Banco Santander SA (SAN) 2017 Q2 法說會逐字稿

Good morning, everyone, thanks for joining the second quarter results presentation and particularly in such a busy day of earnings releases. As our normal procedure, our CEO will kick off the presentation, going through the group performance in the first semester as well as some highlights on Popular transaction, and the CFO, Mr. Cantera will cover the different business areas, the 4 months for the first semester. Will conclude, our CEO, this presentation before the Q&A with some concluding remarks. So always at your disposal for any follow-up after this broadcast. With no further delays, I leave the floor to our CEO. Thank you.

Thank you, Sergio. Good morning to everyone. Thank you for attending to this second quarter results presentation. The presentation is going to be slightly as in other quarters, so I am going to go off a little bit on Banco Popular real, Banco Popular's acquisition and capital increase. Afterwards, I will do what we usually do that is to review the group performance and José will follow on with the units.<p>So on Banco Popular acquisition, the rationale that we explain to you the day after the resolution remains basically the same. We haven't changed our view after reviewing a little bit the numbers, we haven't changed our -- the view we gave to you on that day. And our view in terms of return on investment decisions that we can -- we expect to achieve the EPS and (inaudible) on net asset value per share impact on the group remains basically the same. So it is just to confirm that our views in the -- after (inaudible) we made the offer to acquire Banco Popular remain in place as we -- with the same numbers that we gave to you. A small change in fee on that, but nothing material that changed our view.</p><p>Allow me to elaborate a little bit what we have done since that day, yes. So the first task we took was to stabilize the bank and to stabilize the very first day was on the liquidity side, we injected EUR 13 billion liquidity on the same day on 7th of June to stabilize the liquidity of the bank, the operating liquidity so the -- to comply with the liquidity ratios and to pay back the emergency liquidity they got from the ECB. The changes on the Board of Directors that we did the same day and after that -- and probably this is more of your interest, we established a new governance structure with the appointments of all the committees of the board. We started to review the joint venture arrangements. We took one decision that is to execute the call of Aliseda the servicer, the call that was expired on the 3rd of June and we decided to repurchase the 51% of Aliseda the servicer.</p><p>Probably the main task we have in front of us is to recover the franchise after a period in which the franchise was suffering, you have on the right side some numbers of this. The deposits in Spain basically like EUR 20 billion in the first season out of the year, did the resolution and we recover already what you have in the screen is EUR 5 billion, so yesterday or the day before yesterday the number was EUR 6.5 billion that we already recovered in deposits. And we stabilize on how the loan book, it fell less than EUR 1 billion in the -- since the resolution but the (inaudible) in the bank was not -- somehow had a limited offer of new loans given the liquidity situation. We recover the normal activity on what the productions are back to the normal level.</p><p>So this is going, I would say, as expected with significant recoveries since we took over Banco Popular. So we launch also the commercial action for retail customers, both of Santander and Popular, in order to speed up as much as we can the recovery of the commercial franchise of the bank.</p><p>So this is then on the actions we made. On the other side, the accounting of the acquisition in the figures of Grupo Santander, you have in the screen the changes we made basically are the ones we told you. You have here the numbers, we got the bank and we made an adjustments in equity direction adjustment. They were basically group (inaudible) some intangibles and some EPAs (inaudible) adjustment, the 4.3. We made adjustments of EUR 7.2 billion for loans and real estate yesterday what we estimate is the fair value, the commercial action we launched and basically Banco Popular came into Santander account with no equity and with a EUR 50 billion risk-weighted assets, a little bit more than EUR 50 billion risk-weighted assets. So as a result of this, our core equity tier 1 fell at the end of June from 10.72% to 9.58%.</p><p>That is the reason we launched the capital increase that just released yesterday, was extremely successful. We published yesterday the data about this capital increase and we restored back the capital ratio to the previous levels, to the 10.72% as a result of the capital increase. This is the impact on Santander accounts of the acquisition of Banco Popular.</p><p>In Banco Popular itself, we got the bank with a negative equity after the resolution. The resolution -- the core equity tier 1, the regulatory ratio before resolution was 9.1%. As a result of the actions took by the resolution authority, the phase in core equity tier 1 adjusted after resolution and as we received the bank was negative, minus 4.9%. Yesterday the board of Banco Popular, Banco Santander and Banco Popular approved the capital increase Banco Popular of around EUR 6.9 billion and after that the capital ratio of Banco Popular were restored to the levels of around 10.5%.</p><p>So this is -- so as of today, Banco Popular already has -- is complying with both liquidity and capital ratios for this period in which we restored both. So finally just to finish with Banco Popular this -- these are the numbers of the 20 days we consolidate. You have the P&L here, it's EUR 11 million, it's totally insignificant in the context of the group, and you have the impact on the balance sheet.</p><p>Banco Popular represents around 10% of the loan book of the group and around 8.5% in customer funds. So you have all the numbers here. What changed the most probably is NPL ratio that was before Banco Popular 3.55% and goes to 5.37%. Now I am confident that we are going to review this year, the same year below 5% relatively short. The cover ratio remains pretty much the same and the cost of credit is basically the same. So this is -- I will finish here all the elaboration of Banco Popular. Well, if you want to follow more -- you want to get more detail, you have the Investor Relations that can elaborate more on this.</p><p>I am going to go now with the group performance in second quarter in the first half excluding Banco Popular. All the numbers you are going to see from now onwards, unless I say -- I said the opposite are without Banco Popular. So the first half of the year and the second quarter, I could quantify the quarter as a big quarter. So we are delivering double-digit growth with, I would say, very good quality and with high (inaudible). So all the units -- almost all the units are performing very well. So it's -- I would qualify this as a good quarter with pretty strong developments on the -- after the -- of the P&L, both net interest income and fee income have booked development, you have numbers there. And as a result of this, we are generating capital at the pace we were expecting. The capital ratio is 10.72% and the return on tangible equity is 11.7%, close to 12%.