Banco Santander SA (SAN) 2017 Q3 法說會逐字稿

Good morning, everyone. Q3 earnings presentation as every quarter, the group CEO will address the group about key topics and messages. And after that, the CFO will address on a business by business unit the details of P&L, balance sheet-wise and the main commercial and financial trends as well. Obviously, we will have plenty of time for your live questions and the IR team will be at your disposal in case if there is any follow-up afterwards.

So with no further delay, José Antonio, the stage is yours.

Thank you, Sergio, and good morning to everyone, and welcome to this presentation of the third quarter results. As usual, we have in the presentation 3 parts. The first one I'm going to elaborate about the group figures. Afterwards, José, our CFO, José García Cantera, our CFO, will walk through the main areas of the group, the main subsidiaries. And finally, I will make a very short sum up of the -- how we're progressing in relation with our targets that we confirmed to you or established to you in the recent global strategy update in New York.

Starting with the figures from -- for the 9 month, of the first 9 months of the year, what we have is the profit generation, which progressed in a solid way, I would say. The attributable profit for the group was slightly above EUR 5 billion growing at 10% with an underlying profit of EUR 5.5 billion, EUR 5.6 billion. That after the charges we took in the quarter, we took in this quarter all the restructuring charges that we expect for the whole year. The underlying profit grew 14% in constant euros compared with the same period in 2016.

This allow us -- the quarter was good in capital generation. Organic capital generation was pretty strong, 16 basis points in the quarter. I will elaborate later on, on this. The return on tangible equity profitability keep us growing, we are approaching the 12%. And as a result of this, the EPS is growing at 6%, taking into account the number, the new shares we issued to via Popular, and finally, Italian net asset value per share is progressing as well, relatively well.

At the end, these numbers is the result of what I qualify as a good progress in our commercial transformation. That probably is reflected in the number of clients. You know that our -- at the core of our strategy is to increase the number of loyal customers, at the same time progressing in our digital transformation. Those numbers reflect exactly this. We are progressing well in the number of loyal customers, growing double-digit both in individuals and companies; and the digital customers grew more than 1 million in this quarter. So we are progressing well towards our targets. And this has a translation into the P&L where the NII, the net interest income, is growing at 7%, income growing at 10%. That probably is the best -- the number that reflect the best, the progress in the loyal customers. While in the figures in the balance sheet we are growing well in customer funds, not so much in the loan book. This is also affected by more capital-light or more in the GCB business where the loan book is falling, and this is something that we are looking for to have a lighter capital model, business model in the GCB.

Finally, credit quality, significant progress. This is the number, the number went down 64 basis points this quarter. This reflect the disposal of the real estate related activities in the Spain to Blackstone that we agree 2 months ago. The cost of credit keeps falling and is already in line with those targets as has been in the previous quarters. We don't see any concern in this point -- at this point of time.

Let me to explain the restructuring charges in the quarter -- that were late in the quarter. Some of them probably were already announced at the time of the acquisition of Popular. If you will let me to remember the numbers. We said integration costs in Spain, they are going to be in the region of EUR 1.3 billion. This was a figure after -- before taxes, sorry, and this EUR 300 million is after taxes. So you should expect a charge of EUR 300 million per year 2017, '18 and '19 in relation with the integration in Spain. That is a number after taxes that is exactly the EUR 1.3 billion that we announced to you before taxes. So this is -- we are about to start the integration in Spain [different] quarters and is the reason that we took this charge in this quarter.

In Germany, we are following a probably less well-known by you. We had 2 branch networks, one the traditional one coming from the consumer bank, the other one coming from the retail bank, and we're integrating both. The result is a net reduction of around 100 branches, and we took the charge of EUR 85 million in the quarter. The other equity stakes and intangible assets is a mix of non -- listed stakes -- stakes in nonlisted companies. Each of them is very small but we took this charge in this quarter along with some intangible assets related with some (inaudible) that we used in the quarter.

As a result of these charges, you have on the right side both the third quarter profit, pre-underwriting profit and after restructuring charge and the 3 quarters' profit. In both categories we are growing, I will say, in a consistent way both -- in both case.

Going to the P&L, it's a little bit complex, sorry for that, in this quarter. So you have the first column is the total group; second is Popular, they are due to have Popular stand-alone; the third column is the group without Popular; and the fourth and the fifth is the comparisons with the previous year in constant and current euros without Popular. What you have basically, to sum up what’s going on, strong gross revenue, the more recurring items, in the NII and fees are growing both in constant and current euros. What is different this quarter, this quarter, the euro appreciate against the other currencies like 4% or 5%, in the previous quarters was the opposite. Overall in the year is 1% that what is -- what you see in the difference between the numbers.

So as a result of this consistent growth in NII and fees and basically flat capital gains or results of financial operations, we have the revenues growing at 9% in current euros, operating income in double digit. Loan loss provisions, as I mentioned before, credit quality, this scenario remains quite benign even in some countries, the environment, macro environment, probably José will elaborate later on, on this. It's improving, so this is reflecting in the loan loss provisions that are falling.

And finally, it may surprise you, some increase in the corporate tax. This is due to Brazil, where we have -- results in Brazil are growing at a very nice rate. As a result -- and we have very high corporate tax rate in Brazil as a result of this translate into the group corporate tax rate. Finally, you have the nonrecurrent items that I mentioned to you and I explained to you to go to the bottom line, in which we continue to grow according to our expectations.

Looking at the countries, you see as we highlight here a solid profit growth across the board. The majority of the units are growing double-digit or around double digit. There is 2 exceptions. Poland is due to -- if you look at the numbers in the -- in Poland is due to the increase of the charges in deposit guarantee fund, but if you look at the numbers we are progressing very well in Poland.

And in the U.S.A, the bank is progressing very well. What we have in the quarter is 2 charges, one related with the sale of the (inaudible) business in Puerto Rico, that is a charge of EUR 30 million that we saw back in June. The second one is related with the hurricane in Texas that affected SCUSA in the sense that we charged EUR 50 million for losses on uninsured cars in the cars, which we were fund. So overall, good developments across the board, very good performance across all the units.

