Banco Santander S.A. (NYSE:SAN)
Q1 2013 Earnings Call
April 25, 2013 4:00 am ET
Claudio Melandri – General Manager
Alfredo Sáenz Abad – Chief Executive Officer
Unidentified Company Representative
We are going to start this results presentation. First, the highlights for the quarter, for this first quarter 2013. Although with some signs of improvement, the economic context for our business has continued to be complex, there has been continued downturn in the euro zone’s GDP at the beginning of the year with strong deleveraging continuing in the peripheral countries, slightly better trends in the U.S. and the UK due to their (inaudible) programs although growth is still very moderate.
In Latin America, the year began with a slowdown in Mexico, and a weak recovery in Brazil, which is expected to improve throughout the year and invest some low growth environment, interest rates have remained at record lows in many countries after the cuts in recent quarters.
So in this context, our priority continues to be strengthened our balance sheet to triple approach based on liquidity, capital ratios, and risk quality, posted by our ability to generate results. The main developments in the quarter were first to change in the trend in profit, which has begun to return to normal after the large provisions made in the last few quarters.
This is a process that has been impacted by our strategy strengthening the balance sheet and by this very low interest rate environment. Second, we have maintained our strategy to attract deposits, thus improving our liquidity position, which can be seen in a short reduction of our commercial gap, and a great improvement in management ratios. Third, strong organic capital generation in the quarter has enabled us to maintain a comfortable position, our [biz] to core capital ratio was 10.67% at the end of March, and the [face in] estimated for the end of the year and the Basel III was close to 12%.
Fourth, stabilization of NPLs in the first quarter in most of the group. And fifthly, we’re moving forward with our integration processes in Spain and Poland and on schedule as we will review later. Let’s now look at each of these points in more detail.
The group posted attributable profit in the first quarter of €1.2 billion, clearly higher than that of the previous quarters last year. Specifically, in the fourth quarter, attributable profit was only €423 million or €1.2 billion before non-recurring provisions.
There are three points to note in this trend. First, there has been some pressure on revenues, mostly net interest income because of the macroeconomic context, slow growth, deleveraging and low interest rates, together with the temporary impact of the group strategy in the last quarters of improving our liquidity position by attracting new deposits, a conservative policy and wholesale issuances on maintaining a large quick de-buffer.
Second, stable costs for the Group overall in the last few quarters with different performance by units, a very impact of the integration processes underway with restructuring costs and synergies will be felt in the coming quarter, and thirdly at short fall in total provisions after the enormous effort made in 2012 for real estate. As we have said before, liquidity has been one of the Group’s priorities in the last quarters as shown by the improvement, by €30 billion of our commercial GAAP that is the different between loans and deposits in 2012, mostly from Spain. In the first quarter of 2013, we have again narrowed the gap by around €20 billion for the Group, again mostly through short term deposits in Spain together with an improvement in our commercial GAAP in the U.K.
The strategy to attract customer funds has not just had a positive impact on the Group’s funding, but has also enabled us to improve our market share in market such as Spain, where market share has increased by over 250 basis points in the last 15 months. The funding cost for this strategy is higher in the short-term than the funding via the ECB, but it puts us in an ideal position to take advantage of the economic recovery.
This trend is also seen in the produced need for recourse to wholesale market, which has meant a sharp drop in issuances in Q1. We should mention particularly Spain and the UK with much lower needs and SCF, which has continued with its strategy of reducing recourse to the parent bank.
As a result of our policy to manage our balance sheet and our market share, liquidity ratios have continued to improve along the deposit ratios and our medium and long-term funding ratios are in very comfortable positions, plus we have a high liquidity reserve that is liquid assets, which would be doing resource of last resort and situations of maximum stress a €217 billion, a figure, which is well above 100% of the Group’s short, medium and long-term issues.
This comfortable liquidity position has enabled us on the one hand to repay €31 billion in LTROs borrowed by Santander and Banesto, which we were basically keeping as liquidity insurance, and on the other hand, to have an LCR a 145%, which is well above the 100% required by the new regulations for the end of 2019.
Third point in the previous slide was capital. We ended March with our BIS II core capital ratio or other Basel 2.5 ratio at 10.67%, up generating 34 basis points in capital in the quarter through profit generation, our scrip dividend and the management of risk-weighted assets and other minor aspects such as the polish merger or trends in exchange rates, and how does this position, extrapolate for the future.
First, I should say that since we announced our BIS III fully loaded position, there have been changes in the standards that have clearly improved our position.
First of all, DTAs now have a 10 year calendar instead of the five initially envisaged. Secondly, the impact of the IAS 19 is also going to have a calendar starting 2015, so we do not have to fully deduct the impact today. With these changes, our numbers are as follows.
At the end of 2013, our Basel III phase in ratio was 11.95 or will be 11.95 after subtracting 40 basis points. If we bring forward to 2013 as total impact envisaged till 2019, the fully loaded scenario our ratio would be 9.2%. So, in brief have a comfortable starting point for Basel III without phase in at almost 12% plus, we envisaged a natural evolution of our business, which will benefit us and which is not reflected in our current fully loaded calculations, the current free capital generation and a low growth environment for risk-weighted assets.
We should also keep in mind that this estimate does not include the likely reduction intangibles in our DTA absorption in ten years nor less in a group which generates positive results continuously prolonger than timeframe significantly dilutes it’s impact. In the Q&A, our CFO will be able to give you additional details of these impacts.
Fourth point, credit quality, the first thing I should point out is that the group has high coverage ratio after the large provisions made in Spain in 2012 and the stability of almost all the units in the quarter. As for our MPL ratio up 22 basis points in the quarter up to 4.76% and we have seen, in general, stabilization of NPL entries with constant parameter and exchange rates versus the fourth quarter, which means below the quarterly average for the last two years. Additionally, there has been a moderate impact through the integration of the credit bank, which has higher ratios than our group standards.
Looking at the major units, we can see a clear stabilization of NPLs in most of them, which account for 70% of our portfolio increases; we’re concentrated in Spain and Portugal where trends have remained at the same level as in the previous quarters. The real estate unit in run off and Poland due to incorporation of the credit bank as I’ve said.
The rest and then the net consumer’s finance ratio has remained in the last year at around 4%, which is an excellent ratio given its business. And severance fell, again, in the first quarter to record lows. Brazil’s trends continues to improve with stabilizing ratio and good figures and early NPLs below 90 days whose impact should be felt in the coming quarters.
Santander Banesto Banefe merger, in the previous presentation, we announced one of our main priorities in the year was going to be the merger and then the integration of Santander Banesto and Banefe. The plan is underway and on schedule. The AGMs of Santander and Banesto approved the merger in March.
By May, the legal merger should be completed. And in the following quarters, we will rebrand the branches, continue integrating operations and begin the plan to optimize branches and stuff. In the first quarter, we’ve already carried out some steps in order to facilitate the implication including the launch and the deployment of our new commercial structure and central services. The labour agreement we’ve reached with trade unions to optimize our headcount in the least dramatic way possible, we’ve identified branch overlaps and we’re launching various actions to give our customers the best service and maximum amount of information during the changeover.
