Banco Santander SA (SAN) 2017 Q4 法說會逐字稿

[Morning] everyone, thanks for joining to this 2017 earnings presentation for Grupo Santander. As every Q4, we have the Executive Chairman, who will open the presentation with the key takeaways for the full year, and obviously the Q4. Our CEO, Jose Antonio Alvarez will address the Group and business areas review, and then our Executive Chairman will comment -- and share with you our 2018 key strategic priorities. And obviously, we'll have time as always for Q&A. So without any further delay, Ana?

So good morning, everybody. Welcome to our results presentation for 2017.I will start by reviewing the key, I'd say, metrics that we have achieved this year. It's been a very good year. It's been actually a great year and we have achieved growth in a responsible way. Improving profitability, but also strengthening the balance sheet. You can see that the growth in loyal customers resulted in double-digit income growth. We are again one of the most efficient and profitable banks in the world, with a cost-income ratio that improved to 47%, close to 47%, and an underlying return on tangible equity of close to 12%. And this has allowed us to further improve the strength of our balance sheet, very importantly with NPLs improving, excluding Popular and also reaching a CET1 of 10.84%. If we now go to the P&L in euros. You can see the strong growth in top line, customer revenues growing at 11%, with operating expenses growing at the lower rate than revenues and flat in real terms and loan loss provisions increasing by 4% compared to last year, even though the loan portfolio has increased.And as a result, underlying PBT reaching EUR 13.6 billion, that is a 20% increase over last year. Our attributable PAT for 2017, stood at EUR 6.6 billion, that's a 7% year-on-year growth. This lower growth rate is due to 2 reasons, one is some one-off items that you can see in the slide that Jose Antonio will comment in detail later on, but also to a higher tax rate in 2017. As I said, we have achieved a very good increase in our loyal customers. This is the most important part of our strategy and these customers are growing at 13%, more than 17 million. And at the same time, we are growing our digital customers by 21%. More than 25 million people are now using mobile and digital banking. I will give you a few more details at the end of this presentation. And we're helping more people bank with us in a way that is simple and personal and fair and helping businesses prosper.

The digital and loyal customer growth are having a positive income as we seen in our revenue base, especially on the fee income line, which is growing at 14%. So this gives us an underlying return on tangible equity growth of close to 12%, that's 70 basis points better than the previous year and 3 points above our peer average. One of the highest among European banks. And what's important is that most of our subsidiaries are actually improving the profitability and have higher profitability than peers.You can see that both in Europe where we're 12%, our European subsidiaries 12% return on tangible equity compared to [8% of our] peers and in the Americas, including the U.S. at 17% return on tangible equity, again aligned with our peers.And as I said, the most important thing is that we are improving in almost every single one of these countries this profitability.We continue to be one of the most efficient banks in the world. We have improved our cost income ratio and again, its below -- better than our peers by 17 points more importantly, and we have invested a lot in the last couple of years to improve the customer experience and I'm happy to report that we are now already in 7 of the 10 main countries, which represent 75% of our PBT or profit before tax. We are already Top 3 in customer satisfaction.

We said many times and we maintain that our priority is sustainable growth. And so that we will continue to manage our capital with great discipline. All of our M&A transactions are meeting our announced and strict investment criteria. We improved our return on risk-weighted assets from 1.4% to 1.5% and we've generated organic capital of 53 basis points. As you can see in the slide. We have done quite a few acquisitions. So I want to stretch that if we had not done these acquisitions 19 basis points in the year, we would already be above 11%, but this were good opportunities that are helping our businesses until net-net. And after this effect, the increase is as you can see 29 basis points reaching 10.84% and on track to be above 11% in 2018.

I would like to say a few words about Santander Spain and especially about Popular. Especially in the first few months, we reported this already. We have -- we made an agreement with Blackstone to sell 51% of our real estate asset that was EUR 30 billion nominal value. And very importantly, in November-December, we placed a loyalty bond which had close to 80% acceptance from our customers. This significantly decreases the litigation risk and I want to say that the provisions we have for those potential risks cover -- are well covered. We are well covered. But is even more important that as we manage the integration, we are managing to stabilize the business and even gained market share.The way we will track Popular is by looking at Santander and Popular together. That is the Santander Group in Spain. Between June and December of 2017, we gained 80 basis points of market share in deposits. And for the full year, we increased our revenues by above 1%. Very importantly, the return on tangible equity for Santander Spain has grown from 9% to 10%. And we're well on our way to executing the first stages of the integration. I want to say, we're doing this in a very responsible way both for our people and for our customers.

So in summary, we have met all the targets we set for 2017. Loyal and digital customers are on-track. The cost of credit continues to improve every quarter. We've improved for the past 4 years, it's close to 1.07%. This reflects our selective growth strategy and prudent risk management. We continue to improve efficiency to close to 47% and earnings per share and cash dividend per share are growing as we announced for 2017. We do continue to accumulate capital and we continue to offer one of the best returns among banks in terms of return on tangible equity, reaching 12%.Before I hand over to Jose Antonio to give you more details on the year, I would like to end by sharing with you the progress we're making for our shareholders in more detail. Earnings per share, as you can see here are growing on an underlying basis by 8%. And earnings per share as reported are also growing around 1%. Tangible net per share is stable in the year. If we had excluded foreign exchange effects, this would have been plus 14%, so even after adverse foreign exchange, were actually stable tangible net and cash dividend per share growing at 11%.We continue to track these metrics as our key shareholder metrics.

And I would like to finish by discussing where we are on our people and our communities. These are very important stakeholders for us, making sure we make progress on how our teams are working and the engagement is absolutely the most important part of our strategy. As you know, we are working on establishing a common culture across the group, encouraging our people to live by the 8 corporate behaviors. Starting in 2017, [40%] of our performance management is going [to call my] contribution, it's rewarding already our employees for how we behave. About 100,000 of our teams have been evaluated according to these new methodology. Across all markets, we have taken very important initiatives to embed the culture and the behaviors and making sure that we are doing things in a way that is more simple, and personal and fair. These are ambitious and high standards. I'm happy to report that this year, 81% of our employees agree that we behave in a way that is simple, personal and fair. That's 9 points more than last year.And finally, as I said already, we are one of the Top 3 banks to work for, in 5 countries; Argentina, Spain, Mexico, Brazil and Portugal. Two countries have achieved this for the first time Brazil, Portugal. It means that we have reached our 2018 target of having 5 countries in the Top 3.