Analyzing the P&L, what you have, I referred before, revenues growing very well. The net interest income going up 7%. It's more due to the spread management and to volumes, as you probably will see in the numbers. You have the fee income very much related with building -- with our strategy of building loyalty among our customers. And the other income is relatively flat compared with the previous year. So the progress quarter-on-quarter is and is probably the thing that I like the most, is fairly consistent and we remain the reason that we remain optimistic that we are going to keep building in the line we've being building in the last couple of quarters.

Going into the balance sheet, loan book grew only 1% year-on-year. I mentioned already the -- we have the retail growing at 3%, 4%, 5%, and we have the Global Corporate Banking falling 5% in the loan book. So we have here what basically I told you in New York, basically we have growth in emerging markets. Still a significant deleverage going on in mature markets on top of our policy vis-à-vis.

Here you have mature markets in Spain, U.K. and U.S. loan book is not growing in all markets this quarter. We see an acceleration, particularly in emerging markets in Brazil, Mexico, also in Poland, which is significant acceleration this quarter compared with the previous quarters.

In customer funds, we continue to make significant progress. I'm particularly proud of growing the demand deposits in double-digit and mutual funds are growing at 12%. So demand deposits are 10%, mutual funds growing at 12%, and we are showing significant progress there all across the board.

So sorry, it doesn't work.

Okay, going to the cost side, we -- what we reflect here and the tickets reflects basically, we have positive jobs. We have different policies according to the situation of our subsidies in the market. We have some in subsidiaries we are investing a lot, particularly in Mexico in which we are already in the operational side of the business. We are also making significant investments in Brazil. Argentina is more a question of the inflation that is falling very rapidly and the number probably doesn't reflect what is going on in the ground. And we have at the same time costs falling in real terms in all the mature markets. We accommodate our cost policy to the perceived needs in every market, and it belongs in every market. What is important we are reducing almost 200 basis points the cost/income overall in the group.

So going to the credit quality, I mentioned already that the scenario remains relatively benign. The ratios improved this quarter as a result of the operation that I mentioned already of this [portion of] real estate in Spain. You have the data from Banco Popular at the bottom. NPLs starting in the previous quarter, if I remember well, were in around 20%, fell to 11%. Recovery ratio also fall and now is 47%. At the group level you have the 2 numbers with our -- with Popular. without Popular, there's a consistent downward trend in the NPLs. And with Popular we'll have this operation that I already mentioned in the quarter. I don't have going forward for the future quarters any particular concern in relation with the credit quality. Within this, you have (inaudible) that is quite supportive in terms of credit quality.

Just to update you in the numbers of the real estate exposure in Spain. One, we saw once we agree to sell the exposure of Banco Popular. You have here the gross of the net numbers. The gross number that previous quarter we were in EUR 41.1 billion. We disposed almost EUR 29 billion. Now the gross exposure is EUR 12 billion and the net exposure is EUR 5.9 billion. My -- within that, we are 18 month from now to finish with this and to be no material. So I'm relatively optimistic about getting this number no material at the end of next year.

Capital. I mentioned that the quarter was good. Organic generation was 16 basis points. The markets and other, particularly AFS came a little bit down and the restructuring charge that we made in the quarter costs 6 basis points. So we are progressing very well towards our goal of reaching -- being above 11% in 2018. We are showing a progress of 25 basis points in the 3 quarters of the year and we keep progressing well. On the right side, just to mention that we already build the majority of the packet of the ET1. Also we've been pretty active in issuing TLAC eligible instruments, and as a result of this, you have on one side, a total capital ratio is already 14.4%. And the Tier 1 is north of 12%.

So finally, you have the ratios. The RoRWA, we are progressing well. The return on tangible equity we are approaching underlying basis 12%. EPS keeps growing and tangible net asset value per share, also do we have the example [theoretically] here, related with FX in the quarter. We continue to make good progress.

And now I give the floor to José to elaborate about the business areas, and finally, I will make some remarks at the end.

Thank you. José Antonio, good morning, everyone. Like always, I will start by showing the breakdown between emerging markets; the developed markets, Europe and the Americas in our business, which roughly is 50/50. It remains pretty similar to previous quarters. We have added Popular, but emerging markets are growing a bit faster than developed economies. So roughly we continue to keep diversification very much intact.

Before I go into the details of the major units, just a general comment, you will see a widespread improvement in the number of customers as a quality efficiency and at profitability.

In Brazil, we have another excellent quarter. We are -- our strategy to gain new customers and to deepen the relationships with these customers is yielding very positive results. We are gaining market share in loans and deposits. In the margins, as you know, we are positioned to lower rates in Brazil. So we are benefiting from the drop in interest rates. But we are also managing much better the cost of funding as we substitute wholesale funding deposits by customer deposits. Fee income also growing very well, particularly in our credit card acquiring business. Slight increase in costs, basically associated to 2 factors: One, is an increase in the activity that we've seen in the bank; and second because of higher incentives in the retail network that is doing a great job. Cost of credit is the lowest that we've seen in 6 quarters. So overall, very good quarter in -- but more importantly, the quality of the results is improving. In this quarter, 92% of profits come from customer-related activities.

In the U.K., relatively good economic performance. We saw figures yesterday that continue to show that the U.K. economy is resilient, and we've managed our cost of funding, which explains the improvement in net interest income. Doing very well in fee income, particularly in retail banking and asset management. Costs, fairly flat year-on-year. We are able to invest in digital transformation and pay for the banking reform without increasing our cost base and cost of risk is almost 0.

When we look at year-on-year and quarter-on-quarter changes, we have to take into account of the one-offs that we mentioned were included in the second quarter, the sale of Vocalink and the reversal of taxes that came in the net interest income line in the second quarter.