As part of the integration process, our greatest efforts will take place during the first 12 months after the completion of the legal merger in May. As for branches, we plan to close 250 this year and 450 in 2014. This calendar of branch closures together with our plans to optimize central structures means that most of the headcount reductions will take place during these first 12 months.
As a result, most of the $600 million before tax restructuring costs will be charged to the year 2013 results. As for cost synergies, when we announced the merger, we said that there would be a total of $420 million up to the third year after the merger that is May 2016, currently in with the plans I just described, we believe we can bring forward the state to the end of 2015.
Synergies will be less in 2013, because the legal merger is not until May, which limits the impact of the measures taken to the second-half of the year, and so will not be fully reflected until the beginning of 2014.
I can say, pretty much the same about the BZ WBK and credit bank merger in Poland. Here, the legal merger took effect in January. The new operating structure has been deployed. We have measures underway to increase commercial productivity at KB with a very good results in our first measurements and we’re getting ready to compete the rebranding over the next few quarters, as well as migration of customers.
with that, we see costs synergies by the third year, 314 million zlotys more than what we announced at the beginning of 2012, when we announced the transaction. also in March, we have carried out a successful IPO, which has enabled us to restructure the Bank’s shareholder base and meet the commitment reached with the regulator to increase the free flow to a minimum of 30%. after this IPO, Banco Santander has retained a 70% stake.
In summary, in two years, Banco Santander has built a subsidiary in Poland with almost 900 branches, which is the third largest bank by market share in deposits and loans. Moreover, the price at which the shares were placed puts the value of 100% of BZ WBK at €5.8 billion. That’s in two years, an increase of 18%, considering the initial investments plus dividends.
Moving on to the Group results now. On the screen you can see as usual, the accounting variation and the trend subtracting exchange rate and parameter effects. Going into more detail in the next slides, but let me just emphasize the main conclusions based on this first slide, fist year-on-year trends exchange rates have had a significant impact on gross income and profit trends coupled with some primitive impacts the take away between 5 and 7 percentage points throughout the income statement which increased 13 of the profit level. Gross income was slightly lower to 28% down also which was not offset by costs and provisions.
However, the comparison is more favorable with Q4 2012 with stable revenues and costs and foreign provisions which have increased with the net profit by 21% quarter-on-quarter. Starting with revenues and deducting the impact of exchange rate and primitive changes, the trend is the net result of various changes. First, net interest income was under pressure partly due to the economy but partly also to the groups on strategy, low interest rates put pressure on revenues in lending mainly in Brazil where spreads have fallen after a cut in the select rate 300 basis points in the last 15 months and in Spain because of mortgage re-pricing.
The Groups strategy strengthening liquidity and higher cost of wholesale issues have impacted the figures for Spain in corporate centre, plus, our improved risk profile has impacted our loan portfolios average yield which however will mean a lower cost of credit in the future. Fee income showed a more favorable trend although sill weak in some markets because of regulatory changes. Finally, trading grains grew basically due to some seasonal revenues from wholesale banking, and also the management of our Alco portfolios in view of the decline in interest rates.
As for costs, they remained very stable in the last quarters for the growth as a whole, although have performed differently in different records. As for comparison with Q4, we can see a fall in Latin America, particularly in Brazil and Mexico, and increase in Poland due to the perimeter effect with Kredyt Bank, plus the first restructuring costs, and in Spain, the U.K. and the corporate centers costs have been going back to normal after the release in Q4 of the cost-related to variable remunerations that one will pay.
Finally – and speaking about provisions, in this slide we can see a slower growth in provisions in Q1 after the efforts made by the group in 2012 through loan loss provisions and also provisions for real estate exposure. Loan loss provisions in the last quarter, we see a fall of $224 million due to the trends in Spain, Santander Consumer Finance, the U.K. and the U.S. As for the rest Latin Americas that remained practically stable and Poland’s increase because of the perimeter effect.
Additionally, you should remember that the huge provisioning effort we made in Spain to cover our real estate risk with over €6 billion will not be repeated this year, given the high coverage level we’ve already achieved.
Let me now hand it over to Jose Antonio Alvarez who will review the results of the different business units.
Jose Antonio Alvarez
Good morning. As our CEO has said, I will reviewing the Group’s business areas. I will begin as usual with this slide, which shows one of the Group’s great strength, which is the geographic diversification of profit generation, which has changed since Q4. 55% of our profit comes from emerging markets. Brazil contributes 26%, Mexico 12%, and Poland 4%. Spain, the UK and the U.S., the matured markets contribute 7% to each or 11%, 12% and Santander Consumer Finance in Europe overall brings in 9%.
Starting with Spain, and I’d like to remind you that due to the merger, we’ve included a new geography, which has been the Spain unit, best unit as we announced a months ago, includes the retail businesses of Santander what we use the call the Santander Network, Banesto, Banif plus global businesses in Spain, wholesale banking, asset management, insurance and cards, as well as the ALCO portfolio and Spain to this unit based on stable low cost or no cost deposits in the unit.
Remember that this does not include the specialized Santander Consumer Finance unit in Spain, which is in the Santander Consumer Finance Europe unit nor been discontinued state business, which I will explain separately later. In volumes, I would say that we have maintained the same excellent pace of deposit, recruitment within moderate drop on loans, which we will review in the next slide.
Gross income reflects the impact on net interest income of low interest rates and the re-pricing of our mortgage portfolio and the rise in the cost of deposits we’ve seen in the second half of 2012. In 2013, both trends will gradually reverse. We will finish mortgage re-pricing towards the end of Q3, beginning of Q4. The re-pricing was begun in September, October last year and the cost of deposits has been falling significantly so far in the year. The more expensive deposits, term deposits are down from about 3% to the levels well below 2%, closer to 1.5% in our latest contracts.
As for Q4 2012, comparison shows higher gross income because of stable fee income on the higher trading gains, wholesale clients, seasonal effect that we always see in Q1, which combined with lower loan loss provision to increase profit to €216 million which is 7% higher than in Q1 2012 and 79% higher than in Q4 2012.
Looking at volumes, as our CEO has told you, we’ve continued to see strong growth in deposits with over €8 billion achieved in the quarter added to the €22 billion raised in 2012. We’ve continued to gain market share. We estimate more than 50 basis points in Q1 and over 250 basis points in the last 15 months.
Lending shows the continued deleveraging of households and companies, the slow demand from individual borrowers, which reflected both in consumer lending and mortgages. We’ve continued to lend to businesses, however, with a relatively stable level and we are making every effort to increase lending to the business sector and we’ve in fact launched a plan, the [10,000] plan in order to bring in new loans mostly with SME, who have received around half the volume envisaged for this plan (inaudible) to credit quality.