We know that our growth, our profitability and strength, as I have explained, we are making progress on this. And this is very important, so we can continue to support our community and fulfill our purpose, which is to help people and businesses prosper.This of course means that we need to do our day-to-day business well, making loans and offering mortgages but it means more than that. It means investing in many, many social programs across the bank to support communities. We have helped 1.9 million people this year. We're also helping businesses prosper supporting entrepreneurs, their engines of growth and job creation. We are launching new microcredit initiatives across Latin America. The pioneering program was in Brazil, and we're launching other initiatives in other countries.

And finally, all of these aims are underpinned by our work with universities and higher education. We have invested EUR 129 million in 2017 and launched Santander X, which is a platform to connect entrepreneurs across our country. So this is why, when we say we're responsible bank, we are actually saying something we are doing already, which is investing and tackling some of the biggest social challenges that will help people and businesses prosper. And we know we can only do that by continuing to grow in a profitable way and strengthening our bank.

So that is the introduction I wanted to make. I would now leave you with Jose Antonio to make a more detailed review of the group and the business areas, and I will come back for the closing. Thank you.

Thank you Ana, and good morning to everyone. Thank you for attending this yearly results presentation. As Ana said, I'm going to start where she stops basically because I think what best reflect the 2017 is this area of profitable growth with a strong balance sheet that you have on the slide. The numbers there reflect exactly this area. We are progressing well on recurring revenues. We are gaining customers, the loyalty programs that we launched in different countries, the strategies are working well. And this is relating to volumes on one side, and to revenues in the other side. The profitability, the numbers speak by themselves. We are progressing well in a recurring way, in a consistent way that is as important as the growth is, the consistency of this growth.

Finally the strength. We give attention, strong attention to our -- to risk of the balance sheet. The risk is -- the quality of the balance sheet is improving, at the same time, we are increasing our capital risk in line with what we've been communicating to you, the capacity to generate a capital on an organic basis quarter-after-quarter.

[Not going to talk] much about the P&L in itself. Ana did already. I'm going to focus you in the -- on the right side of the slide, that shows that the growth we are showing in the bottom line of the P&L is consistent. We come from -- at the beginning of 2016 being generating EUR 1.6 billion a quarter. We are now without Popular EUR 1.9 billion with Popular around EUR 2 billion a quarter. This show -- and the trend is fairly consistent because it comes from the more recurrent lines of the P&L, NII, plus fee income that -- as we show before.

Let me do -- play in a little bit, the extraordinary in the quarter. In the quarter, we had 2 positives, 1 coming from the disposal of Allfunds and were 25% in Allfunds. We got EUR 297 million coming from these disposal, capital gain, and we got also from the tax reform, a positive in the sales -- a positive impact in the P&L of EUR 73 million in the quarter. On the negative side, extraordinary negatives. The main one is a goodwill impairment. We impair goodwill [in SCUSA] for about [EUR 500 million] in the quarter. This is the main impact in the quarter. So then, we have a net charge of EUR 382 million in the quarter, that in the year is EUR 897 million compared with EUR 417 million in 2016. You have all the

[integration] information in the Appendix in more detail.

Going to the business. This chart probably reflects what's going on in the business of Santander across different regions. Fairly consistent growth, non-recurring items of the P&L. You see the net interest income grow in a consistent base, fee income also growing and this is what reflects -- exactly what we are doing and why do we think that our commercial transformation is working in a proper way, and that the loyal -- the bet we made in the loyalty plus digital strategies is you seen not only number of customers is translating straight into revenue and results.

On the cost side, while we continue to be the most efficient bank among our peers. You see, we are growing revenues more than cost in almost all the markets, and I'm going to remark especially that while after a strong effort in the U.S. last couple of years, our cost base in the U.S. is already growing in line with inflation or less than inflation that is -- that reflects properly the processing which we are in the U.S. And also remark Mexico, probably we comment also in the previous quarter. Mexico has a significant increase in cost because we are making significant investments in the quarter -- [during] the quarter, the last couple of quarters and we continue to do so, because well we need to improve over operational capabilities in the [country].

Quality, as it can be reflected as cost of credit is around 1%, which is below what we were telling you in the Investor Day and well reflect a benign credit scenario but is well spread across of what you have on the right side, all the [year] within which we are improving our cost of risk. NPLs, follow the same trend, as you can expect and you have the figures with and without Popular on this [term]. Finally, real estate. Well -- we are well ahead of our competitors in this regard and I will say 2018 will be probably last year in which we report this because we are achieving the aim of the process to normalize the situation and finishing the numbers now is EUR 5.7 billion in our balance sheet. You have the split on the right side, and this is coming to an end after the real estate -- the severe real estate crisis in Spain.

On capital, the quarter was very good. On organic basis, we generate 27 basis points in the quarter. This is not as you know, we guide you always for 10 basis points per quarter, with some volatility in this case came in the positive side just because the risk weighted assets in the quarter grew very little, and this was enough to offset the inorganic [businesses] we did in the quarter, that are already known by you, basically the acquisition of 50% of the asset management and the acquisition of 10% of SCUSA that came in the quarter along with the disposal of Allfunds, net-net is 15 basis points negative in the quarter. So overall, a very good quarter on capital generation.

Finally, we've been pretty active with TLAC eligible instruments and as I mentioned, we are already in line with MREL requirements. So we made, each ones you see in the screen and we are already compliance with required regulations. Going by geographies, you have the usual pie which we split by countries, no big change there. But you look at the right side, overall very good growth in almost all geographies. Plenty of them in double-digit, but overall very good growth with some ones having [a stellar performance] in the year.Starting with Brazil. Brazil, we had a very good year, we've been communicating to you that our franchise -- the quality of the franchise has been improving the last -- probably the last 2 or 3 years. We've been consistently telling you that our franchise was improving. You see the numbers, you see the numbers in the number of customers, digital customers, you see the volumes, we are gaining share in some of the most profitable segments in the market like consumer loans, credit cards, acquiring business. So in this segments, we're gaining share and we are consistently translating this into the figures of revenues, with good control of cost translating to a significant growth in the profits and consistent.For 2018, we remain optimistic, the macro is helping, is better, definitely than it was in 2017 and 2016 and '15 that the country was in recession. And we can expect some volatility probably in the markets coming out. There is since elections in the country, probably we can expect some margin pressure, as a result of [low risk]. But maybe some regulatory impacts here and there. But overall, we expect significant growth in volumes and better cost of credit that well [it has to] think that we can continue to deliver in that significant -- and to grow our profits in a significant way in the country.