Santander Consumer Finance. We continue to be leaders in this business in Europe. New production associated with new car sale financing is up 11% in a market that is growing new car sales at approximately 4%. That explains net interest income performance. We're doing a bit better than that because of our new businesses in durables and particularly in direct lending. Operating expenses, very much under control, good asset quality. Provisions are up quarter-on-quarter because you remember there were some reversal of provisions in the second quarter associated with a portfolio sale. So net, a very good underlying performance.

In this quarter, as Jose Antonio mentioned, we have the charge for the integration of our branch networks in Germany.

In Spain, the 1 2 3 account continues to bring in new clients with which we are developing deeper and longer relationships. Retail customers are up 36% year-on-year. Companies are up 12%, and as an example of how we are developing more profound relationship with our customers, credit cards turnover is up 46% year-on-year. When we look at the P&L, very strong performance in fee income, both in retail and in GCB. As the quality improving, despite some one-offs. And in terms of activity, although this is not seen in the numbers, we are growing SMEs year-on-year, for instance, EUR 1.1 billion. The stock of SME lending is up EUR 1.1 billion. This is not seen because still the loans to public sector companies and entities is down and obviously we are improving asset quality. So net loan growth is not picking up. But when we look at retail, when we look at companies, clearly, we're starting to see a much better performance. In terms of quarter-on-quarter comparison, take into account the charges -- the contribution to the Single Resolution Fund in the second quarter.

Looking at Popular, in the quarter we completed, you all know, the capital increase, the EUR 7 billion capital increase. We launched the commercial action for those customers of the bank that participated in the capital increase, and those that bought subordinated debt. We also reached agreement with Blackstone to sell 51% of the real estate assets and credits of Banco Popular.

In terms of the integration, we have started to take the first measures. We have rebranded the Popular branches with an underlying say, Group Santander. And from a business perspective, we have recaptured more than EUR 10 billion of deposits. In terms of loans, it's taking us a bit longer, but you remember, we already expected that when we made the acquisition. So clearly, the bank is, in terms of activity, very much back to normal today.

Looking at the other subsidiaries, Mexico, very good performance at the bottom line, in this case driven by very, very strong performance in the top line. The 1|2|3 strategy in Mexico is called Santander Plus, is bringing in new customers, improving the cost of funding. So the top line in Mexico is doing very, very well. As you know, Mexico is a country where we are investing for the future. So in terms of cost/income, cost evolution, it's -- you have to frame that with that in mind. So overall, very good quality of results, particularly driven, as I said, by the top line.

In Chile, the results are driven more by an improvement in asset quality. We have lower activity. The economy is slowing down, lower inflation. That's affecting our revenues a little bit. But we are managing costs and particularly asset quality extremely well, which explains the year-on-year growth in profits at 12%. In the U.S., we excluded the 2 charges that Jose Antonio mentioned, hurricanes and Island Finance. The bank would have shown positive year-on-year growth in profits.

The bank is doing very well. We are improving the margins quite quickly. Currently, actually, the cost of funding that we have in our bank in the U.S. is similar to the average of our competitors. In Santander Consumer, we are stabilizing the bank, focusing on the loan mix and reduced cost of funding and costs, both at the bank and at Santander Consumer.

In Portugal, we've concluded the integration of Banif, which has been done very, very, very well. We are gaining market share. We are the most profitable bank in Portugal. Because of the integration of Popular -- of Banif, we already have very good asset quality and asset quality indicators, which again explain the very good performance of the bank growing 15% in profits.

In Argentina, we have great expectations for Argentina in the next few years. Loans to deposits, as you know, is at 14% right now. And as the economy stabilizes, we should see a significant recovery in banking activities in the country. In the meantime, we've seen a 17% growth in profits, which is affected by the costs associated with the Citibank integration.

And Poland, who's José Antonio already mentioned, very strong performance all across, affected by the higher taxes and the higher contribution to the deposit guarantee fund. But when we look at net interest income fees, costs, provisions, et cetera, Poland is doing very, very well indeed.

Let me finish with the Corporate Centre, and here, 2 messages. On the one hand, we have a slightly higher cost of hedging, the currency exposures that we have, but obviously, it's a negative charge here, which is compensated by the better performance of our FX exposure in the countries.

And as José Antonio also mentioned, we've followed our plan to issue TLAC compliant instruments in terms of AT1s and tier 2s, and that has increased our financial costs at the Corporate Centre a little bit in the quarter. These 2 items is what explained the increase in losses at the Corporate Centre.

And with this, I'd like to turn it back to José Antonio for his concluding remarks. Thanks very much.

I'm not going to take more than 1 minute to you and we go to the -- straight to the Q&A, yes? More than to remember the numbers that we gave you in the strategy update that we have had only 2 weeks ago.

The overall picture of the bank, I would say, is good and the macro is definitely helping in the emerging markets. And we are heading towards little by little slightly higher rates probably in mature markets, already in the States, probably relatively soon in U.K. And maybe depending on what the ECB does in Europe in the coming future. So this is an environment that we can be -- we can work in a [constant] way and continue to deliver good results in this environment. You have here the figures. We confirm to you the targets. We increase the target for return on tangible equity in the coming years, and this allow me to be relatively optimistic about the outlook of the group for the coming quarters.

And now without any delay, we go straight into Q&A. Thank you.

So please operator, we are going to kick off this Q&A session.

(Operator Instructions) The first question comes from José Abad from Goldman Sachs.

The first question on, and I'm not sure if this relates to Q4 probably (inaudible) region. If you could comment about how the Catalonia-related tensions are actually impacting your business or the way you see your business evolving before year-end, so in Q4 and also into 2018 in the form of potential actually positive inflows or inflows in your asset manager. The second question relates to the U.K. given that we are getting our sourcing to a new rating cycle -- rate hike cycle in the U.K., could you please remind us about your rate sensitivity in the U.K?