Here we’re looking at NPL without including the discontinued real estate activities. They have continued to rise. Mostly this was due to businesses, one-off operation from GBM, the company has declared bankruptcy, but mostly it’s because of the SMEs, which have had increased NPL ratio. Also there’s been of course a reduction in volumes that brings on the denominator and has a significant effect on the ratio.
If we look at NPL entries, I’d say, the trends are as we had announced in previous quarters. Good behavior or relatively good behavior of NPL ratios with individual customers, including mortgages, but volumes have continued to fall entries, and in businesses fairly stable and the similar level compared to the first half of 2008, still high, but stable.
Talking about discontinued real estate activity in Spain, first time we post as a separate division, this is a business which is in run-off. Here we include basically three concepts foreclosures, customer loans with mainly real estate development purposes and equity stakes related to the real estate business more relevant, or the more significant are Metrovacesa on our stake in this area.
At the end of March, net balance was under €12 billion, down €10.6 billion in the last six months. The beginning of 2013, we once again reduced the net lending by €450 million and foreclosures down €20 million, from the other hand it has been slight increase because of the investment in this area in the first semester for the year. These loans and foreclosed assets have coverage levels of over 50%.
This division has had losses of €175 million in the quarter which are due to a cost base for this unit of around €40 million per quarter, plus certain volumes for further asset impairment which will be at around 2% for foreclosed assets and for loans allocated to this unit. These foreclosed assets and customer loans we expect will fall by 25% yearly until the end of business for this unit.
Continuing with Portugal, activity for those – same trend as in previous quarters lending down deposits up much less than in Spain, nevertheless we’ve been able to reduce our commercial (inaudible) by €2.7 billion in the year, and we continued to improve loan to deposit ratio which is now close to 100%, it’s a 108%. So with that we’ve gained market share in both lending and deposits, and again significant improvement in our loan to deposit ratio. Results profit in the quarter was €21 million in line based in our last to previous quarters. Gross income was up versus Q4, partly due to trading gains and fee income which have performed reasonably well. Gross income was way below that of Q1 2012, where there was a tender offer recorded which makes rather unfair comparison.
Net interest income trends have continued to fall in the last quarters. We think that, however, this has now touched bottom, because the 100% of the mortgage book has been re-priced in Portugal. Mortgages are reprised every six months. And so unless interest rates fall further, the mortgage has been re-priced and the cost of term deposits is still high although falling.
So a significant fall in net interest income, but we expect it to stabilize in the coming quarters and then recover. Operating costs fell in the country, we closed a few branches and costs are down 2%. And so in a complex economic context the leveraging continues, revenues will begin to recover gradually, costs well under control. And the loan provisions are still high, they will begin to stabilize in the next quarters.
Poland now, countries economy is still growing although much less than previous years around 1%, significantly better than a euro zone, but not as good as in previous years. In the quarterly figures, however, we’ve got a significant parameter change. The indication of credit banks, deposits and loans have grown by around 80%, deducting this parameter effect, this growth in loans was 6%, 11% in deposits.
Moving to results. The KB the indication of course just starts the comparisons with previous quarters, particularly in NPLs because their NPL was significantly higher than we said. Also as far results, profit before minority interest was €1 million, first consolidation has significant effect. KB has profitability below BZ said and much higher NPLs, coverage for new banks has the same as for BZ and before the integration.
The contribution to results in this first quarter was negligible, since they have higher costs, similar revenues and restructuring cost of 26 million zlotys in the quarter. They are seasonal factors and specially there has been a significant fall in the quarter of interest rates in the country, 125 basis points and that has impacted net interest income since last November.
Our priority in Poland right now is to continue with the integration process and we think however we can confirm our guidance with respect to profit volumes and synergies as our CEO announced. In to the finance, the unit we managed in very unfavorable business environment and because in 2013 further foreign car sales in the euro zone of up to 30%. In this market environment, the unit has high recurring profit, based in gaining market share; there is a 5% fall in new lending when the sector is fallen by 10%. but this is currently driven by Central and Northern Europe for Poland Nordic countries and Germany, which [utilized] the lending after taking into account seasonal effects.
Three factors are behind the definite evolution. our business model designed to gain market share and managed spread diversification by countries with critical math, diversification by products combined with cross-selling and brand agreement with manufactures. there is a good evolution in risks, the provisions made at the start of the crisis and the top-level criteria are today reflected in all provisions of stable NPL ratio of around 4% and coverage of around 110%, and high self-financing capacity, the appetite of inventors for SES risks is enabling to continue to issue securitization, attributable property was €176 million, 9% more than end of the fourth quarter of last year, maintaining a return that is truly higher than the average of its peers.
The customer business continues to perform very well compared to the competition and we’ll hope that it will profit from a better market environment better than the one we had in this first quarter. The UK, we focus on activity. we have focused on selective growth reflecting the priorities of the bank.
In terms of lending the mortgage, mortgage is declined 7% as we’ve said earlier our policy with regards to mortgages while we’re much more restrictive in lending and the contrary in the SME business, which is the priority for the bank our loans to SMEs increased 16% were taking different initiatives, opening regional centers, developing product and we have different programs to try to gain market share in SME.
On the side of deposits, there’s a global growth of 1% and retail deposits are growing 4%, but we’re very satisfied with the success of the current account strategy, we still called 1, 2, 3 strategy, which has raised to €6 billion in current account ever since that was rolled out in March 2012.
This has increased the balances of current clients by 55%. This growth in the last quarter was 18% and this is one of the foundations of the bank to gain more current accounts together with gaining more SME customers that is – that is why we want to continue to do on the future.
In terms of the results the profit was 191 million pounds. There has been a – an improvement in the net interest income, also better spreads with a fall of funding costs on the side of deposits that also to wholesale funding.
Less provision NTLs remains stable, coverage is good and cost remains stable.
In summary, we can say that we began the year with a very good trend because evolution of our 123 product, more current accounts to look in customer and improvement in the net interest margin and the controlled provision and cost environment with or below inflation. Brazil, in 2012 the country grew much less than what the market consensus expected, it only grow 0.9%, in 2013 growth is estimated to be 3% and low interest rates. Well, now that it is changing we hope – well they started to go up interest rates and we believe is that they can reach 8.5% by the end of the year.
Our lending activity hasn't grown very much, only 5% and deposits including (inaudible) that’s 1%. Lending fell down in the country in line with other private sector banks. We hope that the situation will improve with an improvement of the GDP. In terms of results the attributable profit was $658 million, the main trends our net interest income that fell because of a sector-wide fall in the spread on loan because of lower interest rates and because there is more competition in some products in last summer. There is a mixed effect on the competition of our portfolio which is changing towards lower risks product, more secured product and lower growth in volume which we believe is temporary, while the other two effects we think are more structural in nature. Good evolution of cost minus 7% or 7%, we have made some adjustments in the unit after the integration, lower year-on-year growth in provision would NPLs tending to stabilize. In terms of NPL effects are stabilizing in individual customers that remains stable the NPL rate. We think we’ve reached the peak and from now on the NPL individual borrowers will fall.