The U.K. overall good year. So you look at [the year]. We grow NII and fee income in -- for that market that is very much a market and very competitive market in a consistent way. So we were able to translate this into the bottom line, but one-off in the quarter -- in the fourth quarter that increased in a significant way the provisions for bad loans. The quarter was a bit more complex, with NII suffering a bit for due to the SVR. SVR in mortgages and mortgage market being fairly competitive. Overall for 2018, we continue to see an environment with relatively flattish (inaudible) volumes, while margin compression probably is going to stay as it was -- depends for us in the trends on the mortgage market and we are optimistic about the fee income where we see a stronger growth than we have had in the coming years.We are confident that we're going to meet our commitments in the U.K.

Consumer finance, well, another good year, I would say, consistently gaining market share. The car market grew 3%, our production grew 11%, so we are gaining share. The last quarter normally seasonally weak on revenues and it happens already this quarter, but the trends well are very consistent and we expect to continue to deliver in line with what we're delivering with a return on risk-weighted assets in north of 2% and good return on tangible equity in the region of 16%. So for 2018, well, we expect some continuity in this business. The credit scenario continue to be very benign for this business in Europe.

Spain, well, our commercial strategy is working. You look at the numbers of loyal customers, digital customers, we are growing [plus]. We are translating these into revenues. Some of --

you see the NII been a bit weaker. In the quarter, this is due more to ALCO and GCB activity more than the retail. But overall the revenues in the year, customer revenues grew 2.4%. That is in this environment is a good outcome.We are growing well, both in deposits, mutual funds, 10% -- mutual funds 18% and we are in record territory many items, very important items consumer loans, credit cards payments acquiring. We are in record territory and gaining share on those fields. So going forward, we -- probably we are going to see in 2018, or we expect a slight growth in loans. Net interest income probably stabilizing and improving around the year and we continue to grow well in fee income and improving credit quality. That is already quite good.

In Popular, the word that probably reflect the best. Popular is stabilization of the bank. The third quarter was -- the first quarter we took over. The fourth quarter the bank was stabilized, volumes are basically flat and loans of the bank is stabilized and the 1st, in January the bank is starting to show the capacity -- more capacity to grow. Well, so I would say that the best -- what I can say to you is that we're comfortable with the [additives] we established at the time of the acquisition and this is probably -- tells you about our -- would be about the future of the bank. In the last quarter, Ana already mentioned the loyalty bond that we [sold] that was accepted by almost 80% of the customers. That is a good outcome and required a significant effort in the quarter.

So going to the other countries and Mexico, the year was very good. The return on tangible equity is almost 20%. Execution is difficult in Mexico as you -- also the P&L, you see the revenue growing very well in double-digit, also cost are growing in double digit, and the [execution for duration] is quite demanding. But well, and as I said, we are growing well 24% more loyal customers, [62%] more digital customers. And what we can expect going forward is growing revenues by single-digit -- double-digit, also because we will be in this region. So we can continue to deliver a significant growth in Mexico, as we expect to do in Chile where the macro situation is [scurrying] -- a little for the better and we expect to continue to profit from this situation.

In Portugal, well, the results speak by themselves. Excellent cost management, cost went down 7%, NPLs went down 300 basis points, so very good developments in Portugal. This year, we're going to do the Popular integration that we expect to finish before the year-end.

In the U.S., overall a very good year. Yes, so on one side, we pass the CCAR. We were able to pay the [first] dividend and when you look at the units, the different units. There are 3 units. So basically a few units that we have in the country. As we [aid] the bank improving NII, not yet growing volumes, but we expect to grow volumes in 2018. BCI, the private banking -- offshore private banking performing very well. And SCUSA, well changing the risk profile for higher risk profile to lower risk profile that you see in the P&L, lower NII and lower provisions and significant improvement on the operational side. So I think that in 2018, we should be able to start to show a growing and consistent results quarter-after-quarter in the U.S. So -- and this is my view for the U.S.

In Argentina, well, with Citibank integration, the unit is performing well in a country that is heading for a more stable financial situation that allow us to develop the business.And in Poland, we were growing double-digit from volumes, double-digit revenues. We stood at -- we had some one-offs like increased contribution to the [deposit to finance], some others that probably affect these results, thus reflect exactly what is going on [and the like].

Finally, Corporate Centre, only 2 areas here. We have here higher -- a more negative NII due to the TLAC issues that comes to the corporates -- [the exacts] come to the Corporate Centre and the cost of hedging the FX that also increase. So those are the main -- the 2 main impacts here on top of the non-recurring items that you have and I already explained before. Now I hand over to Ana that is going to elaborate our -- the conclusions of the presentation and the priorities.

Thank you, Jose Antonio. I'd like to end this presentation reminding you about strategic priorities and what it is we're doing to prepare to continue to deliver profitable growth in the years ahead. So I'd like to remind also where we are -- our mission and what we want to be as a bank. What is it that Santander aims to do differently than others. And so we said already and reiterate here, our purpose is to help people and businesses prosper. We want to do things in a way that is simple and personal and fair for our people, our customers, our shareholders and our communities. And we aim to be the best open digital financial services platform ensuring the lasting loyalty of all our stakeholders.We have a great opportunity to connect with millions of customers and to increase the loyalty of these customers.

We see our strength and our strategy based on 3 things. First is our scale and I want to stress in-market scale. Second is how the scale joins to the diversification of markets. And these are only 10 markets where we get 97% of our profit in Europe and the Americas, which allow us to deliver predictable growth. And last but not least, the size allows us also to work ever more closely together across countries to innovate together and build a better bank for the future across the geographies, building global platforms.

Just a few words about this in-market scale and this is really important. You can see that in 5 out of our 10 core geographies, we already leader in that market. #1, if we take for example loans. In 3 countries that together have more people, the United States of America, Brazil, Mexico and Poland, we're #3 and getting closer to #2 as you've seen in our presentation in Brazil and Mexico.