Okay. In relation with the question, in relation with the political situation in Spain, particularly in Catalonia, well, probably this is too early to call. So what is for sure is the longer it takes to settle the situation, the higher the impacting in the overall economic activity. And being that the case, probably the end will affect also our activity. It's probably too early to talk about changes in the forecasts. The government produced some figures. I saw 30 basis points lower growth next year. They are all independent analysts that put a higher figure on this, probably it's too early to say. Definitely, it's not good and the longer it takes, probably the worse for the outlook for the business, not only in Catalonia where our exposure, as you know, is relatively low. It's more to Spain what the potential impact in overall Spain that may affect us more. In relation with the rates, José, you want to elaborate in the U.K?

Yes, 100 basis point increase, but this is 100 basis point increase in parallel upwards in the entire interest rate curve would bring in approximately GBP 500 million of higher revenues.

The next question comes from Carlos Cobo from Societe Generale.

One quick question on MREL and something you explained in the strategy day. You said that MREL would be higher requirement in terms of the proportion of risk-weighted assets, but the eligible funding instruments will also be higher. Did you imply that the senior debt will be eligible for MREL? Is this your view or guidance from regulators when you compare MREL with TLAC requirements? And secondly, quickly on Poland, we've seen a couple of big players in the market exploring consolidation. Clearly, you said that the impact on the banking costs were higher. What's your view in Poland from a strategic perspective? Are you interested to consolidate all the competitors or even to explore a disposal in these integrated markets?

Could you elaborate it?

In terms of MREL versus TLAC, the calculation of the requirements is different and also the base on which to calculate requirements is different. However, we don't have the final requirements in MREL. So we are just reacting to what has been mentioned in the markets and the different working papers that are being discussed in Europe. In these papers, we see a higher risk-weighted asset requirement than in TLAC, but also higher MREL liabilities. Part of that higher MREL liabilities is senior debt like you said, but it's also the wording of the debt instruments that are eligible, that also makes the difference. So it's a combination of a type of instrument, but more importantly, is the wording of subordination of those instruments that is different in the 2 MREL and TLAC requirements.

Question in relation with Poland. First, Poland is for us one of the -- our 10 core markets. Being that the case, the general policy applies to Poland in relation with consolidation. So we find opportunities at right price that will provide the right return for our shareholders with the rules that we established that are very well known by you when we look at it. On top of that we said, myself and José, we said that we are pleased how the business is developing (inaudible) through that taxation has been increased year after year in Poland, and we haven't been able to translate these good developments in the bank. The bank is progressing very well, it's very well-advanced in digitalization. It's managing the costs in an extremely effective way. So from the business point of view, we are extremely pleased. It's true that restrictions from the regulatory side and supervisory side have reduced the visibility at the bottom of the P&L. But we remain committed with Poland, and we expect good news going forward coming from Poland.

The next question comes from Alvaro Serrano from Morgan Stanley.

Two questions, one on Brazil and one on Banco Popular. On Brazil, obviously the NII is up very nicely in the quarter. I just wanted to understand if you can give us a bit more color -- obviously, benefited from the reduction of rates. We had another 75 basis points cut. Is -- going to next year, I realize you've guided for double-digit profit growth at the Analysts Day, for next year. But if margins, strictly margin-wise, if you look at the NII, are we going to see at some point, when rates stop going down, the NII actually fall sequentially? Are you going to be able to grow? If you can give us a sense of what kind of growth we could expect in '18 and what are the offsets on loan growth versus potential margin deterioration? And then on Popular, if I look at the Q3 stand-alone, what -- as we model next year, with the disposal of the Blackstone portfolio, how do you think that will affect? If you can give us at least some broad thoughts how do you think that will affect the NII, the lower funding cost because you've got the real estate now deconsolidated. And if there is going to be any significant deconsolidation of costs that will go to the vehicle, the Blackstone vehicles?

Okay. First question Brazil NII, color going forward, what's going on there. So well, what we had in the quarter probably the main change compared with the previous quarter is we saw a higher growth, particularly on the consumer side. It's true that is quite specific from -- probably from Santander because we are gaining significant market share in several key markets, in key segments in Brazil. Particularly we are gaining market share in acquiring business, we are gaining significant market share in payroll-based lending, what they call Consignado. We are also gaining share in auto lending, and that's where the growth comes from. When you look at the other side, the corporate and GCB business, we are now growing -- I mean in the asset side. On the loan book, we are not growing. In fact, I think we're flat or slightly down in the quarter. So what we're seeing is good developments on the more individual-related business. Still, the corporate -- Global Corporate Banking is now growing. You mentioned the reduction in costs. It's true that we have some ALCO portfolio there that with the reduction on rates, we are getting higher NII coming from this. But the main impact comes from the growth -- the volume growth on the lending side, particularly in relation with consumer finance and auto lending and payroll-based lending, as I said before. Going forward, well this year, Brazil is growing -- we grow around 0.5%, 0.7%. Next year, forecasts are getting better and better, probably we may expect some -- how we grow between 2% and 3% in the country. This should allow us to grow faster the loan book and probably with lower rates, I will say the NII coming from the ALM portfolio will be comparable with this year, probably pretty flattish, yes. So because the portfolio stays there, and probably, the game in the future is about -- in Brazil, if my view about the country rise probably again between significant growth in volumes. The leverage is still relatively low, with some margin pressure. As you know, the spreads are relatively high in some segments. Some margin pressure coming from this side. The fee income that as you saw grew relatively well, and probably we won't to be able to be keep the 20%. So the 200% we are showing this year is difficult. In any case but I am relatively optimistic about -- to show significant growth in the fee income going forward due to the volume. The business is growing all across the board. And the franchise, I've been telling you, I don't know how many quarters, the franchise is now in a better position to compete head-to-head with our main competitors Itau and Bradesco. Banco Popular, model for next year, well, what is going to -- the effect of the disposal. Well, since the day we bought Banco Popular, several changes, structural change have happened in the balance sheet. The first one is we increased deposits by EUR 10 billion, going yet EUR 7 billion capital and we're going to dispose EUR 10 billion -- around EUR 10 billion of assets. So that means altogether that we're going to inject to the bank EUR 30 billion cash. So EUR 10 billion high deposits, EUR 7 billion capital and EUR 10 billion from the disposal of the real estate related assets. It is nice to have such an amount, such a big amount of cash, such a big excess liquidity is probably not good news from the NII point of view. But on top of that, and this is a fact that structurally affect the balance sheet, what is important from the real estate deal, you have this effect. On the other side, you have an effect of reducing -- increasing the capital ratio reducing the risk-weighted assets. And you have an effect on costs that we still are -- still work in progress because we are finalizing with our partner in the real estate how many means, meaning people and operational people to manage all the real estate assets is going to leave Popular perimeter, let's say, to go to the new company. Sorry I cannot give you a specific figure for this, but some figure is going to happen there. And more important than this figure that is not going to be there in terms of cost is going to be the other costs, meaning the maintenance costs, the taxes related with all the repossessed assets that were there. And this should be a significant figure.