</p><p>EPS accordingly is growing 23% compared with the period and the tangible net asset value per share we -- the developments were good on the P&L side, but the impact of the FX has been significant in this regard on the group a little compared with what would be otherwise the outcome if we don't take into account the depreciation of the currencies vis-à-vis with the euro. So overall the big numbers, good quarter as I said good growth quality in the results.</p><p>When we look at business, we have bigger developments in volumes in the customer funds and not only the growth that is 8%, the quality the demand deposits are growing at 12%, mutual funds are growing 13%. Bank lending, retail bank lending is growing 2% and the overall lending is growing again at 1%, it is a little bit less than what we were expecting at the beginning of the year probably in some middle markets we're growing less than expected. The balance sheet quality remains intact, NPLs keep going down, cost of credit is where we expect to be. And the development on the customer side are pretty good. We are growing loyal customers double-digit and the digital transformation, more and more customers you see the figures, the growth is quite impressive, in terms of the number of digital customers, quarter-on-quarter and year-on-year.</p><p>So overall the development is -- this is the P&L, we have already published when we launched the capital increase. I will remark what I said before basically, the income is growing well, good cost control, efficiencies growing across the board we will see the cost later on but costs are growing there is an inflation, the average inflation, the cost of risk is falling. Still we have some certain high expenses -- significant high expenses below loan loss provisions that probably will get reviews in the coming quarters. The ones we have now is -- we are anticipating good reviews particularly in Brazil, good reviews last year the FTE's and we are anticipating potential costs 13% significant variation with this we are anticipating some cost of this reduction on the FTEs as I say.</p><p>The corporate tax remains pretty high, although we think that we can do as we said in the previous quarter, end of the year is going to be lower than the current one we have right now. And you have profits growing at -- I think we're roughly growing at 24% in current euros, up 20% in constant euro to underlying profits 14% and 11%, good numbers overall. So the Banco Popular profit, I already mentioned, is not material in the accounts. So you have the different quarters and going to the right side you see that the units are performing pretty well, all the units. Including the States (inaudible) minus 2%, you see the quarter has been pretty good and the bank is making significant progress particularly in the reduction of the costs. Deposit cost that is allowing the bank to generate a significantly higher pre-provision profit. In Poland, there is some change of criteria, but the unit is performing well as you can see in the accounts.</p><p>So overall looking at the group, revenues growing at 7%. The main drivers, as I said, NII and on fees, NII is more due to good margin of the spread and the volumes, the volumes I said in lending were relatively low out of the deposit -- deposits grew significantly, demand deposits and this push up the margin in countries like Mexico and also in Brazil and this is reflected in the NII here.</p><p>So you have numbers here, the volumes, both in loans and deposits. As I said, we are -- I am pleased with the growth we are showing customer funds not only the volume growth, but also the quality of the growth, as I mentioned before. On the loan book as I said, we are growing less than we were anticipating but in some cases are more optimistic going forward. In some cases like in Spain where I think the de-leverage is coming to an end, the quarter we already show some growth. I mean particularly in Mexico and Brazil, probably we should be slightly more optimistic going forward about the potential growth in the loan book.</p><p>In costs, I mentioned before, costs are falling compared with inflation 0.8%. We have positive jumps all across the board but in the U.S., where I am more optimistic about the future one, when we passed the CCAR in the quarter. That is going to affect this line particularly in the coming quarters.</p><p>Credit quality, I have already mentioned, cost of credit in line with our expectations, falling 6% year-on-year and the NPR continues a downwards trend. You have the numbers here, this is going to -- the Popular numbers have looks like the group the Popular recovery ratio falls from 73% to 68% and as I said before NPLs goes from 3.55% to 5.37%. You have the Banco Popular numbers on the slide, the NPL is 20%, the coverage ratio is 61%, compared with the numbers Popular was producing -- Popular was saying 15%, this is more due to the denominator of the ratio, what Banco Popular was including in the denominator, more than a significant reclassification in the numerator.</p><p>Well let me to -- before I go to capital, collaborate a little bit on non-core real estate activity. The first half of the year has been very good in disposing under used in the real estate assets in Santander. You have the numbers on the left, the net loans fell 43% and become -- I probably said in previous quarters, have become immaterial. Real estate asset falling 12% and the amount of properties sold grew 34%, so very good developments there accordingly with the situation in the real estate market that is much better than in the previous year and is accelerating still accelerating.</p><p>On the right side, what you have is the new exposure. I would call to real estate, the gross number is EUR 41 billion, but what's more important is the EUR 15 billion debt we have in the real estate exposure. As we announced after Banco Popular's decision, the group is planning to reduce Banco Popular real estate exposure to insignificant levels in the next 3 years. And I am very confident that once we are allowed to do so, we can knock -- we are still waiting for some regulatory approvals from Banco Popular particularly the (inaudible) the competition authorities. I think that we will be in a position to deconsolidate real estate asset relatively soon.</p><p>This will happen I think rather sooner than later. So finally, on capital, I already elaborated on this, the ordinary capital generation in the quarter was 6 basis points, probably below the guidance we gave to you on average 10 basis point, but we are progressing accordingly with our plans. Remember that we have a -- due to (inaudible) activities some capital consumption in the second half of the year, particularly the one related to the acquisition of 50 of the asset management and we are still waiting for the approval to buy a 10% off SCUSA. But we are progressing according to our plans and we remain naturally committed as we said, after Banco Popular's acquisition with 11% this year.</p><p>So finally significant improvement in the ratios of profitability. The RoRWA went up significantly, return on tangible equity a full percentage point. EPS is growing accordingly and the tangible net asset value per share was affected this quarter by the appreciation of the euro vis-à-vis the other currencies.</p><p>And that's all on my side. I will hand over to Jose to elaborate on the units. I will come back to make some concluding remarks.</p>