So, in the future stable only NPL and bad debt declining, we see continued pressure on spreads for another quarter at least, volumes that will rise to end of the year with the double-digit growth. Personnel and general costs rising, truly below the inflation rate and the cost of credits that returned to improve as the economy recovers. Mexico, good prospects for the rest of the year, GDP expected to grow more than 3%, but of course has been changing (inaudible) there below our investment and spending and reduce the exports to the U.S.
Interest rates stable at 4% and inflation were 4.25% in terms of activity, double digit growth (inaudible) profit in the first quarter, mainly in our target segment, which is SME companies, cards and demand and time deposit. We’ve opened 16 branches in this first quarter and we are going to open 75 in the whole of 2013 and 110 in 2014.
In terms of results and net profit of $117 million in the quarter, which is a record for a quarter, net income grows 12% year-on-year and 3% in the quarter. The net interest income fell slightly because of several impact, because there has been a transfer, which is margin and fees. So there is a very good performance of fees for wholesale banking, insurance and cards, more trading gains from customers.
Higher cost as a result of new commercial projects, provisions fell 11% and the risk premium remain low with very good NPL and coverage ratio. And showed a good underlying trend with business still growing in that double digit rate and (inaudible) result in the coming quarters.
Chile, in a very good macroenvironment with economy growing more than 5% and interest rates of about 5%. Here the main effect is the low inflation in the quarter and compared to 2.4% estimated for the whole year. And this affects the revenue because the portfolios are indexed to the inflation rate. We are so growing well in deposits, and retail deposits are growing 12% selective growth and lending.
In terms of results, we already mentioned the impact of the inflation rate. The impact of the lower inflation is quite significant. And in terms of fees there has been regulatory changes, now there is mandatory bidding for insurance contracts strengths and mortgages, costs were basically flat in the last four quarters and provisions continued to slowdown and were slightly lower than in the last two quarters with the risk premium stabilizing.
We are maintaining our views for the coming quarters, higher inflation some recovery in volume, stable costs and provision are not expected to increase. Rest of the country and the region performs very well more than €200 million in profit and an increase of 22% over the first quarter of 2012. Half of it profit comes from Argentina, which is a quarterly profit of a $140 million, quite a recall of the last year’s profit, a year ago our profit grew 12% and improved 6%. Apart from the countries and the area we also have international private banking with a profit of $42 million. We don’t expect any changes in these countries probably significant changes.
In the United States the group made $207 million and the increase of 5%, 5% more than in the fourth quarter, both units because we have both units in the United Sates (inaudible) and Santander consumer USA in terms of revenue sovereign less revenue because of the net interest income, there has been a restructuring of the portfolios and run-off sales of the portfolios and the strategy we are following with the market that needed to sell these mortgages.
Other countries and the consumer USA has grown very strongly based on higher volumes, significant growth of volumes, and growth funding in particularly in new production, flat cost in the first quarter. Credit quality remains excellent, NPLs at minimum levels, attributable profit is $160 million in the first quarter was under the consumer USA was $147 million in new quarterly record.
Over the next few quarters, we see recurring revenues standing to stabilize our foundation of our balance sheet more evenly distributed by businesses in a further range of products and services in accordance with the investments we are making asset quality we believe we will remain great. With regards to the corporate countries we finish, we see results similar to our previous quarters although with some differences.
The net interest income is associated to the cost on liquidity, which has had a negative impact on the net interest income, but also higher cost of the issues, which are offset in part because of volume and falling. Cost very similar to those in the first quarter of 2012, the right over the fourth quarter was not due to that quarter incorporating average because the (inaudible) variable remuneration.
In other income and provisions the features are very similar to the first quarter of 2012, but not with the fourth quarter, which included right downs of goodwill and equity stake. So the trend should be better revenue.
Let me now hand over to the CEO, who will talk about the outlook for the next few quarters.
Let me conclude with a few comments on the current situation and my outlook for the future. The first quarter saw radical change in the group profit trend after the exceptional provision need for real estate in 2012.
Today, we are in a different profit dimension as declined from levels of €100 and €400 million in the last three quarters to more than €1 billion in the first quarter of this year. The several of profit however is far from our potential and there are several factors today that exist pressure on the group’s result.
First of all raw macroeconomic growth, which coupled with regulatory fact is limiting the growth of the business or the volume of the business. Number two is our global environment of our interest rate, I think it’s current level in many countries, which have an impact on the spreads on loans.
And certainly very important management focus in a very complex environment has the given priority to managing liquidity and risk over process. We made the biggest retail check deposit. We were conservative in issuances, and now we are back to more usual funding. We also improve the risk profile. We reduce the relative share in profitable products but of greater risk, for example, interest only mortgages in the UK or consumer credit in Brazil and we are deleveraging on some non-core businesses.
As the one would expect all which is having an impact on our results, but it is positioning us better to take advantage of the economic recovery when it happens. And, for the next few months I don’t see drastic changes. Overall, I do see a gradual improvement as the year progresses, especially after the year 2014 I expect a recovery in revenue in our larger units.
In Spain, due to the end of the re-pricing of mortgages and the lower cost of the projects, although this is already seen in recent loans and deposits it is yet to be transferred to the cost of the stock. The UK, another large unit for us already reflects improvement in that interest income and these improvements will continue because of a lower pressure of liquidity. In other units, Brazil a large unit is also going to see revenue recovering because of higher volume and increase in interest rates should be in April. Whilst in the U.S. we will continue to focus on company.
Lastly, another group level, we see averages, cost of funding needs which will lower our financial costs. That is with regards to revenue. And with regards to costs, well, it will vary by unit. In other words, Spain and Poland are undergoing regular processes; their recurring costs will fall, of course excluding restructuring costs by our synergies as the mergers proceed. It will be faster in Poland and Spain, though. Therefore, we see stable costs in mature markets and some rises in those countries where we are expanding, for example, Mexico. And lastly with regards to provisions, we expect the risk cost to stabilize in 2013 and they will begin to fall in 2014. Spain will be the main driver.
If you see that the NPL evolution link to GDP and direct costs falling to levels of 150 basis points including real estate and normalizing as of next year to 100 or even less than that. In Brazil, we see a stabilized cost of risk. In short, revenues will rise as of the second half of the year and the cost of credit will remain stable and of course, far from the efforts made in 2012. And this year will be consolidated as one profit began to return to their normal path. Thank you very much.
Good morning. We will start with the questions that we received over the Internet and then if we have any questions from the conference hall, we will take it later. We are going to organize questions by subject, let’s start with strategies and regulation. There is our first question from (inaudible) autonomous and (inaudible).
With regards to IPOs, (inaudible) in the U.S. and what is the intention of our partners?
Unidentified Company Representative
The only IPO that we’re considering now, although we still haven’t made a final decision on the price or the timing is taking part of our U.S. subsidiary ex-drives the consumer lending unit. But we don’t have any plans for 2013 for any other IPO end market.