The next question comes from Sofie Peterzens from JPMorgan.

It's Sofie Peterzens from JPMorgan. Just going back to Brazil. I was wondering, asset quality is improving there and coverage on NPLs pretty strong just under 100%, how should we think about cost of risk going forward? It has now gone down to [450] basis points. Where do you see it going in that kind of mix 12 to 24 months? And then my second question is also around asset quality. There was a paper out by the ECB a few weeks ago that from the beginning of next year, although unsecured NPLs should be fairly provisioned within 2 years and secured NPLs within 7 years. How do you think about this and what impact should we expect if any on Santander? And then if you could just give a quick comment on Mexico, what the outlook is, how do you think about growth and cost of risk going forward?

So first question, cost of credit in Brazil. Well, the -- as I said, the macro outlook is improving. We expect a significant or a substantial reduction in the cost of risk, particularly in the corporate and global corporate banking business in Brazil. On the other side, the mix is shifting from corporate and GCB towards more consumer kind of oriented kind of businesses. So overall, although the environment we expect from the [gate] is benign, probably you can expect a slight reduction. On a like-for-like, you're going to see a reduction. Overall, you're going to see a slight reduction because the mix, if I am right [on this] the consumer is going to continue to be strong. And I don't see that evolution on the corporate side. So probably, we are going to see a slightly reduction, but not as big as the one you may expect due to the better economic condition due to the fact that the mix is going to shift a little bit or is going to continue to shift towards more consumer kind of business. The ECB nonimpact, all this as far as I know, I know you all have something to add, but I think it's no impact to us at all. And finally, growth in Mexico. Well, as you know, the uncertainty, the significant uncertainty, the discussions going on about NAFTA, and this is the main uncertainty. Mexico, also Mexico face elections next year. But more around beyond the macro conditions in the country, I remain optimistic in Mexico. As you know, we are investing significantly in the country. You saw in the numbers, you saw in the costs. You saw -- and we are improving or we are trying to improve in a significant way the quality of the franchise. In the last quarter, as a matter of fact, Mexico grew quite fast. And I expect to continue to show significant growth, although the macro conditions remain more uncertain than they were a couple of quarters ago.

The next question comes from Francisco Riquel from Alantra equities.

Wanted to ask about NII in Spain. If you can comment if you have made any changes in the loan portfolio during the quarter and an update on the ALCO portfolio? When do you expect the loan deleverage to end? And if you can give any guidance on margins in Spain, what shall we expect before interest rates start to rise? Also on the U.K., in NII excluding the one-off in the second quarter has gone up in the third quarter and was expecting a decline there, SPR attrition, et cetera. So you can comment also margin dynamics in the U.K. before interest rates rise there. And sorry, just last technical question, Corporate Centre, almost no tax shield, if there is anything extraordinary here, on the tax rate in the Corporate Centre?

Okay, NII in Spain, I will elaborate on the commercial side, but I will pass to José to elaborate on the ALCO portfolio. Well overall, in Spain, what we have is a pretty stable situation. So after many quarters of margin compression on the front book, we got to a point in which -- well, we are not seeing margin compression in the front book. But we continue to see naturally is the Euribor 1-year, Euribor getting lower and lower and this affect the repricing of the portfolio. But in the new activity, we're not seeing a significant -- we are not seeing a -- more margin compression. Do you want to elaborate on the portfolio?

No, there were no changes in the ALCO portfolio.

Some in Popular.

Yes, not in Santander, not significant changes. We remain with a EUR 26 billion, EUR 27 billion portfolio with an average yield of around 1.7%. We sold some bonds, some Italian bonds that Popular had in its portfolio in the quarter. But other than that, there were not many significant changes that would affect net interest income in the future.

The second question, [Paco] was about NII U.K. Well, you mentioned the key points, as we are, attrition continues to be at the pace we were expecting. The front book was quite constructive in the quarter. It's not that much now. As a result in the changes in the year carve in the U.K. due to the new expectations of increasing rates, what has happened and we haven't repriced the front book. So as you compare the new rates with the new year carve, you have lower spread than -- but this for the new applications that will come to the book eventually in January, February next year. There's a 3-month delay. So -- but we expect probably some increased competition, particularly in the mortgage sector. On the others, we're not seeing that any change. We are progressing relatively well or very well in the commercial side of the business, in SMEs, and we are progressing very well in the ECB. So those businesses are gathering momentum. While as still small, but by the -- every quarter represents more in our P&L. The interest rates we elaborate already in the impacting in this. The no tax in the Corporate Centre, basically, we are being conservative and not taking tax rate on the Corporate Centre.

The next question comes from Ignacio Cerezo from UBS.

A couple of questions on or around Popular if you want. The first one is if you can share with us in terms of the composition of the P&L versus the main announcement you made in June, without probably changing your full year targets actually on the bank, but how has the P&L changed in your mind in terms of, again, target versus the ones you announced back in June? And then around the Blackstone joint venture, if you can share with us actually the road map in terms of how quickly that company is going to start generating profits? Or are you going to going into situation where in the beginning naturally the [PNL] unit actually for you?