Good morning everyone, thank you Jose Antonio, like always we will go in detail over the main subsidiaries of the group, the breakdown between emerging economies and developed economies and Europe and Americas remains about the same, 50% in either case. <p>I would like to highlight first that in all pages that you are going to see from here, on the upper left corner places where you can see the evolution of our main business indicators, showing significant progress in the last 12 months, as we continue to develop on a strategy to have more client relationships, deeper customer relationships and longstanding customer relationships, which translated into more loyal customers, more digital customers; in turn you have seen very good performance in fee income and lower cost of credit generally in all countries, improved efficiency ratio and growing return on tangible equity.</p><p>Starting with Brazil, based on quarter -- following a very strong quarter following the first quarter, based on loan growth which is higher than the average of the system, year-on-year growth was 7%, we are gaining market share, the system is contracting, private banks are contracting slightly and in this environment we are growing market share. Very good performance also on the margin side. On the asset side because we are -- the breakdown, the composition of our assets are geared towards higher-yielding assets and we're doing a very good management of our liability substituting more expensive (inaudible) the wholesale funding by the deposits, which are cheaper and as such our net interest margin, as you can see, is expanding. Following the drop in interest rates, last week we saw a drop of 100 basis points and we think this trend will continue. We would expect similar trend in the coming quarters.</p><p>Income also performing very strongly. We are growing in credit cards, we are growing in credit card servicing, payroll related services so good performance in fee income as well. Costs are being kept under control and asset quality is improving and we would expect, as I said, to see a further improvement in the coming quarters.</p><p>In the U.K., our bank is well positioned to succeed and meet our goals and our expectations despite a potentially more challenging economic environment in the next few quarters. We have a robust P&L in all items, net interest income growing high single-digits on the back of much cheaper cost of deposits. Fee income is also doing very well associated with the -- having more loyal customers and digital customers and having more transactionality with these customers.</p><p>Costs are being kept flat despite the pressures from the banking reform and asset quality remains at very low levels. So in general terms a good quarter overall and again positioning the bank for a more challenging environment in the next few quarters. Santander consumer also has a strong quarter all across the P&L. Despite the pressure, the competitive pressures on margins and on fee income, we've been able to manage volumes very, very well with the relationships that we have with dealers and with car makers. Costs are being kept very much under control and asset quality very low at all time high, so a very strong performance in the quarter again basically demonstrating that we probably are the best consumer finance entity in Europe.</p><p>Spain, flattish net interest income quarter-on-quarter, as you can see, but sequentially we believe it will increase in the next quarters. We starting to see stability on the yields on loans and yields overall deposits and we would expect to start seeing positive loan growth in the coming quarters as new mortgage production, which is up 30% this quarter will outweigh the amortization of the existing portfolio. We are seeing positive growth in small- and medium-size businesses and in the corporate sector as well.</p><p>Our 1|2|3 strategy continues to yield very positive results as you can see loyal customers, individual loyal customers are up 35%, company loyal customers up 20%. Following the changes to the 1|2|3 proposition last year, we have seen a significant increase in credit card turnover, 43% up. Also new lending in international businesses is up 30%, on the back of a stronger economy. So in general terms, we think that the macroeconomic environment and the competitive environment in Spain is conducive towards an improvement in the net interest income and total revenues in the coming quarters.</p><p>Following the cost cutting exercise we did last year, we've seen a significant drop in operating expenses we are comparing first half with full impact of that exercise against the first half of last year when we didn't have that. So this will moderate throughout the year, but is still very strong control in operating expenses. And cost of risk up 33 basis points improvement and we would expect as José Antonio has mentioned an improvement in the coming quarters from these levels.</p><p>Talking quickly about the smaller countries, in Mexico profits up 26% with very, very strong performance in net interest income. Volumes are up and margins are also up as interest rates go up we are geared towards higher rates in Mexico and this is helping our net interest margin. Also very strong fee income following the equivalent to the 1|2|3 proposition that we have in Spain and Portugal that we've in Brazil -- sorry, in Mexico, which is producing significant growth in payrolls where we are gaining significant market share, number of customers, loyal customers are up 23%, digital customers up 60%. Asset quality is very much flat with nonperforming loans down.</p><p>In Chile, our bank in Chile has already achieved a return on tangible equity of 18%. So it has recovered the profitability that we had a few years ago on the back of improving the quality of service, investing in digitalization and transforming the retail banking, but with particular focus in medium- to high-income individuals and SMEs. Profit is up 11% with very strong performance across the P&L.</p><p>In the United States, as Antonio mentioned, the key qualitative aspect in the quarter was the -- not rejection to our CCAR plan from the Federal Reserve, which means that we will be able to start paying dividends going forward. And the bank has improved its profitability, margins are better because of lower cost of deposits and higher interest rates which helps our margins and costs, and we are starting to see the efforts that we've mentioned in the past few quarters about cost control.</p><p>In Santander Consumer, we continue to de-risk the balance sheet of the company. And we believe that the results of the company following the cyclical adjustment that we are seeing in the used car market in the States will normalize relatively quickly. For the whole company for Santander SCUSA, overall we think it's a very good quarter and the prospects for the next few years are also positive because of our capacity to keep costs under control.</p><p>In Portugal, we have the best bank in Portugal, we are gaining market share in loans and deposits, and as you can see significant growth in profits at 16% as we start seeing the benefits of the 1|2|3 strategy in the country. Year-on-year comparisons are affected by lower results on financial transactions. And asset quality, after the increase that we saw after the acquisition of Banif, is starting to normalize back again.</p><p>In Argentina, the results are affected by the acquisition of Citibank. We had extraordinary higher costs in the quarter. Because of that, our overall -- the performance has been very, very good with profits near EUR 200 million, growing 36% year-on-year.</p><p>In Poland, our results in Poland, as José Antonio mentioned, are affected by higher contribution to the deposit guarantee fund the tax on assets, a higher tax rate and that explains the flat profit after tax growth year-on-year. Before these extraordinary or nonrecurring elements, our profits would be up 10%, which we think is a very good performance. We're gaining market share also in Poland in most businesses.</p><p>Turning to the Corporate Centre, losses are higher, financial losses are higher than last year as it was the case in the first quarter because of the higher costs of hedging our expected earnings coming from the countries. So obviously negative comps that we have here is offset by the positive performance -- more than offset by the positive performance that we have in the countries. Net interest income, the interest in net interest income reflects the increased costs of our funding as we start building our TLAC needs that as you know we will need to comply by January 1, 2019. Also we have a lower tax recovery. Operating expenses were down 4% year-on-year accounting for only 2% of group's total costs.</p><p>And with this, I will turn it back to José Antonio for his concluding remarks. Thank you.</p>