In the U.K. we're #5, even though we rank second or third in some areas like mortgages. And in the U.S., we have 2 businesses. One is Santander Consumer, which is one of the top consumer finance companies and a regional bank where we are now making progress. Very importantly, we are growing, not just our loyal customers and digital customers. I want to remind you that digital customers will grow in 3 years from 15 million to 30 million, which is our target for '18. We're at 25 million this year and we've grown our total number of customers to 133 million. And again, through our global platforms, I will cover that in a few minutes. We can grow also in -- to some new markets. So the diversification of our business, and this is important, it's not just across geographies in Europe and the Americas, it's also by businesses. And this balanced mix between mature and emerging markets and a diversified client mix is what allows us to deliver predictable results through the cycle. You can see this high growth in emerging markets, but very importantly, we're growing also customer revenues and total customers, and in some areas like France, even growing in the mature markets. Again, the target is to grow profitably in all of these.

As a result, the predictability of our earnings, these numbers show over the last 20 years how we have performed against our peers in terms of quarterly earnings per share volatility. We are at 9%, that is significantly better than the second best, and we've grown our earnings by 4x, which is the third best among our peers. Again, this lower volatility in earnings means that we are much more resilient through the cycle and can deliver, and therefore need less capital. This is one of the reasons than our peers.

This predictability allows us to do 3 things. First, at the same time, which is to lend more to our customers, we've grown our loans by 11% in 2017. And our revenues by 11%, but we've also grown our loans -- we saw before, we are also growing our cash dividend per share 11% versus last year and we are accumulating capital 10.84%, which is above EUR 3 billion more in our CET1.

I'd like to spend, close a few minutes on how it is that we are working on the third part of our model, of our strength, which is innovation across the group. We are focusing on 4 areas, where we were working together to build global platforms in a responsible way. We are promoting this, working together through our corporate culture, and our behaviors, and basically, not exclusively, but mostly looking at these 4 areas, distributed ledger technology, how artificial intelligence can help us deliver better for our customers, new payment systems, and new platforms and services based on APIs, which will enable us -- already are enabling us to share our infrastructure across the group, but also with third-parties. And we are working, as I said, more and more in this line.

So in terms of payments, you can see here, Santander Pay. This is maybe the name maybe not, but this is basically an all-in-one App that will allow our retail customers to have a digital wallet, have a personal finance manager, same day international payments, and person-to-person payments. The infrastructure behind these new payment will be blockchain- based. We've been testing this since 2016 and expect to be -- it's not the first -- one of the first international bank to offer our retail customers in 4 countries, Spain, Brazil, U.K. and Poland same day or next day international or cross-border payments with full transparency on fees and FX upfront. This is very important because our customers as of today and actually, I'd say, all banking customers are getting 2 to 4 days value on these payments. It is a large market, and building this infrastructure across countries is going to allow us again to have a leading role in this new way of allowing international payment.

Second is data. We are working together across the group in an open source platform, with a team of over 100 data centers, learning from over 5 billion transactions, and obtaining very encouraging results on a large number of customers, working on 10 million customers. We are getting results in terms of lower acquisition costs, increasing loyalty by 10% to 30%, and much lower churn. We estimate, and this is an estimate that this kind of insights into customers will allow us to better service and service with more -- more services our customers and more customers and deliver around EUR 500 million additional revenues over the next few years. We're working on other areas together across the group. Also with new types of branches, which we think will be much more attractive. So we want to combine both the digital customer insights with a different type of attention in our branches throughout -- all our countries.

Another area where we're working together as a group, building a digital global platform is -- this is not a bank account, this is a payment for the unbanked. It has been launched in Brazil for several years. We're launching in several countries over the next year. Where basically, we're allowing our customers to receive transfers from third-parties and top-ups from current accounts [and might] from other people, transfers, but also, and this is very important that they can actually make withdrawals in our ATM and both Internet, web payments and physical. This is growing at a very good rate, [where the] 1 million customers, we've added 0.5 million customers over the last 12 months and increased revenues by more 2.4x.

Two other platforms we have developed over the last 12 months. We are growing very significantly. One is OpenBank. It's a 100% digital. it's not just a fully digital bank, but we are using it as a blueprint for what could be the future IT infrastructure for the Santander Group. It is one of the few digital banks that has a full stack of products. It has already 1 million customers, has grown 26% in loyal customers, and has grown deposits, and has lowered the cost of deposits in a significant way.

I'd like to say that OpenBank already is larger than [ApenBank] [Sterling] #26 and [Cedar] altogether. You can see that the other platform we're working on. This is effectively a global cash management system. Santander was not in that business. We're now building the infrastructure based on blockchain, which will be much faster and cheaper. But very importantly, we're adding many customers every month. We now have 154 multinationals on this service. We are very encouraged because this is saving not just time, but also being much more -- with a single entry point, being much more efficient for big company. And we believe, this is an area of great potential for us in the regions where we are active but we also collaborating with banks in other regions.

And so we are growing our digital customer base. It's very important. We now have 41% of our active customers at digital, and these are 2x more profitable customers. We have a number of services and the aim we have it to be where our customers are, just some examples of what we're doing through the Santander app in Spain, you can speak directly or set up a meeting with your banker from your app. So you can choose to deal with us only on digital, if you want to talk to somebody, you have your personal manager there in Brazil, in Mexico and soon in other countries. You can also talk to us through the Facebook Chatbox, with a real-time assistant. So of course, there are many things we're doing. Again, we believe very much in the combination of digital with the branches, and with the new model of branches that we are now working on.

So as a summary of all these things and examples, we are doing -- I would like to add that two years ago, we had no teams working in agile in the group. Today, we have 24% of our project being managed in what we call now agile, with thousands of people across the bank. What it means is that the volume of digital transactions and I wanted to show you '15, '16, because we really started investing and changing, transforming the bank 2 years ago. You could see that the growth was pretty let's say average, plus 7%. In just 1 year, we've gone from 4 million digital transactions per month to 10 million digital transactions, exponential growth, and this is coming from our larger countries.

Spain is at the lead with 4x more digital transactions over the last 12 months. Brazil, 3x more, U.K. 2.5x more. This is very important because today 39% of all digital transactions -- 39% of our total transactions at digital, and as you can see in the slide, 31% of our sales are digital. In some countries like the U.K., we actually, for example, opening 38% of all our current accounts online. And of course this is -- this digital activity is allowing us to reduce the cost per transaction. We get asked many times, where do you see the positive effects of what you're doing in digital. On the cost side, it's is very clear. On the customer side, as I said before, we've gone from 15 million to 25 million, 10 million more digital customers in 2 years, and our target is to reach 30 million by next year.