Antonia (inaudible) from Key would like to ask about our dividend payout policy, €0.60 and the continuity of the script dividends if we have a dividend and cash policy or if we are thinking about reducing the dividends. The only decision that we’ve made is that in the year 2013, this year 2013 the dividend is going to paid out in first group dividend with regards to the dividend policy for 2014 we haven’t decided yet and we will decide that when the time comes. So we can’t say anything about that.
There are several questions on deposit strategy and Spain that we come under from the (inaudible) from acquire and several of that from it put it into sample.
(inaudible) from Citi. The question is with regard to the deposit strategy in Spain; are you making and effort and why in attempt to process. Is that related to the something from wholesale market, is there is a slight quality if we’re wouldn’t enough have the quality what is our pricing policy for deposit despite recommendation from the Bank of Spain and can we say something about deposit clause in April in Spain.
Unidentified Company Representative
Everything is related to freight and policy strategy, and size of quality. Well are on the deposit policy as mentioned several time. It’s based on the following concept. First of all, we want to take advantage of the opportunities that arise in the national market. The national market is distorted at present because of the restructuring properties and we think that it is an excellent opportunity to attract customers and to take part of that market and gain market share.
The second concept which is really related to the first is that in the market. We are witnessing a certain flight to quality that we want to take advantage off precisely to increase our position among customers in the retail market.
The third concept is that we are carrying out a pricing policy that although as the rest of the market was quite aggressive until we end up 2012 because there was a competition, a lot of competition based on prices. After the recommendation from the Bank of Spain and based on the real situation of the interest rates, all of us, of course, our exceptions, we know that there are exceptions but in general terms, we are average in deposits at much lower prices with a significant reduction on prices in 2012, particularly the fourth quarter of 2012 and this trend is going to continue because interest rates are falling because there might be even – because interest rates might fall even further.
We have reduced the price of deposits but nevertheless, we continued to increase our market share in deposits because of that flight to quality that you mentioned.
We are going to financial management now, there are several questions. The first question (inaudible) from Citi. Asking if we have any gaining measures to offset the negative impact of Basel III like selling assets or deleveraging and if we can elaborate on the main drivers of the evolution of core capital III or core capital Basel III. Yes, we could elaborate on many things when we talk about capital, but we feel very comfortable with the capital situation we’re in right now.
On the other hand recently, however, environment issued a report and that some Spanish bank commissioned on the comparability of the risk-weighted assets among the new European geographies, in other words comparing Spain with Italy, France, the UK, Germany, et cetera.
The main conclusion of this report and we have been talking about this frequently in the market is that capital consumption is greater indicates of cases that there are banks in the southern Spain than banks in other countries. This report that we will publish on our web page, this is aside from two things, the more conservative nature of the models approved in Spain by the supervisor, and secondly, because it’s a lower percentage of models approved outside of Spain than for banks in Spain.
If we were to apply the risk-weighted assets criteria and percentages under the advanced model of the less conservative practices in Europe, in other words as a most aggressive ones I comment that way, if we were to apply these criteria and these percentages, our core capital ratio would improve from 90 to 150 basis points. In other words, it will grow from 10.7 that we’ve published this morning to 11.6 or 12.2. That’s for Basel II and a half. But if we talk about Basel III fully loaded, which is 9.2 for us, it would be 10.1 to 10.7, with in that range. So that range would mean that we would be one of the highest that we can see in Europe right now. So this is something that we’ve been insisting on for a long time. This is something that regulators of our Basel committee and the EVA are already working on.
They are aware that there are these differences between European countries and these differences make it very difficult to compare with us. Base 10 in Spain is quite different to 10 in any of these other countries.
Unidentified Company Representative
So that’s just far as the things that are difficult to compare on various questions. But on the other hand, I said at the beginning that we feel very comfortable with the capital ratios we have, we currently generate capital every quarter plus, we have a balance sheet risk profile, which is medium to low because of the nature of our retail banking business. And in fact when we had this stress test a few months ago, the other requirement stress test, the fact is that, Santander has not destroyed any capital since 2007. And that stress test demonstrated our strength and our solidity and we continue to generate capital organically throughout this downturn.
And of course, capital ratios and profit are a balance, which you have to strike and there, I would include business models too. so with these three pillars, capital ratios, business model and cap and perfect, we feel very comfortable with our capital ratios.
Moving on with more capital ratio related questions, (inaudible) from Merrill Lynch is asking about the 77 points in the slide together with the organic growth this year. Benjie Creelan from Macquarie is asking the same thing. the number that we showed this already at the Morgan Stanley Conference, it’s a method of the new accounting standards, but basically, just over a half is to the alternative standard in Brazil and the other is due to other internal local models of less importance, which we will be applying throughout the year.
There is another question about, could we explain changes in core capital in the quarter and 300 million from Keith (inaudible) and connected to that, they’re also asking about the trends and minorities, Britta Schmidt from Autonomous and someone from the Texas. So core ratio trends in the quarter were up 3 billion, can we explain the $1.9 billion or $2 billion increase in minority interests, so connected to the same thing, apart from the profit there’s an increase in minority stakes, basically because of Poland, we have about $1.3 billion, $1.4 billion from Poland and the rest is exchange rate effect as far as minorities and the rest of the capital increase I think we mentioned in the presentation, profit/scrip dividend plus Poland exchange rate effects and so on.
There is another question about capital and that is what we expect for risk weighted asset trends, because (inaudible) are asking whether we expect to pay in any sort of savings with risk weighted assets, and what do we expect from risk weighted assets in the group, but in the different units? I wonder if you’d like to elaborate.
Unidentified Company Representative
Well obviously, here there are two effects, one purely the business effect, where we think risk weighted assets will continue in those geographies where there is deleveraging, they will remain stable or fall, Spain and Portugal, as it has been the case in the last quarters. The U.K. will remain relatively stable too, and Latin America, naturally we expect them to grow, but that’s probably due to business parameters. There’s two additional factors are important excluding the perimeter effect. Two additional factors that are significant, one is exchange rate evolution, very important in this quarter, and most of the year has appreciated mostly versus most of those other currencies.
So those currencies have appreciated versus the euro, and there are significant relations in the quarter. Brazil appreciated 5%, Mexico 8%, Chile 1.5%, and that of course changes the risk weighted assets, and quarter-on-quarter, this has an effect on both sides on the amount of capital as Andres mentioned earlier, and on risk weighted assets – mortgage being offset.
And the third element, returning to – globally to 67 points that is a capital we expect to generate [and currently] said that 33 of those points come from the application of the alternatives and that model to operational risk in Brazil. So in Brazil, we expect to fall in risk weighted assets, so result and also the risk is the application of advanced models, and as they get approved in the different countries. And of course it’s very granular and in some countries, it’s by country and others by business segment, but those are the keys the business parameters, exchange rate effect, risk weighted assets and the application of internal models.
In Brazil, it’s special case because of its size. And then there is the polish impact you mentioned that Poland. In risk weighted assets, yes Poland of course in the quarter risk weighted assets up $7 billion because of the [KB] integration also $1.3 billion up core capitals minority interest in Poland.