Thank you, Jose. So let me just take from you one minute to sum up a little bit. We are on track to meet our commitments with -- that we made in our Investor Day. So we are progressing well on the customer numbers, we are progressing well in our fee income. Those 2 go along together as long as we're progressing, loyalty in customers we are going to be able to grow the fee income. It's the best process we use internally to measure this. We have progression as well in efficiency. Being on top of the industry, this is something that we are proud of to continue to show our capacity to improve the efficiency of the bank and we are showing also good results on our commitments on EPS, DPS on capital that we're progressing towards with 11% core equity tier 1 fully loaded in 2018.<p>So when we look at the customers, you have 2 or 3 years there for the years where that shows our progress well in loyalty and in digital customers. And at the same time, we are making a significant transformation on our business all across the broad to make sure that we are able to compete in a more digitalized world, in a world that the customers become more and more digital and we have proposition for this. And particularly important, we launched, this quarter, Openbank in Spain, that is a full digital bank, it's a full proposition for individuals. And that is the only one that is in the market.</p><p>On top of that, we have some integrations going on. Once we are about to start in relation with Popular in Spain and Portugal; the one in Argentina, where we expect to finish the integration of Citibank operations that we started at end of the first quarter, at the end of the second quarter we expect to finish. I mean U.S., I want to mention U.S. because we are making significant progress. Remember that 1 year ago we integrate, legally speaking, all the operations in the U.S. below the holding in the U.S. and now we are making the first step towards a higher operative integration in the U.S. And that's from side you have plenty of more information in the presentation. We remain at your disposal for the question you may have.</p>

So operator please open now for Q&A. Thank you.

(Operator Instructions) We have a first question from Mr. José Abad, from Goldman Sachs.

Two questions from my side. The first question is on real estate associated with Banco Popular. On our numbers, actually the provision that you booked against Popular's assets are well above the expected loss of the [problematic] portfolio of the bank. So this essentially will open the door for a significant actually capital gains down the road. By deconsolidating, you are losing part of this upside, so how has -- if any, I mean change your thoughts regarding the velocity of these portions, given the tradeoff between actually capital gains on the road or actually reducing your exposure in the short run. And the second question is on the deposits coming -- associated with Popular, so we know that around EUR 20 billion deposits left Popular, you mentioned that you've recovered around EUR 6.5 billion as of yesterday. So the question is out of the EUR 20 billion, what percentage actually went to Santander. And out of the EUR 6.5 billion that you've mentioned, which part are indeed clients that have come back to Popular, but were not clients of Banco Santander.