So I'd like to end just with a key takeaways of our results and what's 2017 has been for Banco Santander. I'd say again, it's been -- again a very strong year with a 20% growth of underlying PBT. And as Jose Antonio explained, in basically, every single country, thanks to a responsible growth. We are again, one of the most efficient and profitable banks in the world, improving efficiency and return on tangible equity. We have further improved the strength of our balance sheet, reaching 10.84% CET 1, and our scale and diversification allow us to once again deliver predictable growth. And as I just covered, working together across the group, innovating to favor our customers in an efficient way, building global platforms will open up many new opportunities for us.

And I would like to end by saying that we reiterate and are committed to delivering on all the key metrics that we announced 3 years ago and basically are confident we will deliver on all our target for 2018. So thank you very much, and Jose Antonio [certainly] we are now able to answer your questions.

Jose Antonio, we have time now for live Q&A. So please operator, we can proceed with the first question. Thank you.

(Operator Instructions) The first question comes from Francisco Riquel from Alantra Equities.

I wanted to focus on capital, the organic capital generation has priced positively and very strong 27 basis points, which is half of what you have generated in the full year. So -- and I would like to see if you can elaborate a bit more on these capital generation beyond the retained earnings. What is driving this capital generation, any optimization in interest weightings that including the tax reform in the U.S. here et cetera whatever. And also on the minus 8 bps of headwind in capital [if you can] give a bit more details. And then, looking also into -- on the regulatory headwinds, if you can update on the potential impacts, we should expect from IFRS 9, before -- ETA guidelines or any other regulatory changes that you may expect. Thank you.

So in organic capital, we include the profits, minus the dividends for the year, and of course the growth in our loans. So those are the 3 main components of capital. I'm not aware that we have any big one-offs, but Jose Antonio maybe you can answer that. I don't think, we have that in the quarter, but it's been a strong quarter. So those are the 3. In other, the main thing there is FX, and valuation of our loan portfolios -- bond portfolios. So those are the components on capital. On impact of IFRS 9, [BIS 4] and EBA, we expect to be less impacted than others, but it's obviously -- in IFRS 9, we have the numbers. They're not very large. On BIS 4 and EBA, there is still some issues where we might be impacted, for example, operational risk, which we have to be defined by the local regulator. In terms of the floors, we're not impacted at all, I understand marginally, actually nothing at all I believe. So really the only uncertainty is -- how the local supervisors actually will interpret the op risk changes. But all-in-all, we expect to be much less affected than most peers in Europe.

Basically is what is [CRA]. In the quarter, the minus 8% is AFS basically, as Ana said. IFRS 9, we communicated to you 15 basis points 1 year ago, before Popular, with Popular is 20 basis points. And the others -- [the theme is difficult to shape, so I believe]. And the others doesn't affect us, the floor and all these things doesn't affect us.

The next question comes from Jose Abad from Goldman Sachs.

Two questions from my side. The first question on capital. If you keep delivering at the run rate of 10 bps a quarter on average, you should be getting to your target of capital by year-end by Q4, Q1 next year, more or less. Once you get there, should we expect any meaningful changes in the way you allocate capital? And related to these where would minorities buybacks rank in your list of priorities. Now my second question is on FX hedging. We are entering to a couple of years, which are going to be quite eventful in Mexico, in Brazil and in the U.K. So could you give us some color please on your FX hedging strategy for the coming 2 years. And if you could link that to the previous question, actually, whether once you meet your capital target later in the year, you plan any changes to your hedging policy, given that actually taking capital is expensive and probably inefficient Thank you.

Well, we said we want to be above 11% by the end of next year. We do have IFRS 9, and some basil effects which could slow down. But we will, and we reiterating above 11% next year. So that is important. On FX, minorities, it's not on our list right now. As we said, we are comfortable with what we have. We are not planning to list any more companies. But we also don't have plans to delist anyone at this point. On FX, as you saw there, basically the big effect this year was on balance sheet because it was year-end euro, which was minus

[14%], and that's why our tangible net was flat, in spite of that minus 14%. Next year, we do expect some effect on our P&L, but we still are confident that with the profit growth, we'll deliver, as I said on all our targets for 2018. Once we get to the capital levels we want, we obviously can do 2 things. We can continue profitable growth if those returns are where we want them to be and that's something we have done both organic and some smaller inorganic, or we can increase our dividend. So those are the 2 options, and we believe Santander offers really very attractive profitable growth, and if this continues to be the case, we hope to be able to deliver that. But we were also decided to increase some of the dividend. I think, we need to wait and see.

The next question comes from Alvaro Serrano, from Morgan Stanley.

Two questions. First one is on scratching the numbers. We expect sort of big push from banking union this year. How do you think the competitive landscape is going to evolve at a pan-European level as a result, and now that you have more -- would you -- will probably have more flexibility on capital, you've proven to be very disciplined on M&A. But given those competitive changes that might happened, what role do you want to play and what role do you don't want to play, basically, how do you see few years down the line, the pan-European competitive landscape. And second on NII, in particular, in developed markets, you've seen some weakness in particularly Spain and the U.K. From the presentations, I've understood that you expect -- NII both in Spain and the U.K. in 2018. In Spain, the NII is down 8.5%, the last 2 quarters accumulated. How are you going to manage flat 2018? Are you seeing something we're not seeing and similarly in the U.K., NII was down 3% quarter-on-quarter, and I think you've said flat. Can you elaborate a bit more on that? Thank you.

Banking union, we at the moment, my belief -- our belief is that until we don't have the euro being totally transferable from north to south and among countries in Europe, and common deposits insurance, I see it's difficult, but it happens, at least with cross-border acquisition. So I would wait until that happens, but obviously, and we very keen and we said that many times, we do not want to go to new markets. So we would always look at in-market transactions, where we already have a presence. So at the moment, our strategy, as I said would be organic, focus on organic growth. There could be expansion, as I mentioned in my presentation, briefly -- if you notice, but OpenBank could decide to go to other European countries. It's absolutely ready, it's a bank that has 1 million customers, offers all products. We are now changing the core banking at OpenBank. So it would be able to go to other countries pretty fast, not just in Europe, by the way. So that is more likely to be the strategy. As of now, it's more efficient, we have a strong brand, and that is where we're going to invest our time and effort for the moment. As Jose Antonio and I mentioned, first let me say that both Spain and the U.K. delivered 10% return on tangible equity this year at the time of record low rates. And for us in Spain, the key measure is the yield curve on our mortgages which is getting a bit steeper. Its been especially hard this year. And our focus is not just on net interest income, but also on fees. And on that sense customer revenues excluding ALCO are up 2.5%.