And to finish with capital related questions is one from [Claudia Benavente] which is whether that there is any impact of [CR-4] any change the treatment (inaudible) of course that will have an impact. It’s one of those that’s includes in that phase in scenario when the new regulations come to force, which we expect will be at the beginning of next year.
There is also a question from our that includes in the fully loaded from 8% to 9% remember that presentation DDAs have no change, the calendars 10 years and so we’re talking full loaded 2019 instead of 2024. And finally there is a question from Santiago López from Exane.
Unidentified Company Representative
Given the impact of Basel III, the 380 basis points, do you think that the bank needs a capital increase?
Unidentified Company Representative
I imagine the answer is very short. I already said what we felt about our capital ratio, so the answer clearly is no, we don’t need a capital increase.
Unidentified Company Representative
And as far as the PLL for corporate center (inaudible) from Morgan Stanley is asking, in Spain, what’s behind the fall spreads in Spain for the corporate center. He is asking, could we elaborate a little bit on the evolution of net interest income for Spain and for the corporate center. There are several questions about this. (Inaudible) from Merrill Lynch who is asking this too and others ask in specifically about the net interest income in Spain and the corporate center.
Unidentified Company Representative
Well, trends, net interest income I think I’ve explained in the presentation, there are two main effects here. The first is mortgage re-pricing, mortgages throughout 2000 what, since the beginning of 2011 and until September 2012 were re-priced with the one year Euribor, which at that point was between 1.5% and 2% more or less. And now we’re re-pricing since September-October 2012 until September-October 2013, we see Euribor at 0.5%, 0.6%. So there obviously, there is a fall due to this mortgage re-pricing, which will be completed around September, so gradually we’ll have lesser effect.
This is significant negative effect depending on the mix as we saw in our mortgages represent about 25%, 27%. And so that is showing a significant fall in yield because of that re-pricing. This is somewhat offset, but only partially by other loans, which we spread for improving generally. And as for deposits it’s true that the cost of deposits is falling strongly as I mentioned in the talk.
At some point term deposits were at 3% and now they are at 1.5% more or less, so there has been a fall by the mix and the sequences meant that overall cost of deposits hasn’t fallen yet, but it will start to fall very quickly. So these two trends as I try to explain, spreads for week as I said in Q1, both price still be weak in Q2, but we will gradually improve, but there is no significant ways and exchange rates. Although it’s been said that they use to be lower rates even further with the relevant rate in this case is the 12-month Euribor, and of course, that is having a negative impact because of mortgages and the three-month Euribor, because we pay part of our funding with three months Euribor, that would be favorable.
So if you run the models, you will see that currently there will be an improvement, which will be very consistent beginning Q3 and Q4. So that’s the size in net interest income for Spain. And in volumes assuming that things will, we believe fall slightly in lending. We expect that 2% to 3% are probably beginning to fall in Spain and deposits will continue perhaps not to grow as much as they have, but we’ll continue to grow over the next quarters. And we’ll continue to gain market share.
As for the corporate center, it’s got a lot more to do with liquidity in the LTRO. As I said, we had maintained the same LTRO with the ECB same amount for a while. We have now returned the first LTRO at the beginning of January and the second half of February. So we brought down this sort of liquidity cushion that we have established. And so that cost is charged at the corporate center.
In addition to that and given the trends and deposits, we have been holding high liquidity levels, which in some cases we’ve invested very short-term. So we have a negative carry trade, and in other cases, also short-term, but in high yield instrument type public debt, which in the quarter went up $5 billion, $6 billion. So in the corporate center, once we’ve repaid the LTRO and depending on how we invest these liquidity surpluses, I believe the net interest income should improve, but the fall in the quarter is due to the factors, I’ve just reviewed.
Okay, there are several questions about our ALCO portfolio and our bond portfolio. Alberto Serrano from Morgan Stanley and (inaudible), Carlos Berastain from Deutsche and connected to that Sergio Gamez from Merrill Lynch. And basically they are asking why there is the contribution of ALCO, the increase in trading assets in the quarter, what is – why is that and how much do we have, can we update them on what we have and how much in the ALCO portfolio? How much is financed. So it’s all about the make up of our ALCO portfolio, and finally, if we’re replacing by [LTRO] by repo.
Well, as far as our ALCO portfolio, what we have right now about 35 – the investment as I said, we’ve invested about $5 billion or $6 billion a quarter and that’s basically we’re investing certain liquidity surplus given deposit growth and short term public debt assets and that’s why there has been this $5 billion, $6 billion increase.
Mix is basically public debt mostly so when (inaudible) mentioned as for repo the numbers are substantial, public debt without repo it’s part of our liquidity buffer number I think is about half the portfolio or just over that is funded directly with liquidity from the rest of the balance sheet so no we are not doing repo to replace the LTRO.
The LTRO as I said, we have deposited with the SEBI and so now what we’ve done is to make that position and we still have as you can see in the loans to deposit ratio that we have liquidity surplus which we’re investing sometimes very short-term and very short-term public debt assets with the negative kind of trade and sometimes other instruments which are slightly higher yield.
Okay there is a question from (inaudible) about the reserve for public debt impairment required and we’ve done anything with this provision has been charged, it was [NAVA] requirement but if you like we’ll give you the details after because I am not sure will I get the point of your question, we can discuss after.
There is a question from (inaudible) about the impact of any additional rate cuts by the SEBI can we give an outlook or how we are positioned. I think that’s it for this area. But I think I said it before main impact of course is on our mortgage book if work falls below 0.5% it will be an additional impact and then it’s a another thing which I believe is less significant deposits which based on ECB rates, current rates are hard to predict I would expect that the price of deposits were pride for more and any ECB rate cuts not just because of electricity were because of competition in the market. So, overall there will be a positive effect on the cost of deposits and negative effect if rates fall for our mortgages.
But we don’t expect rates to fall in the U.S. or the UK we in the Euro zone to an extent that would have an impact beyond what we’ve already experienced and in our core portfolios are there to hedge or mitigate that effect at least partly okay there is a question about tax rates from – can we give any guidance on tax rate, since it’s now 25 and its been raising although there has been some fluctuations we only got the issue here is that as we generate profits it’s generated in those geographies were tax rate was higher and that’s why it’s been raising in the last quarters and could raise slightly above the current 25% still in the year. We have the credit quality there is a general question although we talk about the units later. This is a general question from Carlos (inaudible), could we explain a bit more about NPL entries by geographies and our outlook. Particularly for Spain, you’re saying that the other banks have posted fall in entries and ours are stable. Is it because of the rest of the world? Could we give a bit more detail about NPLs in general, although there are a lot of questions about specific units which will come later?
Alfredo Sáenz Abad
We have provided information in the presentation about NPL entries particularly in Spain by segments. In Spain, what we have seen, it’s true that probably in terms of just the quarter, the trend was better than budget. Is that enough to say that our outlook is going to change? Well, it looks more connected with economic trends in Spain than with Q1 where which one was better than we had accepted and budgeted for. Where do we think new entries will come from? Our main focus now is the SME business where there are still significant NPL entries. Not so much in real estate, we’re obviously; the definition is doubtful and false and so on.