Just a little bit from what we said in the resolution day, other time we were saying a value of -- net value if I remember well, now currently on EUR 9.2 billion and we correct this value to EUR 9.7 billion, so we made more provision for the loan book and less so for the real estate assets. Well, we are evaluating alternatives as you rightly said, the real estate market is in good shape right now in Spain and the prospects are good and we have these alternatives, some potential alternative, we have another alternative that is -- that we're going to explore, that is to sell the majority of this business meaning the 51%. And your question is about why -- if the prospects of the real estate are so good, you dispose these assets, leaving on the table so many. It's true, maybe true, but well we think that the exposure we got from Popular and with the exposure we already had before in our stakes in (inaudible) the real estate that we still have in the balance sheet is too high the real estate (inaudible). If possible, we want to reduce very quickly as we said after the resolution. And we're going to have a process to see if we find a price at which we will be able to dispose a significant part of this exposure. And I said in the presentation that I remain very confident that we can sell at the marks or even above the marks, we'll see and to deconsolidate this exposure and using our exposure to the real estate that I think is too high. And it's not our business. So the second question you said, it's elaboration of Banco Popular deposits, the (inaudible) Banco Popular lost EUR 20 billion deposits. We got some of these. I don't have a figure for how much we got, but naturally in flight-to-quality situation and this is kind of flight-to-quality situation, we tend to receive more deposits than our natural market share. So it's always happens this the flight-to-quality we are perceived as a safe place to go. And for that reason, probably we received a higher than our market share in deposits in customer deposits was -- Santander was in the region of 14% to 15%. Probably we received much more than this from Popular. And well, what matters here is, we are quite confident that we're going to recover in full, the franchise of Popular, that means that we're going to recover deposits. It's going to take for a while. The comments are answering when we launched. It's going to help on this. And this is the main purpose, to restore the franchise. And we will gradually going to be going back to the previous level before we start to grow and I am sure that we're going to show good growth in the deposits in the future in the Banco Popular from the level they were, let's say, at the beginning of this year.

Next question from Alvaro Serrano from Stanley.

Two questions, one on Spain and the other one on the U.S. Spain, as you said, the activity levels remain very strong and fees in particular showed a very strong increased quarter-on-quarter. I was just wondering if you can give us some color as to what's driving that fee, is it DCM, is it asset management, what is driving that and how should we think about what's sustainable growth going forward, what of that is sustainable. And similarly, the loan growth you expected to increase from now, what kind of loan growth should we expect? Then in the U.S., you have now passed the CCAR. It sounds like the worst of the year (inaudible) is now over. You've talked in the past about EUR 500 million, the franchise was under earning about EUR 500 million I seem to remember. Can you give us a bit of color of how much of that was cost, how much was a revenue opportunity and what should we expect going forward, how quickly can you recover that EUR 500 million.

In Spain, the question is, as I understood, is related with fee issue in Spain that we're showing significant growth. This has 2 components. One component that comes from the global corporate business that the performance was very good in the current quarter. Having said that the retail fee income is growing at 8%. Okay, so it's true that, if I remember why I don't remember this -- this year it's growing up 14% and retail is growing at 8%. Is that sustainable, the retail fees for sure and the issue (inaudible) with fee depends on the activity in capital markets. We are clearly the market leader in the Spain in those activities as long as those activities remain relatively strong and I think it's going to be the case in the current environment, in the current macro environment. I don't qualify this at this stage as extraordinary, so probably the 14%, it's more volatile than the retail, but I will expect pretty strong regeneration of showing global corporate market going forward. The second question, the costs in the U.S. in relation with CCAR and I mentioned in the past that -- we were having extra costs in relation with CCAR that once we pass CCAR, I am confident that we're going to reduce the cost base in the country. Not only because CCAR, plus I mentioned in the presentation that we integrate, legally speaking, all the franchises the (inaudible) the private banking business, plus the broker-dealer, plus (inaudible) corporations, plus the bank -– it belong to holding company. Having said that, they were operating like individual units and we're going to enter into a phase that now with -- once we bought CCAR it's going to be easier in a phase in which you want to expect to optimize the cost base. I don't know how to state a number for this but I will say its $100 million that we can optimize there. How long it's going to take, I am not in a position to tell you right now. Loan growth in Spain, well no big deal. Here we show some growth this quarter. Probably we enter into a phase that after a long, long de-leverage process we enter into a phase in which I think we can show some growth. Particularly in the semi-consumer type of loans it's still that in mortgages we are having some amount in which we are able to grow. So the new products in this are higher than the amortization. So probably to thinking in the arena of I don't know between 1%, 2%, or 3% kind of growth in the Spain is something that I think is achievable. In an environment where the spreads remain basically flat, we are not now in a situation in which the spreads are pretty low as we've been seeing during several quarters. And the EURIBOR is still very low. I will say some growth in volumes with potential sum – with stable spreads – is the environment in Spain. The EURIBOR is much more difficult to forecast but it's the variable that may change the outcome in NIA.

Next question, please.

The next question from Stefan Nedialkov from Citigroup.

Two questions from my end. Just to continue with the U.S. asset quality actually, the NPL ratio is increasing this quarter and the increase is actually higher than the increase last quarter, so there is an acceleration of sorts. Can you just give us some color on is that basically just a more conservative recognition on your part or is this something driven potentially by new developments over the past quarter? And my second question on the Popular real estate disposal. You are talking about deconsolidation. Is the deconsolidation based on 100% sale of the real estate assets or maybe selling a majority stake in a separate company? And if the latter, wouldn't that be a better way to capture upside going forward from higher real estate prices and just better general macro environment?

Okay so NPLs in the U.S. in the quarter we're seeing some changes there so in SCUSA in the quarter with NPLs in the bank now flat or are behaving quite well. NPLs in SCUSA went slightly up if I remember. Well and this was -– there are plenty of discussions about the situation of the –- the auto market in the U.S. We are not seeing a clear deterioration in the market but we suffer some operational problems in our franchise in the collection site and our franchise in SCUSA that may led to an increase in NPLs. I don't think this is -- a trend was due to more to idiosyncratic problems on our side. And I don't see a -- it is true that the secondhand car prices are going down and this may affect or is affecting already the loss even before when we recover that -- the loans. But I don't see a trend of deterioration in the NPLs. Secondhand car prices will affect a little bit but we are still underwriting at levels above the car and prices in the secondhand car market. And also when we take residual volume we are underwriting at levels that are still well above the ones we are assuming in our underwriting. The second question, Popular real estate deconsolidation. Well have always alternatives. We have the alternatives. But several alternatives on the table to keep 100%. To look for a deconsolidation that means at least 51% will go to someone else more specialized than us much in this. Or eventually – we don't learn to sell 100%. But it seems to me that the more likely scenario is -- or to remain with 100% or to deconsolidate to sell 51%. We are not –- we haven't taken a decision on this. But it seems to me and I am optimistic and confident that we are going to get a price on the marks or above the marks for the 51% remains my –- is what I see as the central scenario for us.