Having said that, loan volume are beginning to grow for the first time, net lending to retail and commercial, not institutions in Spain was up [EUR 2 billion]. So that together with the better prospects for the slope of the yield curve means that we can improve that in Spain for next year. U.K. is also challenging in terms of net interest margin. We still have high SVR balances. We expect that to continue to go down next year. But again, we are managing the total revenues is going up 4%, 5% if I remember correctly in 2017 and the guidance -- what guidance are we giving for the U.K., slightly lower margins I believe, right.

Some margin compression still [forecast].

Some margin comparison for next year. But I want to stress the great job the U.K. is doing and very importantly managing with positive job. So growing revenues more than cost and what's very important is that we're working more and more together, so you cannot just see Santander U.K. or Spain. We're developing new products together. I mentioned some of the ones we're working on, and this is going to help us manage our cost and continue to invest in a very significant way in digital and improving customer experience.So again, if we can deliver these numbers with a very low rate, I am encouraged we can -- that together with the loyalty strategy, digital investment together deliver good results.

The next question comes from Carlos Peixoto from CaixaBank BPI.

The first one would be on the U.K. mainly on provisions. I was wondering if you could give us some color on how do you see -- how do you expect cost of risk to evolve next year? And also one other provisions in the U.K. whether do you expect the charges we've seen this year, which were around for [EUR 100 million], whether you see this is something that should come down over the next couple of years or not? And then at the same time, I was wondering if you could also shed some light on your views on the evolution of NII in U.S.A. next year? Thank you.

U.K., cost of credit was abnormally low. The previous year at 2 basis points. This year 2017 has been 8 basis points, still very low. We do anticipate some increase for next year of the cost of credit. However, there were significant one-offs for 1 customer in Q4 and there were conduct provisions. I expect should come down for next year.So we don't expect more one-offs. Conduct has been for all banks and including us, I think also this year higher than average and so that should be coming down. But the cost of credit again from 2 basis points to 8 basis points and it should go up slightly. I don't believe we are giving any specific number on that.In terms of NII in the U.S., I believe our bank -- Santander Bank has now almost reached or is at the average of the regional banks, net interest income for the year, if I remember correctly, is at 2.9% -- 2.8%, 2.9%, that's significantly better than previous years. So we are managing margins well. Again as the U.S. recovers, a positive yield curve and slightly higher rates will help us. So we are very encouraged by the progress, not just on the regulatory front, but also on the business side. And again, I don't think, we're giving guidance on that for the U.S., but we continue to be, let's say, confident that is going to continue to get better.

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

I had a few, please. The first one, I guess higher level. You're clearly doing quite a lots on the digital front and metrics like digital customers being 2x as profitable and transactions being 22% cheaper are clearly quite attractive. Can you talk a little bit about how much of that benefit is currently dropping through to the bottom line? And how much is being offset by I guess investment spend as you continue to build out that capability and how long that dynamic might last for? So that was the first one. Second area I wanted to explore with Brazil revenues. So there I guess, fee rate was very strong at the beginning of the year, it's still very strong 11% year-on-year in the fourth quarter, but it has been fading. Just wonder, if you could expand on the comments around that being driven by customer loyalty and activity and how much of that growth is sustainable? And I guess, with loan growth now picking up to 3% to 4% per quarter in the second half of the year, what's driving that and to what degree is that sustainable? And then the final quick area was just on provision coverage, which is down a little bit. The group level particularly driven by some I guess bigger reductions in Mexico and Brazil. Just wondering, what's making you comfortable with those lower levels of coverage in those 2 countries, please. Thank you.

So I try to give some color on the digital strategy, because we always get the question, where is that -- where are we seeing those benefits in the P&L? Where are we seeing those benefits in customers? And we would not have the numbers, we have -- if we were not investing in digital. So we're growing transactions in a very significant way -- actual overall transactions. And it's not in the slide, but I gave the number 39% of our total transactions are now digital, that's close to 40%. And the big rise in how customers are interacting with us gives us better insights into what customers want and need, but it's also lowering our cost. And of course, you're seeing that comes through in better customer experience, you've seen that we are now at 7 out of 10 countries in Top 3, you're seeing that in the cost income keeping it at [EUR 47 million] and coming down in Spain around 50% in the U.K., it would not be possible without the digital activities. So we're doing much more business with cost either coming down or flattish and you can see all of Europe is actually in real terms coming down in cost.That is already there in the numbers. This is what I was trying to explain with the examples, so you can visualize this. There is one of the most encouraging things in digital is that there are opportunities for us to become a relevant player in things like global cash management. We do not have to build a traditional infrastructure. That is why we're very, very confident that the blockchain is going to allow us to build that cross-border payment infrastructure at a fraction of the cost of what some of the global banks have done.And this is something which is real. We're working on it. As I said, in retail payments, cross-border payments, we expect to go live in the next couple of months. I mean, it's difficult to put many more numbers on that. We are working I believe on the right track and you're seeing that as I said comes through in the numbers.Brazil revenues, I guess, we are aiming to -- obviously margins will come down, rates have come down in Brazil from 14% to 7% in 1 year. So there will be tightening of margins. You're seeing some of that already, but we are aiming and I think the guidance is for double-digit loan growth for next year. And maybe Jose Antonio, you want to add something on the provision coverage or more on Brazil?

In Brazil, in the presentation that we have positive volumes. As Ana said, double-digit growth in volumes, some margin compression due to lower rates. Fee income is working well because we expect to continue to gather momentum and gaining market share in several process, I mentioned. Well overall, a good environment, a good outlook for Brazil.In coverage, you mentioned coverage going down in several countries. Well (inaudible) provide. It depends very much on the level of collateral we have. And so in Santander is where we have a collateral -- recoveries tend to be lower in some others tend to be higher. And depends also quarter-on-quarter on the volume of write-downs.So when you write-off more in a given quarter, gives the coverage as because you write-off those loans cover at the 100%. And as a result, mathematically the average goes down, but nothing has changed.In this regard, I will think the main message is that we are very well provided all across the board, yes.