The question about -- so probably it's too early to have a -- naturally, we saw a potential business plan for the joint venture we're going to have with Blackstone that we plan to incorporate in January, February next year. But probably it's not in a stage of elaboration that we are in a position to share with you. And we -- as you know, we are not -- we don't want to match this company. But naturally, you can play with the numbers that a private equity normally does in these kind of deals. You are very familiar with this kind of numbers. And apply to us the 49% and you have a proxy that -- about the expectations. I don't have at this stage a number to share with you because it's responsibility of Blackstone to come with a business plan for this company. But naturally, we expect some profits coming from this. This is not going to change. Now our outlook for the next 3 years for Banco Popular or Banco Popular related business if you include the joint venture with Blackstone.

The next question comes from Benjie Creelan-Sandford from Jefferies.

First of all, maybe just go back to Popular again, I mean if we look at the underlying result in the quarter, it is already running quite far ahead of the 2018 target profit level that you gave in June. So just wondering whether you had any further comments around your expectations there or what's the pricing [positively] in the results to date? And then a couple of quick questions around asset quality. If we look at the U.K., the NPL ratio ticked up quarter-on-quarter very slightly. But I was just wondering whether you are seeing any meaningful changes trend there. And also if we look at the consumer division in Continental Europe, there was an increase in loan loss charge this quarter. I mean again, that's still at very low levels, but I was just wondering whether you expect that to continue to tick up going forward or whether that's just a one-off in the quarter?

Popular, we are not changing, as I said before. We are not changing our expectation for Popular and we expect to -- we confirm to you the numbers we gave to you after this decision. NPLs in the U.K. was nothing new, wasn't specific case coming from GCB. That is the main difference in the quarter, nothing has changed in the main portfolios. And in relation with consumer finance as to what you say, the charges in the quarter were higher but this was do that in second quarter, we disposed, and probably we mentioned to you some nonperforming portfolios. And this makes the difference. We are not seeing, as of today, any change. The scenario as I mentioned in the overall for the group and specifically for consumer finance continue to be quite benign.

The next question comes from Ignacio Ulargui from Deutsche Bank.

Just have 2 questions, one on the restructuring charges that we could expect for Popular, whether this you could confirm that you have done already most of them or we should expect any additional charges into fourth quarter? And the second one is, yes, regarding consumer finance unit. What should we expect in terms of costs going forward after this -- the restructuring charges you have done in Germany?

Well, not in Popular. We don't expect any restructuring charge, any further restructuring charge this year. I mentioned to you that we're going to have round number, 300 million net of taxes per year, 2017, 2018 and 2019 is our expectation. If we change we will tell you. In other charges in the fourth quarter, the only thing that every year eventually may come in the fourth quarter is the assessment that we do of all the goodwill that we have in the subsidiaries that we perform this analysis in November. And if some comes, you go to the fourth quarter. It's the only thing that -- but I do not expect any additional restructuring charge in the fourth quarter. That is your question. In Germany, well, there's a reduction in costs here. Let's say the payback we are estimating here is slightly below 2 years. This is to give you an indication on the reduction in cost that we expect there.

The next question comes from Carlos Peixoto from CaixaBank BPI.

I was wondering if you could give us some further indications. To begin with, if you reiterate the impacts on IFRS 9 for the bank, particularly in here would impact on IFRS 9, I'm referring both to the impact it will have on capital or for the capital and also on the provisioning side. And also on the U.S., if you could give us your views on your expectations for the evolution of NII into 2018 and also for cost of risk?

Well first question, related with the run rate of IFRS 9, IFRS 9 original impact, I told you probably in the previous quarter that for the group before Popular was in the region of 15 basis points, with Popular probably we go to 20 basis points is the one-off impact at the beginning of 2018. Afterwards, you asked us -- the impact afterwards, while this naturally as you know IFRS 9, relies on models and depends on the macro outlook that may change and not some volatility quarter-on-quarter. What kind of volatility if this is upward or downward depends on the models mainly in the macro outlook for the different business countries in which we operate. Sorry I cannot be more specific than that. This is basically the rule and we will apply the rule. The other question was about U.S. NII and cost of risk, those are closely related. In NII, I am currently optimistic in the bank, in SBNA. We expect to grow both volumes. We are making significant progress in the repricing in deposits and loans, and I do expect this year -- we've been building capabilities in the corporate side and the commercial, in what they call C&I and ECB. And I expect those capabilities to start to help to grow faster the NII. This is the bank. In relation with SCUSA, things are a little bit more complex as we have a business that is shifting from more sub-prime to more nonprime and prime due to the Chrysler deal. And probably what we are seeing, and probably you saw already, in the last couple of quarters is the yield in the loan book is falling as a result of higher FICOs. And the cost of risk, I expect to fall accordingly with the quality of the new -- the front book that we underwrite. And so probably you're going to see a decrease in the NII, a decrease in the cost of return on net. We expect to be positive.

The next question comes from Mario Ropero from Fidentiis.

And my first question is related to the real estate unit in Spain. José Antonio was mentioning that you expect a material reduction in the stock foreclosed assets by the end of next year. I was wondering if you can give us some color on when you expect this unit to reach breakeven, also considering that you are expecting some profits on the deal with Blackstone. And then my second question is on the coverage, NPL coverage in Spain, which is 58%. Are you considering, given the high coverage, a potential deal to dispose a large chunk of NPLs? Or otherwise, do you think that this coverage is too conservative considering that the average for the industry of around 50%?