Thanks for the question Stefan. Next one please.

Next question from Rohith Chandra-Rajan from Barclays.

Got questions on Brazil and U.K. if I could, please. And on Brazil just particularly on the margin where I see there's been a benefit from falling rates and also the liability management that you've been doing. I'm just wondering how we should think about that as the rate as the easing cycle comes to an end? How we should think about margin evolution, I guess, over the coming year or so in Brazil? And then on the U.K., on margin in credit quality. So the U.K. mortgage market price competition has intensified in recent weeks. But it also looks like you're probably paying above your peers on deposits and so just wondering how you're thinking about the margin evolution in the U.K.? And then credit quality as you mentioned remain very strong, which is always seen across the U.K. banks. I'm just wondering about your expectations there as well, relative to what you sort of set out last year?

okay, lets' start with the U.K., you mentioned the margin in U.K. that we're having competition in the mortgage market and as long as our cost of deposits. Well -– so as you said in U.K. we are facing probably, going forward, more uncertainty than the ones we were facing in the previous quarters. We were being as you know relatively cautious compared with average of the market vis-à-vis the evolution in the U.K. So we think that this is going to -- we are facing a scenario of relatively low growth, but it's still growth in the U.K. In the coming quarters this is going to affect Santander volumes. I don't know the margins, the margins depends on the competition as you rightly said. There is significant competition growing now in the market. But the main impact for us probably is the attrition in SVR the one that makes the difference. And we are seeing this attrition in line with our expectations. So I see the outlook, our outlook for the U.K. is relatively cautious both on margins due to the SVR and I don't see the other issues taking significant deterioration in the credit quality. Also we have a cost of ratio, if I remember well of 2:1 -- going from 2 to 4 it's not a big deal in terms of credit quality. But it is a significant deal in terms of P&L, as you know. So in Brazil, I am optimistic about Brazil outlook going forward. Yes, it's true that we mentioned to you that we changed our liability. The margin of our liabilities you look at the balance sheet you see a significant increase in time deposits, a significant decrease in (inaudible). Yes, and as a result of this management of the liability ways, we are -- I remain confident that we will continue to show good trends on liabilities even taking into account that the ROIC are going down and will continue to go down in Brazil. The margin in Brazil, the main drivers have been this different approach to the deposits and second, the mix has been a significantly changed on the asset side. We are growing faster in payroll based lending kind of consumer related lending and less so in global corporate banking, as a result of this we have a positive trends in spreads in Brazil both in assets and liabilities, assets is due to the mix. Liabilities is due to a reduction in the cost of the deposits higher than the one we are observing in the market. And I remain confident that we will continue deliver relatively well in an environment in which we are gaining significant shifts and that's important, we are gaining new share in acquiring business, we are gaining share in credit cards, we are gaining share in payroll-based lending, so as I said in previous quarters, the improvement of the franchise has been remarkable in the last couple of years and we are in a better position to compete the service with the top players in the market that as you know are phenomenal competitors.

Thanks Rohit, next question please.

Next question from Mr. Francisco Riquel from Alantra.

Two questions from me, continue with Brazil, I wanted to ask about asset quality trends that you are observing, there is this limited progress in the reduction on cost of risk so if you can update on the 4% guidance, which you believe that you can get there and when, would be the first question. And second on loan growth, what's your risk appetite and how do you see volumes going forward in Brazil?

Okay. Volume trends are pretty good, you just saw the numbers. I think the cost of risk remain flat this quarter compared with the previous quarter. As I said, the mix has changed from higher corporate exposure to higher consumer related exposure, although the consumer related exposure is -- tend to be on the secure side, is payrolls based lending and some acquiring business that is -- the collateral is very good. So I continue to say quality trends in Brazil going for the better and with the cost of risk (inaudible) improving. Loan growth, well, we are growing if I remember what 6%, 7%.

7%.

7%. So I do expect going forward, as the economy recovers, to be able to show higher growth. Keep in mind that inflation is falling quite rapidly in Brazil, so the growth, the 7% growth now compares with an inflation that is running at 3% or 4% and when in the past we were comparing a 10% or 12% growth with inflation running at a 9%. So, I do expect a real growth, let's say, the growth of the loan book compared with inflation to go up in the coming quarters although as I said before the percentage may be lower than in the past due to the inflation is lower than it used to be.

Thanks Francisco, next question please.

Next question from Sofie Peterzens from JP Morgan.

So, my first question was again on the Spanish real estate division, how should we think about the net losses that we have seen from this division going forward, when is it reasonable to expect that to disappear from your P&L? And my second question is on Mexico, how should we think about net interest income growth, loan growth and cost of risk in Mexico going forward?