The next question comes from Andrea Unzueta from Credit Suisse.

I'm going to go back to NII if you don't mind. In Spain, you mentioned that the weakness is related to the ALCO portfolio. Can you give us the details of the ALCO portfolio in Spain, both for Santander stand-alone and together with Popular? And how should we expect that to evolve going forward? And then in Brazil, you also mentioned margin pressures because of rates which we all knew, but I was wondering how the ALM contribution to NII is expected to perform going forward. Thanks.

We mentioned NII ALCO portfolio once we acquired Banco Popular, we took some decisions in relation with the size of the ALCO portfolio, as a result of this we reduced the ALCO portfolio and that's the reason why the ALCO portfolio was producing less revenues in the fourth quarter. We disclose the ALCO portfolio stating the combined [figure of] EUR 35 billion with a relatively short duration. The duration is pretty short.Well, you also mentioned Brazil, margin compression you have ALCO portfolio. The balance sheet of Brazil, the position is not like in our markets, so the natural position of the balance sheet is to be long, not to be short due to the fact that as you know, as you very well know, the reserve requirements on the deposit side are extremely high that in fact creates a situation that is different from other markets. And the role of the ALCO portfolio in Brazil is for example that is minor compared with the size of the NII in Brazil. So I will not -- we have some ALCO portfolio in Brazil that -- who is going to produce more revenues in 2018 than in 2017, but this is not going to be the main explanation of the terms of NII, given the percentage, the size of the ALCO portfolio. The NII coming from the ALCO portfolio compared with the total NII of the bank.

The next question comes from Sofie Peterzens from JP Morgan.

Yes. Hi, yes, it's Sofie Peterzens from JP Morgan. I was wondering if you could just give an update on cost of risk in Brazil. We saw it going down from 455 basis points to 436 basis points and NPL also falling in Brazil. How should we think about the cost of risk going forward in Brazil? Second of all, could you remind us again of your sensitivity to higher rates across different jurisdictions? And lastly, if you could just comment a bit how you see competition from the large tech companies, given that you mentioned that it's much cheaper for you to roll out some products and becoming more Internet-based and digital. But how do you see the competition from the big tech companies such as Apple and Google? Thank you.

I would take the last question and maybe Jone Antonio wants to take the rates and the Brazil. I understand Brazil, cost of risk for next year is expected to normalize around [400 basis]?

Yes, it's 400 and [some payment] is going to go down like 20 basis points or something like that but there is a change in mix.

So, let me just comment on the large tech companies. We are collaborating with some of them, for example, Apple with, we've become the leader in mobile payments in Spain. We offered Apple Pay 1 year ahead of all the other competitors. These are our customers, so these are customers that are using Apple Pay, there's I think 350,000 using Apple Pay in Spain. So in the U.K., we're collaborating with others, so we are going to collaborate and we believe we're very well placed as long as we can maintain as we are, our place with the customers. So be where the customer wants us to be in many different devices. Again, as we build APIs and we can connect with third-parties. This is going to be increasingly easy for us to do. So we are very confident that that together with the large in-market brand and market shares we have like Brazil, Mexico, Spain and all the other countries, will allow us to compete very effectively with these large companies. They're definitely going to take a part of the business, but we also are going to be able as I said before to take business away from others and global cash management is one of the examples that I gave you, but there are others. There's a 160 million unbanked people in Brazil -- in Latin America. We're doing microcredits, we are doing financial inclusion programs, we've launched in Mexico recently. We have a very ambitious program with universities where we also banking the students and getting into the relationship early on in a customer's life. So we're working on many fronts to stay relevant, to make sure we have growth not just today, but 10 years down the road, and we are becoming increasingly digital. Again some of these examples I gave you, these are what we call the speedboat, the global platforms working across the group, and basically allowing us to invest together in new areas. So we are quite encouraged by the signs and the numbers that we've seen this year and some of them we have shared in my presentation. You want to take [the others]?

Well, you asked about sensitivity to higher rates in different countries and across the board, yes. So it's positive, we are -- we have a positive NII reaction in much markets, Spain, U.K., U.S., Poland, Portugal and actually Mexico. So the numbers, well it's a couple of hundred millions in -- 100 basis points in Spain, less so in U.K. and is smaller in U.S. and Poland, and Portugal because the size of the balance sheet. But while these are the position, we have a negative position to higher rates in consumer finance in Brazil, although in consumer finance we tend to be quite conservative and tend to hedge because it's relatively short run loan book 2 years on average. And we tend to -- is relatively hedged. The other question was the cost of risk in Brazil. Well, we have it with us. So when you look at the cost of risk in Brazil, it's important to take into account the change in the mix because the yield outlook [bold] although you see the cost of risk falling from close to 5% to 4.40%. At the same time, you have a significant change of mix.We grew, if I remember well, the loan book by 7%, but this is a combination of growing the consumer-related activities let's say credit cards, consumer lending and all these things in double-digit, and decreasing the ECB and the corporate book. As a result, the cost of risk went down [80] basis points, but with a significant change in mix. That's important. We expect next year to review the cost of risk, but at the same time, we still expect the mix keep changing the way that the mix did in 2017.

The next question comes from Ignacio Ulargui from Deutsche Bank.

Just have 2 questions. One, if you could elaborate on the outlook for fees in Spain and then fourth quarter has been at 10% Q-on-Q growth, whether you think this is sustainable.

[Alternatively] you have offset in 2017, more than offset actually than decline in NII with fees. So what should we expect in 2018, and how do you see the cost of risk, [credit level]

you have 107 basis points this year down 11 basis points. How do you see that evolving going forward at group level, should we see similar decline in 2018? Thanks.

Yes. So I want to stress that the increase in fees is not by increasing fees, but by increasing the number of loyal customers and you've seen this quite close relationship between those 2 numbers. And so, yes, we expect to continue to increase fees at double-digit next year based on the growth in both digital and loyal customers, and we think that is sustainable. And especially in the bigger countries, where we still have quite an upside between total customers loyal and digital customers. So in terms of revenues, we're not -- if we take net interest income and fees, we expect growth for next year, I'd say low single digit, but without being more precise. On terms of the cost of risk for next year, it's been very low, so I think, we probably stabilizing. I mean, we haven't really given much guidance, but we expect a strong economy. You've seen a good decrease in the cost of risk in Spain, 37 basis points to 33 basis points this year, that's quite low. But given the strength of the economy and our balance sheet, we think that probably we should be about the same, but again, I want to be cautious on these numbers because there well don't want to give precise numbers on these, but they will be good.

