Banco Santander S.A. (NYSE:SAN)
Q1 2014 Earnings Conference Call
April 29, 2014 4:00 AM ET
Javier Marin Romano - CEO, Executive Director
Jose Antonio Alvarez - CFO, EVP-Financial Management & Investor Relations
Angel Santodomingo - Director-Investor and Analyst Relations
Javier Marin Romano
Okay, good morning. Thank you very much for attending this first quarter results presentation of Group Santander. We will begin with the presentation on the offer to acquire the minority interest in Santander Brasil, and then we will pass over to the presentation on the first quarter results.
So as we announced this morning, we -- to acquire the minority interest in Santander Brasil that accounts for approximately 25% of the shares in the -- . The Brazil shareholders will receive 0.70 Santander Group shares for each Santander Brasil shares, or units, or ADRs equivalent to a BRL 15.31 per Santander Brasil unit. This is a 20% premium on the closing price of yesterday and implies a 21% to 29% premium on the average price for the last one and three months.
If all the minority shareholders accept the offer, we will issue approximately 665 million shares, which will be listed either on the São Paulo Stock Exchange, or they will receive Santander ADRs that are listed on the New York Stock Exchange. Of course, all the shares will receive the Santander dividend. We expect to complete the transaction basically by the fourth quarter of 2014.
The calendar expected is the following: we expect to have Santander Brasil Shareholders' Meeting between May and June. Of course, we should appoint the independent expert to issue their own -- opinion on the offer that is being launched by the bank. Actually, the bank has been -- is working with UBS and Goldman Sachs for this transaction. But Santander Brasil will need to engage their own advisors.
We expect to fulfill the requirement, the legal requirements and regulatory requirements between May and August 2014. And we will call our General Shareholders' Meeting, of Extraordinary Shareholders' Meeting of Santander -- by September 2014.
What's the rationale behind this transaction? Basically, the first one is to unlock the long-term value of business. I think everybody (ph) shares that there's some short-term headwinds in Brazil, but we are definitely very optimistic on Santander Brasil's long-term prospects. I think we have very clear -- the measures that we have, that we need to put in place and we are putting in place in order to enhance the value of our franchise. And we have the team to do this. So this together with the prospects of the country makes us to be optimistic about the future of our unit. That's why we're ready definitely to invest more in our Brazilian unit.
It will definitely increase the weight of markets with structural growth in our business portfolios. So growth markets will increase their contribution to the -- or the weight on our contribution from 43% to 49%. And it will enhance the long-term growth potential of Santander Group. And financially, it's very attractive. It's a 20% premium for Santander Brasil, but it's at the same time, it's accretive for Santander shareholders since the first year.
With respect to the financial impacts, with the premium we are paying, if you take a look to some of the transaction multiples compared to our peers, Santander is quoted, is at 8.8 times earnings 2014; 7.6 times, 2015. Our peers are quoting at 10 times and 8.8 times. And with the premium, we will be paying a -- on price to earnings multiples for 2014 to 2015.
For Santander Group shareholders, it will have a net attributable profit impact since the first year, of course, 2% on 2014 and 7% for the 2015 and 2016; while our earnings per share impact accretive since -- for this year and 1.3% and 1.1% for the next two years. We've had no material impact on capital side with respect to the Basel III phase in, 3 basis points. However, there will be a reduction of the consumption of minorities over the next five years. So it would have of certain 20 -- sorry, of circa 20 basis points over this period.
So, in conclusion, it's a very interesting operation. We're paying 20% premium over the closing price. Santander Brasil shareholders to receive the shares of Group Santander, so they will have not only the benefits of Santander Brasil, but also the benefits of our diversified group. We will be able to capture full growth, full term -- full long-term growth of a potential Santander Brasil. It is increasing the weight on the high growth markets and will have positive earnings per share impact and almost neutral on the capital side. So, just this initial remarks to talk a little bit about the Brazilian operation and its rationale.
If we move over to the first quarter results, 2014 has begun with a -- in a better environment confirming some signs of improvement of what we commented on the previous presentations. This scenario we are focusing basically on one side, on maximizing the new cycle of higher profits and profitability. On the other hand, we are at the same time maintaining a solid, liquid and low-risk balance sheet.
With this focus, the main developments over this first quarter were strong recovery in attributable profit, which was 8% higher than in the first half -- in the first quarter of 2013; and 23% more than the fourth quarter. If we leave aside the exchange rate impact, this would have, this increase would have been, comparing both periods, on top of 26%. Growth was supported by all P&L lines. So we saw an increase in income, a decrease in costs and a decrease in provisions; consolidating the good trends that we were seeing already during the last quarter of 2013.