Okay. So, real estate losses going forward, with the losses in real estate now are basically costs, so cost related with maintenance of the buildings that we own and the taxes we pay for this and the fee we pay to the services in our case, Altamira mainly, but control of services (inaudible) that we pay these fees. So, as long as we review -- are able to review the size of the real estate portfolio, those losses will get reviewed because as I said mainly are operational losses, is a mix between taxes, and exposure cost. We are selling with a small capital gains, yes, small at this stage, maybe in the future as a result of the real estate recovery and having higher prices we may get more gains, but all things equal, I am not assuming any scenario for prices because the losses should get reduced along with the size of the portfolio. The second question if I understood you, where was (inaudible) in Mexico and I think (inaudible) Mexico and cost of risk in Mexico, the net interest income went up significantly due to the high rates, as you know, due to the lower elasticity of the process compared with the market rates, the volumes that also grew less with respect to (inaudible) in the loan book, the market became pessimistic after the elections in the States and now the (inaudible). The cost of risk is mainly related with evolution of credit cards, yes. So the credit cards it will grow, we are going to show a higher cost of risk (inaudible) it will turnaround with probably we are going to show lower cost of risk overall is the mix in relation with credit cards for markets here. We are not seeing particular developments in GCB companies or in other segments of the market other than credit cards in which -- is what makes the difference there, I am not pessimistic in relation with this, but is more mix than anything else.

Thanks Sofie. Next question, please.

Carlos Cobo from Societe Generale.

Thank you very much for taking the questions. A quick one on the NPL ratio you explained for Popular. I would like to understand whether the ratio comes down just for FPO methodology change or because you have got off balance sheet exposures and that's why there have been major falls with this business or on methodology? And also if, sorry, I may have missed it, but could you revisit the 4% cost of risk guidance for Brazil, whether you remain confident with that level and when do you anticipate that whether it's going to be by the end of this year or moving into 2018?

(inaudible) Popular, I mentioned in the presentation was mainly due to the numerator, the majority was due to numerator, Popular was including in the denominator some items that we don't, those were mainly related with lending to a financial institution, some things like that, yes. So and this is the majority, some of this also effect the numerator (inaudible) so due to a naturally which went from the criteria of Banco Popular to Santander criteria that is a little bit more conservative, but as I said denominator being a big deal for this particular ratio. Cost of risk in Brazil, the 4% level, well, with the mix -- we are not seeing a particular change in trends in the credit quality in Brazil, what we are seeing is a change in mix as I said before. And that with a relatively low overall in corporate and GCB and this may increase the cost of risk as a result of this, but I don't see a change at this stage in segment by segment in the cost of risk of Brazil. What we are seeing is we are gaining significant share in auto lending, in acquiring business, in payroll based lending that the cost of risk is higher than in GCB and this is what it is. The trend for the cost of risk should go down, yes, from the 4.8%, I don't know if you are going to reach the 4%, this is going to depend more on the mix, but the trend clearly is a downward trend.

Thanks Carlos, next question.

Next question from Adrian Cighi from RBC.

I have 2 questions, one on capital and one on [TBV]. On capital, you previously have provided the IFRS 9 impact at around 15 basis points, is that still the case and can you please remind us the other headwinds on capital on the second half quantifying the assets management and SCUSA headwinds? And on TBV it declined quarter-on-quarter and I understand the FX was the majority of the decline. Can you provide any additional color on this, if there are any other factors?

Okay. On Capital José I don't know you want to elaborate on this?

As you know the impact from IFRS 9, we still think it's going to be in the region of 15% acquisition of Banco Popular may increase that 4 basis points or 5 basis points. So for the group as a whole now after Banco Popular the impact might be in the region of 20 basis points or slightly less. In the second half we have to account for the acquisition of 50%, the buying back of 50% of Santander Asset management that's going to cost around 10 basis points of capital and we're still waiting for the approval to buyback the 10% stake that the founder of the company had on SCUSA, which might cost around 5 basis points to 6 basis point more. So we have approximately 15 basis points to 16 basis points to account for from here till the end of the year.

On the second question net annual book value per share on our currency notes and user basis we should be growing if are reaching a 12% return on tangible equity and with the equity the dividend policy we have, we should be growing now on a constant basis around 5%, 6%, 7% this is the region we should be. Naturally there is an impact of the currencies and ex currency impact we should be there with a currency impact it's much more difficult to predict.

Thanks Adrain. Next question?

Next question from Ignacio Ulargui from Deutsche Bank.

I have one question on the competitive landscape, do you have any data on margin pressure in Brazil in Banco do Brazil data, sorry, in the Central Bank data, how do you see the margins going forwards if you strip out the change in mix moving towards consumer?

Okay, we've not seen a particular pressure on margins in Brazil as we have shown in our numbers it stood at going forward you cannot rule out a potential regulatory impact or potential regulation that may produce some damage to this margins wherein as you know impacting in some segments deemed to be relatively high. So but I will -- I don't see this as a impact of the competitive dynamics right now I see more the raise on the regulatory side of having -- introducing or having pressure to reducing some particular products as we had in the past in credit cards and you never can rule out these 2 happen again, but this is the only concern I have at this point in relation with this.

Thanks, Ignacio, the next one please?

Next question from Carlos Peixoto from BPI.

My questions would basically still on the capital front and I was wondering how much were the risk weighted assets consolidated from Popular because -- have a sense it's -- and why are such RWAs and if this is the case that seems to be materially lower than the RWA 55 or so billion RWAs reported by Banco Popular. I know that the write downs are way down a bit, but that should mean something in the areas of EUR 40 billion of RWAs coming from Popular and if I'm not and if I'm correct Popular was more in the areas of EUR 40 billion in terms of RWAs, but I would like confirm that with you. And the second question will be on the evaluation of NII for Spain and what should we expect on a pro forma basis excluding Popular for the rest of the year in terms of NII?