Okay, real estate unit, what I mentioned is the EUR 5.9 billion net volume that we have in real estate-related activities I expect at the end of 2018 to be nonmaterial. This means that we expect to dispose this and to continue to manage this in a way that would reduce this to be nonmaterial and to reduce the costs on this side. This is our expectation. Naturally, as you know, we have a little exposure, Some of them are listed companies like [Merlin], some of them are already are in depending professionally managed by third parties, in which we have an estate with Metrovacesa that we continue to manage. And we will see I am fairly optimistic on first reducing the capital that we deploy there. And second, make some capital gains on those stakes going forward. The coverage in Spain, it's okay. I will say we are disposing basically at the marks, taking into account the costs. We are making some gains there. But basically those gains are enough to pay the costs. The -- I remain -- well, naturally, the coverage is the one we think that we should have naturally.

The next question comes from Britta Schmidt from Autonomous Research.

I've got 2 questions, please. Going back to the Spanish balance sheet, conceptually, loan volumes are still declining, the funding side [lending] is stable where Popular deposits have easily increased, which means that you are carrying higher cash balances. How do you intend to manage that in the future? And maybe you can give us an idea of your ECB deposits and the ALCO management outlook. And then secondly, on the NPAs, what impact do you think the current political situation will have on the NPA disposal market, if it will eventually be reflected in lower prices or less interest?

Well loan volume, you mentioned the loan volume now growing and deposits growing as a result, the cash balance increasing. That is the case and this is embedded cost that is in the Corporate Centre. Yes, in the Corporate Centre we are running significant amount of targets, large amounts of cash in our balance sheet. That costs us money at this point of time. In the future, well in the future depends what you call future; future I expect the rates to start to normalize sometime in the future. In the meantime, we need to match properly both assets and liabilities. That means that in some cases, we need to replace downwards some liabilities, particularly wholesale liabilities that we probably have still room to reduce the cost of those liabilities. NPA, nonperforming assets, disposal are up. To what point the effect of the political situation going on in Spain may affect the disposal of those assets, probably to close ideally in this stage is difficult. But I said before, if I didn't say before, I think that the situation is going to settle rather sooner than later, and we're going to go back to normal business and we're going to continue to dispose it. The market is in pretty good shape, the demand is there. And all the news this morning we got the employment survey and the numbers were extremely good in the third quarter, yes. So the underlying economic situation before this crisis was extremely good. Probably this affecting 20, 30 basis points, 40 basis points, but the growth continued to be good and the real estate continue to be in good situation to dispose of assets. And we've seen even this month in the middle of the crisis, some companies going to the market they think with pretty good demand.

The next question comes from Stefan Nedialkov from Citigroup.

Stefan Nedialkov from Citi. A couple of questions were asked already on margins. I just wanted to dig a little bit deeper. Mexico, Brazil, U.S. margins, it looks like the client component is either stable or improving. But in terms of the sort of nonclient component with wholesale funding, also wholesale income from ALCO portfolios, very different trends. So just looking, for example, at Mexico, it looks like the net interest margin increased a lot more compared to what the client margin would have suggested. Could you just give us some color, is that driven by a much better wholesale funding cost, or is it something else? In the U.S. similarly, you did mention that the yields in Santander Consumer should be trending down because of the lower risk in the portfolio. But it does look like the NIM actually fell a lot more compared to what the PNL loan yield sort of suggested. So does that make you think wholesale funding costs for Santander Consumer are going up quite significantly? Again, if you could give us some color on that and what that means for the future. And lastly, in the Brazil client margins table, ALCO gains seem to basically have driven pretty much the entire improvement in the margins. When would ALCO gains taper off? Are we talking once the SELIC basically reaches a constant level of around 7%? Are we talking later than that or sooner, next year, year after, et cetera? So just any color on this 3 components for Mexico, U.S. and Brazil on the NIM side of things would be great.

Starting with Mexico that you mentioned before. In Mexico, the main driver of the NII has been the liability side. So we've been growing for years and still this year in double-digit in demand deposits. And when the rates went up, we are able to extract significant increase in the net in the NIM in those deposits. And also in the fourth quarter last year, we were relatively aggressive in taking time deposits and we profit from those time deposits in this year. I don't see a particular role for the wholesale funding here in Mexico in the trends in the NII. It's more the management of the liability side of the P&L -- of the balance sheet and what produced this outcome. In Brazil, second point, I was -- as I said to you, going for what until now has been probably in the last explanation I didn't say anything about liabilities. But our liabilities, we match, the team in Brazil has been able to match the liabilities in a much more effective way. And the part of the balance sheet where the net interest income is growing the most and net interest margin is in the liability side, and also in Brazil. What happens in the liability side, we are growing the margins at 40%, or 40-something percent, while in the asset side it is much less. Naturally the weight of the asset side is much larger than on the liability side. Going forward, I remain optimistic in keeping relatively higher margins than in the past, than in Brazil than we had in the past, but not to go up again. So this is kind of one-off that becomes recurrent but not in the future. The growth depends -- will depend more -- depends more on the volume of liabilities. That is growing very nicely. You look at saving accounts, they are growing at 11% and time deposits are growing at 26% or something like that, they are growing a strong way. So I remain relatively optimistic about NIM, net interest margin, in Brazil in the liability side to keep what we got. On the asset side, the NIM probably is fair to assume that we are going to have some margin compression in extremely high-margin segments and really rely more on the volumes. So overall, I think that we can keep growing but more in volumes than in spread as we did in the past. In the U.S., you elaborated about SCUSA. You asked -- in this case, the wholesale funding costs that you mentioned play a role naturally. So as a result of the increase in rates in the U.S., the wholesale funding, as you know, this business, the wholesale funding is important, it's not the case in Brazil and Mexico. In this case, it's important. And the higher rates play a role in the reduction of the net interest income probably I missed when I explained before. I was focused more on the yield and not in the margin. The margin -- the funding cost, the wholesale funding cost went up clearly in SCUSA, and this affect the NIM in this business. Going forward, well, at some point, we -- I do not see a situation in which we are not able to pass these increasing rates to the front book. So I remain relatively optimistic that we're going to be able to pass the increasing rates to the front book. But well, it's true that at the beginning, the wholesale funding costs in part are due faster than you are able to reprice the front book.