The next question comes from Ignacio Cerezo from UBS.

Couple of questions actually, one is in the U.K., net interest income, more specifically on the lending yield, if you can give us some information on from book -- back book on mortgages. And related to these, what is the impact you're expecting from the change in the SVR rates you announced recently. And the second thing is on the U.S., obviously performance has improved a little bit in the bank. But I think, an investor update back in September, there was a possibility of a more precise or big restructuring plan in the union actually. So just asking how far are we from that possibility? Thank you.

So I don't know if I used these words, but the U.S. in 2017 has really turned the corner. It has not just turned the corner on the regulatory and supervisory side but also on the business side. And so, we are confident, we had a good business in the U.S. We are confident we can add value in the U.S. It's an attractive market for banks. Net interest margin in a regional bank like Santander Bank is 2.9%. As you know, that is significantly more than -- I know it's a different business. But again, we can run banks efficiently with much lower margins than that, and there's a lot of things we can do together within Santander Bank and Mexico for example, and also other of our markets. So we believe the U.S. is going to do better next year. We're not going to be very precise on numbers, but we expect to continue the recovery in profits and business and do better. In terms of guidance on the U.K., front and back book, there will continue to be SVR attrition, and I'm not sure what the guidance is on going forward. But U.K. is probably the most challenging market for us next year. We said that we expect growth in every single 1 of our 10 core geographies. In the U.K., our expectation is aligned with Bank of England, around, I think [1.4%, 1.5%] GDP growth. So we will continue to work on efficiency together with other areas of the group. We'll continue to invest in digital. So we can improve customer experience and do more on that side. But there will be volumes and margins will continue to be under some pressure in the U.K.

The next question comes from Mario Ropero from Fidentiis.

The first question is regarding impairments in consumer finance, Europe. Jose Antonio said that the environment is still very benign for 2018. So I was wondering is whether or if based on the latest production that you're making, whether you think that the cost of risk is sustainable in 2018 at the current low levels or whether we should already expect some minor increases there? And then, the other question is on the 123 account in Spain. What are the triggers that would make you -- think the strategy with this product or lower the conditions on this product. Is it reaching the targets in terms of number of customers? Is it interest rates going up, please if you can share your views that will be helpful. Thank you.

Let me take the 123 question. I mean, the strategy is not going to change. I mean, it's very important that 123 is a strategy. It's a strategy of having and developing long-term relationships of adding value to customers of transparency, of really trying to treat old customers the same, not just new customers, which was -- so this is super important. Its worked for us in the U.K. We've grown again in the U.K. after 5 years, GBP 2.5 billion in current accounts to GBP 67 billion, remember we're coming from GBP 10 billion in 2012, if I remember correctly. So we're up to more than 5 million 123 customers. Now this doesn't mean that the conditions are always going to be the same. I mean, a strategy is a strategy. But obviously depending on markets, we could change conditions. So we have done that in the case of the U.K. and in the case of Spain also. So we've lowered the threshold from

[15 to 10], but what's important is that 123 customers have 5x lower churn, have much better cost of credit, the risk is much better. They have 50% more credit cards, and this is the reason fees are increasing because we have a deeper relationship. So we are very, very satisfied, confident, that this is the right strategy, it's working for us. And again, it doesn't mean that the conditions might not sometimes over time change, and so that is the key point there. On Santander Consumer...

Well the year, we have probably a normally low cost of credit because we dispose some portfolios. I think was in Poland. And this net offset partially the early NII provisions we are making. But this is not going to be a big number aside from that. What we see is stable cost of risk aside from this factor, we sold some portfolios.

Thank you. We have time for just one last question, please.

We have time for just 1 last question, please.

The last question comes from Stefan Nedialkov from Citi.

Just to continue on the question of fees and the loyal customers. The 10% CAGR targets that you have for 2015 and through '18. Could you please just tell us how much of that is organic versus inorganic? And when you set the target back in the days, couple of years ago, did you mean it to be completely organic growth on the retail fees side of things. I'm just asking this question because of the acquisitions you have made over the past couple of years? And secondly, when you go country-by-country, the main countries at least like Mexico, U.K., Spain, Brazil, where would you say from an operational point of view, you have the most to do in terms of building out to the loyal customer franchise. In terms of spend, say, are you done with the loyal customer-related spend in Mexico. Is that coming to an end or tapering off at some point? Similarly for Brazil. Just to give us some color from an operational point of view and I guess from a financials point of view where we are in these countries? Thank you.

So when we set the strategy back in '15, we were -- we had sold some of the core businesses in the previous years, businesses that are related really to our core customer strategy. So it's -- we were, we didn't specify would be organic or non-organic. We obviously accelerating and were above 10% in the last year. But I'd say that what's important is we're going to meet the target. Some of that is inorganic, I believe maybe a couple of points will be due to Santander Asset Management buyback. But it was not '17, it's only in '18, right? We closed now. So all the numbers and you've seen a very, very significant acceleration. I mean, what matters is that there is really a correlation between deeper relationships on fees, even though actually in many cases, the absolute fee level is coming down in many countries. I've always been very confident about organic loyalty strategy because precisely the 4 countries you mentioned is where we have the most upside. So where we do have less -- let's say, less to do with countries like Portugal or Argentina or Chile, where we are already #1, where we actually need to grow the number of customers. These are the smaller countries, where we have been a leader for longer. So where we needed to better job, and we delivering that in Mexico, Brazil, U.K. and Spain. Again, these are countries that have 400 million people, actually more than 400 million people together, and with actually we have less proportion of loyal customers, the total customers. So I'm not going to say a number, but definitely more than 5 years, we can grow organically in each one of these large countries. Where we investing most of these 3 at the moment to improve our operations -- I'm not sure that was the question, is Mexico. We've announced a very significant investment in Mexico, where we had been underinvesting for a number of years, and we're really trying to and we've increased our ROE there, return on tangible equity to 20%, close to 20% this year already. At the same time, we're investing for growth. But clearly, those are the 4 countries where we have more upside in terms of the loyalty strategy, and the digital strategy, digital customer strategy.

(inaudible). Obviously, the IR team is at your disposal for any follow-up. So thanks very much for joining this call. Thank you.