The risk weighted assets for Popular and prior to the resolution process Popular risk weighted assets were slightly higher than EUR 60 billion. In the resolution procession the risk weighted assets were reduced by approximately EUR 7 billion not the EUR 12 billion because the total adjustments for Santander shown in numbers were partially charged against items that were not part of capital. So in terms of risk weighted assets equivalent, the risk weighted assets that we bought were in the region of EUR 53 billion, which is what is it today. So Popular risk weighted assets that are being brought into our books are EUR 53 billion.

So in NII Carlos I already elaborated on this, but basically I said there were new production is coming basically the spreads are low but stable right now I don't see a big deal on this and I either see some growth, limited growth in the volumes so this gives you a idea of where the net interest income is going go in the coming quarters. Finally, EURIBOR was, number one I'm not expecting to get reviews but as a matter of fact the last 2 or 3 months still the trend has been still down. So those are the 3 components volumes, some growth, margins relatively flat and the EURIBOR that remains the question mark.

Thanks Carlos. Next one please?

Next question from Britta Schmidt from Autonomous Research.

I've got 2 questions please one is on the cost outlook for Brazil and Mexico. I think the (inaudible) Brazilian management has some measure but the guidance of the local business Q1 was both above inflation could you guys comment on that what the outlook is there? And in Mexico the outlook was also 10% to 12% ex the deposit insurance fund cost for this year, do you think that that's still going to be the case or could the costs come in a little bit better there? And then secondly, I would be grateful to have your view on how you're thinking to potential corporate transaction for example or potential buyback of the minorities of SCUSA, under what conditions would be consider such a deal?

Look for both Brazil and Mexico I mean we have to look at the dynamics there. In Brazil we expect to grow costs for this year probably above inflation because well as you know as you signed the agreements with unions for one year they sit on the past inflation and this year the inflation last year was in the region of 7%, 8% and inflation this year as you know get as low as 3%. So this year we're going to grow cost higher than inflation but going forward overall I expect to grow around inflation in Brazil. While in Mexico is different, Mexico we're investing, we're improving or we're investing heavily to improving our operations in Mexico, and I will expect going forward in Mexico the cost is growing around or close is slightly below probably or around double digits. So we're making significantly investments there and we're going to continue to do so in the coming years, probably in the next 1, 2 year. In SCUSA the buyback of the SCUSA okay so we're not -- we don't have any decision on this regard, like what we're going to do once we got the regulatory approval is to buyback the 10% that is honored by the previous -- by the founder of the company.

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

Next question from Mr. Ignacio Cerezo from UBS.

Couple of question on the U.K. One on the margin and I think customers credit is down couple of basis points, but top line for the quarter actual is quite strong so if you can give us the reasons behind that? I'm guessing actually there is probably going to be some key funding provided by the government through schemes, but if you can elaborate on that? And the second one is in terms of [EBITDA] which I think, GBP 150 million, if I'm remember correctly, in the quarter what are your expectations here?

Well, in relation with the management in U.K., in the quarter I don't know if we mentioned it was a one-off, yes. So I don't remember that.

In the merger there is a one-off related to the reversal of the interest associated to foreign tax payments in the region ongoing GBP 30 million, more or less GBP 30 million to GBP 35 million. So, that's in the net interest income, excluding that the 8% growth would have been below 5. So, there is this one-off in the net interest income in the quarter in the U.K.

Aside from that, as I mentioned the key drivers there are the mortgage market (inaudible) deposit costs as you know, there (inaudible) the other component of -- in the margin in the U.K. In relation with the PPI we have some provisions for this. I will not expect a big deal in relation with the PPI, yes, but I know that our capacity to forecast this in the past has been not -- for the industry has been not the best and the industry continued to add some PPI provisions is difficult to assess how the endpoint, the final endpoint that is going to be in 2 years time is going to affect the claims in relation with this. But as of today we think that is not going to be a big deal going forward at all.

In the quarter there is a one-off charge of around GBP 70 million, half of which is PPI, but the other half is related to products that were sold, were interest rate hedges that we have provision for that. So, the PPI charge in the quarter is around GBP 35 million.

I don't know if there are any additional questions on the line.

Next question is from Benjie Creelan-Sandford from Jefferies.

Just 2 quick questions. First of all on the 10% to the stake purchase, I was just wondering if there are any potential to review or re-negotiate the price of that purchase given the length of time that has passed since the deal was agreed? And then the second question, apologies if I missed earlier, but did you give any update on the guidance on the loan loss charge in the U.K. versus the business plan guidance of 20 basis points for 2018?

No, in relation with the change of price of the put there is no potential to change this price. And the second one if I understood you well is the cost of risk going forward in SCUSA. We are not seeing a significant change. I expect to go back to the previous levels in the prime lending ones we sort it out, that was already done some operational issues we had and going forward what I do expect is less volume in the market, at this stage with the low level of unemployment in the States, I don't expect a deterioration of NPL and so as I said before, it may be that the (inaudible) and may increase as a result of the situation of the secondhand car market is what we are seeing now and we have pricing the new loans accordingly with this expectation, but this may affect a little bit the cost of risk.

I think we need to leave here. Thanks very much everyone for joining us and obviously the IR team is at your disposal for any follow up. Thank you.