If I may...

(technical difficulty)

[destroyed] 1 million cars in the areas where we operate in the U.S. So the operating outlook in terms of pricing, it's better than what we have estimated just a few months ago.

Yes, in fact, the losses we are facing when we repossess cars are lower than the ones we were estimating before the hurricane due to this. But second hand car prices went up slightly compared with our expectations and what was embedded in our assumptions.

The next question comes from Rohith Chandra-Rajan from Barclays.

I've got 3 fairly quick ones, hopefully. The first one was just on Brazil. I mean you've talked about the margin and the credit quality quite a lot. I just wanted to check on fees where you indicated that the 20% growth are unlikely to be sustained. But fees were pretty much flat quarter-on-quarter. I just wonder if there's any particular seasonality there that we should think about? So that was the first one. Second one on U.K. cost of risk. Again, you sort of explained the NPL ratio increases relating to a single corporate exposure. I guess you probably have a fairly good line of sight over the next couple of quarters and the U.K. economy looks in reasonable shape. So I was wondering if there's any reason to think that the cost of risk would rise from the low single-digit basis points that you currently still see in the U.K., at least in the next few quarters? And then the final question was just on Blackstone. You deconsolidated the assets, but as for as I understand it, the deal has been agreed but not yet completed. I just wondered if there's any risks there that we should be aware of in terms of the completion of that deal and if the assets are staying off balance sheet?

The final question, I don't see any reason not having the -- not finishing the deal with Blackstone. The first one, you elaborate about the fee income in Brazil. We were only at 20%. Naturally, we're going to keep growing a good rate in fees, not at 20%, in those fees related with the volumes. For example, in mutual funds we are optimistic. In insurance we are optimistic. Not that much I see lower growth in those fees related with, let's say, inflation. Inflation went down from 9% to 2% in Brazil and probably going forward, what makes sense is those fees related with more services, probably they're going to grow less than they have been doing in the last 2 or 3 years. In U.K. cost of risk, for the next couple of quarters, well, we are not seeing -- every year we because the risk is so low, currently in the U.K., normally, we always budget a higher cost of risk because it currently is very low. And -- but do we have reasons to think in a significantly different scenario than the one we have today? Not in our book. Our book, as you know, is mainly mortgages, high-quality mortgages, extremely low NPLs with some consumer exposure but they're limited in the conservative side, particularly in auto loans. And the exposure to companies where probably it's more difficult to forecast, to have a gauge like the one we had this quarter. Probably this is much more difficult to forecast maybe if something happens, maybe comes from this side and the other side, I don't see any new development.

The next question comes from Marta Sánchez Romero, from Bank of America Merrill Lynch.

I got 2 questions. The first one is on the SCUSA. You have almost 3 billion of goodwill. Is there a risk of impairment in Q4? And an impairment would be capital neutral, of course, but would affect -- that the headline payout ratio of 30% to 40%. Does the supervisor look at the spaces? Or do you think it's irrelevant given that the impairment has no impact on capital? The second question is on Santander Consumer Europe. We've seen some negative headlines over the past couple of weeks from auto lenders and producers in Germany. I'm trying to understand the potential risk at Santander Consumer. How big is your leasing portfolio? How big is your portfolio where you assume the residual value of the cars?

Well, SCUSA, 3 billion goodwill, we review us as a before, I think, that we review the goodwill of every subsidiary in the fourth quarter in November. It's something on average we charge at the end of the year as we have done for years. So you mentioned specifically to the SCUSA. I am not in a position to tell you if SCUSA or any other subsidiaries may have a goodwill charge. That may be the case, may not. The payout, well, it's true that we are now in an exercise in which we are generating capital and we deployed this capital in 3 parts, 1/3 each one. 1/3 goes to dividends, 1/3 go to business, 1/3 to build capital for the '16 business. Naturally, I expect to reach, to be above 11% at the end of 2018 and beyond that, we gain flexibility in capital. Flexibility means that we can grow faster the business or we can pay more dividends, but it's too early to call at this stage. And leasing in Europe, we don't have residual values in Europe in the car finance business. We do have in the states in SCUSA where the portfolio of leasing is, I think speaking from memory, $8 billion or something like that. While in Europe, we don't have residual values in the car business.

The last question comes from Andrea Unzueta from Crédit Suisse.

Most of my questions have been answered, but I just wanted you to go over your volume expectations in Spain again. You mentioned that SMEs have grown by EUR 1 billion for Santander stand-alone. But the loan book is still declining. So I was wondering when you expect stabilization. And also if you can reiterate the underlying tax rate in Brazil, please.

Well volumes in Spain, well, let me split the loan book in 2 parts. One part, that is the noninstitutional, non-GCB business. That is already growing, and I'm more optimistic on this, probably we are heading to some growth, [we grew] from the beginning of the year, EUR 1 billion, EUR 1.5 billion in this part of the balance sheet. While in the institutional lending and GCB it is for different reasons. The institutional lending because there's a substitution by the government of our positions, as you know. And this keep on going down. And GCB because we are, I said in the presentation, we want to have a lighter capital business model. Well in this sense, we are not -- we don't have as a target to grow this book. Probably this part of the book continues to be -- to go down at best, flat, probably down, at best flat. And on the other part of the business, I am more optimistic to start to show some growth. The other question was tax rate in Brazil. In Brazil, since we bought Banco Real, we had a large chunk of goodwill that was tax-deductible in Brazil. And this came to an end. I don't know if in March this year or -- well, in March this year, and that's the reason why our tax rate is going up in Brazil. Naturally, this is Brazilian GAAP, and we are looking here at the numbers on their IFRS to see the tax rate, how this evolved. You should look at the Brazilian GAAP numbers in which you see clearly this effect.

We need to leave it here. Thanks, everyone, for joining this call and obviously, the IR team at your disposal for any follow-up. Thank you.

Thank you.