Leave no room for any additional surprises. We also see a reasonably good performance of individual loans both for mortgages and consumer finance. That’s been falling even in the last quarters. And so that’s the outlook for Spain. I think NPL ratios will continue to rise. We expect for at least two quarters, until the economy is no longer in t his section and there is still prediction for NPLs in Spain, which would mean or we expect should mean the cost of lending will be at around 150 basis points in the year.
I think we’ve set to that, after that we expect that it should go down to about 100 points in 2014, that’s just for Spain. In other geographies, there are guiding trends, but there’s really no change in the U.K. where NPLs are stable.
Coverage levels are good, we don’t expect any changes. In the U.S. performance has been good, good for in NPLs and I think worth mentioning in Mexico as we said on the other two points where we need to focus our Brazil and showing and starting with the Brazil. In Brazil, we have seen starting a year ago a rise in NPL ratios both individual opportunities and businesses, individual launch, we started to implement some strategies beginning at June, so no it’s under control and we’re comfortable that NPLs from individuals have peaked and we’re full or adverse stabilized, but probably for depending on the economy.
In businesses, we don’t where we can’t say that we have entirely stabilized those following yet. So, as we said in the talk, we expect that provisions will remain high, higher than we think would be reasonable to expect medium or long-term. And then the mix effect, which we mentioned as a negative impact on our spreads will gradually changed us since the cost of risk should go down.
As for Chile, things are better, we had spike mostly in 2012, but now that’s stabilized. And as I said in the presentation, NPLs and the cost of lending should stabilize or fall in Chile. So that’s basically, I think what you are asking. There are several questions about postpone new provision requirements in Spain, question from (inaudible) they are all asking whether we expect a new law or new requirement with their current industry, there is a lots of rumors about refinancing SMEs and different portfolios and so what we expect will happen with provisions and do we expect any extraordinary provision requirements, new regulations are approved.
Well, first of course we’ve not received any notification from the Bank of Spain, from our supervisor about this. So everything that’s being said about this is purely speculation. Second, in our report which we published a year and a half ago, we included very detailed information of the groups position in this whole issue, refinancing, restructuring, however you want to call it.
And so you can refer to that if you want to know anything, in the great detail. In terms of our position on these issues, you can find in our report. Of course we have made a huge provisioning effort and we don’t believe that we are going to need additional provisions given very conservative note that group has been implied, every things probably provisioned and what our policies are seeking is to make it easier for our customers to meet their payments and that’s why we have the refinancing volume we have but we’ve made a significant provisioning efforts on the policies we’re following are very strict. And we don’t really see the need for anymore provisioning but you can find many detailed information about this in the report, the annual report that was just published. Okay there are several questions about the cost of risk in Spain which I think Jose Antonio has covered already about the 150 basis points we’ve issues as guidance. I think Jose Antonio has said that again.
There is a question from Patrick Lee about how do reconcile as with the cost of risk we currently have in Spain.
In Spain, of course, there is no real estate division for assets to be – on the divestment, so we had a cost of risk from both units but we maintain that guidance for 150 basis points.
(Inaudible) I wonder asking about restructuring in Spain and our CEO has just referred to the information in the annual report, there is not a lot of vision from that. I think (inaudible) is asking about NPLs in Brazil and I think you’ve already answered that and I don’t know you want to elaborate.
Everything as much to add to I already said. (Inaudible) is asking about the reversion of debt folds and so on.
So far we’ve said, we don’t expect any changes in this. We have covered everything to do with credit quality. Moving on to the business areas starting with same as the question with higher SME bar, our outlook for the Spanish economy in 2013 and 2014, and how it might impact the banking business.
Well today is difficult day to talk about this because tomorrow the government’s own forecast will be announced, and the new reform package, and well their outlook for the country.
And so anything I say today may be contradicted tomorrow by the government so no forecast. But anyway, in Spain we believe that adjustments are moving forward at a good rate. I think we are touching bottom, consensus says that this year 2013 GDP will fall 1.5%, but of course, that’s going to be a clear fall in Q1 and Q2, flat in Q3, and then slight growth in Q4, which means that although in the whole year there might be a fall of 1.5% of GDP, which is I think what they’re predicting. In 2014, we expect growth to be at around 0.7%, so that’s a good sign, and that’s good news and that’s why I say that the reforms are making headway and that we've touched bottom.
And in this trend, what’s really important I think is what is happened with the balance payments particularly the current account, but which – at one point had a deficit of almost 10% GDP in this year it’s going to have a surplus of 1%. This is an unprecedented change and it’s really important because it’s also helping to reduce our dependents on foreign funding. So, it’s a really important very positive development.
Another important positive development is the fact that inflations on the control. It will be at around 1% absorbing all the tax hikes and the country is dealing with the leveraging as the private sector the restructuring of the real estate sector for financial sector, the physical discipline, the reform of the labor market and all of this obviously has a negative effect on growth. But, it’s important so that conditions can improve in the future.
I think the private sector has now made most of the adjustments that were needed I think we could save and that the war is over. Company’s have cut cost of deleveraged SAN households the financial sector is completing its reforms so clearly the second half of 2013 will be better. On of course I didn’t mention the fact that now the treasury is able to fund itself at costs which were – which have gone back to what they were in 2010. These are all clear signs of improvement.
In Q2, we’ll be more clear and certainly much more clear in 2014. Having said that, we believe that volumes for us, banking sector this year lending is still not going to grow or will grow very little. In spite of the preferred (inaudible) by the government to promote lending with all kinds of plans. But the impression we have is that lending in 2015 will not be grown yet and continuing with (inaudible) I guess from Citi and (inaudible) are asking about net interest income. Plus Antonio I think already elaborated on deposit spreads and different types of deposits and spreads, volume, prices, what’s our outlook for the price of deposits and if we look at one key 2013 as bottom.
Unidentified Company Representative
No, I mentioned this earlier that let me clarify or it will confuse you even further. What I said earlier was that we expect decreasing volumes in lending about 3%, the profit volume that will grow 5% to 8% growth is what we expect in terms of volume, and if the three year (inaudible) to remain at 0.5 for the year and 0.2 for three months – in the year we would expect a cause at a reduction of 30 to 45 basis point in the cost of the process.
I am going to compared December 13 with December 12, a 30 to 45 basis points is by how much the cost of the process would fall with a – and a fall lending will be half of that. The outgo visit is stable about $30 billion for the whole of Spain.
Therefore, the first quarter was negative, the second will be less negative, the third quarter might be stable or growing a little and the first quarter growth. Of course with all the caveats the other bank – the European Central Bank et cetera, what they might do with the rate. The driver you know that well enough.
There’s a question about the real estate in Spain, we mention that in the fourth quarter, we might make an additional 1 billion in provision for real estate assets in order to accelerate the selling of assets. We’re still thinking about accelerating that sale and generating capital gains to offset that. I’m going to answer that question because I was the one who made that statement in that results presentation.
