

And the third one about capital. Your valuation adjustments have gone down in the quarter, despite positive moves in the currency. What is driving that?

And if you could give us an update on how much of unrealized gains you have in your Spanish, Brazilian and UK portfolio. Thank you.

Net interest income in the UK; again, our guidance, I understand, is flattish net interest income for next year, even though better than expected. A lot, obviously, depends what happens with interest rate. As in other European countries, we have a positive impact if interest rates go up.

If you look at the whole of Santander in Europe and the US, with exception of Brazil, obviously, as Jose Antonio mentioned, that is about EUR1 billion of additional income for all our countries in Europe and in the US for 100 basis points parallel movement in the yield curve. So, that -- depending on when rates move, that's not in our numbers, that could be a positive.

On provisions in Spain, yes, we are doing better than others; that is a fact. Our real-estate exposure is reducing quite fast, let's say, the restructured side. We expect, we have another two years on that before it becomes immaterial. Basically, the cost that you see there, in the restructured on the bad bank, is now basically the cost of running that -- run-down in the portfolio and the net amount there is about EUR5 billion.

Again, Spanish economy has done really well for the last couple of years; 1.5 million new jobs, more exports, and so that is being reflected in the cost of risk and we're doing better than our peers.

I didn't really -- the capital question.

What is the AFS impact here.

The AFS impact was --

We have a capital -- a mark-to-market that is positive. Naturally, this changed on a daily basis, but between EUR500 million and EUR1 billion, has been moving in this region for the last two or three months. It's more in this region.

But the impact is a marginal impact. Naturally, the impact in capital is not where do you stand, it's the marginal movement from where you were before. This is where we show the volatility in the fourth quarter.

You should expect, depending on the level of the rates, some volatility coming from this part of the business in terms of capital.

We have time for two more questions. Next one, please.

Mario Lodos, Banco Sabadell.

I have one quick question about the IFRS 9. Can you explain or give us some detail on the effects that this change in accounting has in Spain in the fourth quarter? Thank you.

I already said that this was marginally material in our numbers in Spain; the changes made by Bank of Spain, and it's still too early to come with a number for IFRS 9.

Next question, please.

Benjie Creelan-Sandford, Jefferies.

Just two very quick follow-ups from my side. First of all, just on the Spanish real-estate division, total assets there were down 30% quarter on quarter, so a very big drop. I was just wondering if there was any particular driver behind that.

And then also just on the Spanish ALCO portfolio, if you could possibly provide the absolute size of the ALCO portfolio, the average duration and the current average yield, that would be really helpful? Thanks.

That reduction is due to BAU, our business as usual, reduction, which, of course, the objective is that to be run down to nothing.

But there was also a few transactions, which were done with Metrovacesa, where we are now managing that through that company, and this was a valuation done -- not just us, a few other banks decided that this is the best way to manage this and maximize value for our shareholders.

There's a few bigger transactions, but there's also just regular sell-down of our real-estate restructured portfolio.

Okay. So, I think we are done. We need to leave it here. Thanks very much, everyone, for joining. Obviously, the IR team is at your complete disposal for any follow-up you may have. Thank you.