Yes, when we made our earnings announcement, I think I it was in February, we thought that the sales in 2013 end up that prices in 2013. If you continue to sell at the prices, we felt that 2012 that might give us additional losses of 600 to 900 or up to 1 billion and that’s what I said. Nevertheless, we signed the first quarter that our pricing policy is not the same as in 2012 we are more conservative. In fact, we’ve sold 5,000 units. So, we are still selling quite a lot and right now we don’t think that this special provision that we were thinking about in general for 2013 will have to be made.
A question from (inaudible) on whether we still have that, we still think that we are going to increase our revenue by 1 billion, I think that’s referring to what we announced in April for the next for the next three years, and yes our vision of the business in that regard has not changed from 2014 to 2016. As for Brazil there are quite a lot of questions on the support of the P&L with regards to net interest income, as well as ratios and volumes. So, let me try to summarize on some of your days from key and another question from Nomura and Credit Suisse and similar that one from the level asking about the drivers for the fall of the net interest income. The performance of the net interest income as a ratio be expected evolution of prices spreads and volumes and the guidance for the top part of the P&L in Brazil.
Unidentified Company Representative
Yes, interest of the net interest income is under pressure. There is several impacts here, several effects. On the one hand, we believe and our management team in Brazil continues to believe that if the economy in Brazil grows 3% as the consensus has established and that is also the opinion of our economies and other people in Brazil. Well, if that happens if the economy grows 3%, the asset volume will accelerate in line with the economy to grow and were part of private banks and in our key we would be growing by two digits more than two digits from 10% to 15%, 10%, 12%, 13%, 14%, if the economy grows 3%. So that’s a positive impact on the net interest income.
Now what is a negative impact on the short-term for the net interest income over the fall of spreads it has been a fall of spreads for two reasons. On the one hand because of the pressure of the competition, which is making spreads fall and on the other hand because of the product mix that we have in our bank, because we are focusing on more secure products with more security and therefore lower spreads, and that will mean that the cost of lending will fall, because these loans or these products have a lower cost of credit, but also lower spread.
On the other hand, the contrary effect would be the fees that will accelerate with credit volumes, because fees are doing well, and its lending increases by two digits then, obviously fees will also grow by two digits. Therefore, if the economy does grow at 3% as we expected, that would give us better performance in volumes and also in the credit quality.
And that is why we believe that in our outlook for Brazil, we will improve our results in the next few quarters because of the combined effect of all these things that I mentioned. There is a question from (inaudible) whether we expect a fall in the NPL regional cost of lending, which I think we already covered, let me talked about changes in management in Brazil.
We say something about the fact that Marcial Portela will no longer be the CEO of Santander Brazil. Well, changes in management are natural process in any company, so, we shouldn’t be too surprised by that. Marcial Portela has been working as CEO of Brazil for almost three years. He was there to overlook the merger process when we realized that we were a little bit late in our schedule, we weren’t really compliant with our schedule, so he went there to overlook that and did an excellent job, because today Santander Brazil is a fully integrated bank. And that have been fully integrated.
Now priorities are different – now we want to focus more on the business on commercial activity. And so the group has sent a CEO, someone who has two conditions for this job, first of all he knows America, the American continent very well. For many years, he has been working and leading the America division, and therefore he knows the continent very well. He knows the practices and the markets in the American continent. And he is very good in the commercial side of the business, and commercial development of a bank.
And therefore we are convinced that he is going to do an excellent job in Brazil. At the initial there is a question from Francesco Regail on the impact of the rate and the net interest income, Jose Antonio would you like to elaborate on that?
Sensitivity to increases in interest rates. How would that have an effect on margin volume? Well I already mentioned in my presentation that we expect the interest rates and results to continue to rise. They are going up 0.25, they are now at 7.5, we think that they might go up to 8.5 by the end of the year.
What is the impact of on the business world? The business, it’s natural sensitive to these increases in rates. So we won’t be feeling the impact that when rates go up you’ll have the greatest break, although it’s very little. Now what they might have an impact now what that might have an impact on is on the competitive pressure on lending, because the origin of decreases in margins that we’ve seen are related to a lower rate of last year and the perception by part of – or the public Brazilian banks being very aggressive in trying to transfer that to the lending markets. So that might have an impact, but it’s very difficult to quantify what the effect will be on the prices of lending, but on deposits, it’s going to be a very small impact.
There is a question on the levels of capital that we have in Brazil. We have high pay-outs in local terms more than 90%, as that is our capital management policy?
There is another question from Citi on the fall of the net interest income in Chile, what was the reason?
Basically, inflation, and with low inflation we’ve had in this quarter that has an impact.
From the U.K. two questions, it’s necessarily (inaudible) like to ask on the sole part of the P&L deposits, if you want to elaborate a bit more on that and when it goes from Citi what is our premium on the (inaudible). Is that going to have any impact on volume off-spreads and have you received that? And what – on the help to buy the government program to faster mortgages, if they – for the percentage of the risks?
Unidentified Company Representative
Okay. With regards to the first question, the number is very positive. It’s positive because we have served a certain stability in the spreads on lending and a reduction of cost on deposits and household funding and that combined those have been combined. Well, I think the net interest income is going to grow 6% so it’s more positive and on the revenue side we have negative impact on the standby situation of the selling of financial product, we have to take – make a decision of what policy we are going to follow for the products that has have a negative impact, but the cost to the government program is there’s aid and that helps, but it will be terrible, but we can say by how much right now.
Well there is a question from Steven (inaudible)
Can we extrapolate results remember that is quarter KBS included in the volume the contribution to earnings is almost none or very smaller or even negative, slightly negative and we already gave data on synergies and expectations on the recent placement of the market in the market. On the United States the last question is on the U.S. what are the business expectations, revenue expectations in the U.S. would you like to add anything to that and we would finish with this question?
Unidentified Company Representative
There we have two units one of them is going through a transformation process and extending the range of products. We are trying to after sales or try to sell to do asset management insurance selling cars that is the advance priority right now and when that materializes that will be having effect on the revenue, but doesn’t happen in one single quarter, it takes longer. In the case of drive of the consumer business in the U.S., it is well-known that a deal has been signed, which is transformational for them, which is to turn into the supplier of funding for Chrysler car dealers, that is going to – unlike it grow strong, and it’s a transformational deal for the consumer business in the U.S., that we’re not going to see yet. We’ll notify in the next few quarters, but it is an element that does change size and the pace of growth of the consumer business in the U.S.
Let me answer your question in Chile, surprised by the evolution of the MPL rate, it has been going up since, we’ve been recording more provisions for that, still getting ahead of movement, and that means that the cost rates will be flat during the year – every customer asks about the fall in the rest of Latin America of revenue for the revenue. It is the addition of different sectors that we already gave you, also a small fall in BTI, but it’s a marginal fall. I don’t think there are any further questions, no questions from the conference call either.
So with this, we finish this presentation. Thank you very much.
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