Volumes, of course, they are reflecting the different macro moments that we see in the different countries. In lending, the efforts to recover growth in mature markets is already yielding and we are already growing in places like the U.K., reversing the trend. In Spain, small growth but reversing also the trend and we have good growth in emerging markets except for Brazil, which we will discuss later.
In funds, we continue to focus on reducing the cost of deposits. And we see also a nice increase in funds, in mutual funds. In risks, the non-performing loan ratio is slightly lower than in the fourth quarter, due to the reduction in entries and the continuing normalization of the cost of credit. So if during last year, we were seeing an average, new non-performing loans every quarter of €4 billion, this first quarter new non-performing loan came at €2.5 billion, which is a significant decrease.
We give – lastly, we give a very comfortable liquidity position. Loan to deposit ratio at 2,012%. And the liquidity coverage ratio well above the minimum that will be required in 2015, with almost at the group and the main units, already on top of the 100%. With respect to capital, we feel very comfortable with the Core Equity Tier 1 of 10.6%. There's a small decrease of 0.3% that we will explain later. And our total capital ratio of 12% under the new regulations.
As I was mentioning before, attributable profit came at €1.303 billion for the first quarter. This is 23% more than the first quarter of last year, over 23% more than the fourth quarter of last year; 8% more year-on-year; affected, of course, as I mentioned before, by exchange rates. Excluding the impact, the growth would be at 26%.
My view is that the profit is of great quality, but by net interest income and fee income that represents 92% of the gross income. All the increase is coming from recurring revenues, and it is definitely not affected by capital gains from corporate operations in the first quarter, both the capital gains that we have in Altamira and with the reconsolidation of Santander Consumer. That has been – these capital gains have been assigned to a fund that is pending allocation. So there's no impact on these first quarter results of any of these operations. In short, I think it's a clearer step towards a return to more normal levels of profits and a better level of profitability.
With respect to group revenues, two points. The first is the change of trend in the first quarter with gross income growing by around €100 million and 1% in current Euros. If we eliminate the impact of exchange rates, the rise was 3.5%, mainly due to the recovery of net interest income and fee income as we see on the chart that we see on the right.
The trend in net interest income is accelerating. The rise over the fourth quarter was 4%. This will provide an annual rate of close to 16% when we are carrying right now an annualized rate of 8%, so it's more than doubling the trend. In fee income the same, we have a 2% growth over the last quarter; on an annualized basis, this would mean 8%. So it's more than doubling the trend that we are seeing in the previous quarters.
If we take a look into costs, we have different performance by units depending on their momentum and we divide it into three large blocks. Our first block, with units undergoing integration or adjustment in the restructures, this is Spain, Poland, from the integration point of view, and Portugal, which declined not only in real but also in nominal terms.
At the same time, Brazil, costs grew at well below the rate of inflation, grew at 2.5%, 2.4% which means a real decrease of 3.4%. On top of this, my view is that we will finish Brazil well below these figures by year-end and we will see the acceleration during the year. A second block including the U.K., which is combining investments in its business platform with an increasing costs mostly in line with inflation. Santander Consumer Finance can also be seen in this block.
Lastly, in a different dynamic, Mexico, Chile and Argentina, whose costs are higher because of their expansion plans or improvements in commercial capacity. As you know in Mexico, we are opening this year over 100 branches, opening some branches also in Chile and Argentina. The U.S. is also improving the franchise of Santander Bank, growing strongly also at Santander Consumer and adapting to regulatory requirements, and of course, recorded a double-digit growth in costs.
In short, the integration is underway and the efficiency measures that we began to implement in some units are enabling us to get the first cost savings, which will increase in the coming quarters. We've reaffirmed our goal of €750 million of savings this year, half of our €1.5 billion reduction three-year plan. This should enable us to increase our advantage over the sector in terms of efficiency.
With respect to provisions, this remain on a very good trend. We see a fall in most units year-on-year. Over the fourth quarter, we see improvements in Spain, Brazil, Mexico and Chile. It's not fully reflected in the whole group because of the higher provisioning at the Santander Consumer U.S.A. resulting from an upfront system of provisions based on expected loss, which has a big impact in periods of strong growth in new lending as is the case, following the agreement with Chrysler. So in order to make a reasonable comparison of the evolution of Santander Consumer, we will need to go into the second half of the year, where we will see the full impact in both years of the agreement with Chrysler and the impact on the new production at Santander Consumer.
The cost of credit maintained its normalization trend for the whole group, improving from 2.45% in the first quarter of 2013 to 1.65% a year later. This is still high compared to pre-crisis levels and should continue its normalization trend. Summing up on the above -- in order to take a look at the evolution of the P&L. The first point to make is the large impact of exchange rates, particularly on year-on-year comparisons, but also with regard to the fourth quarter of 2013.
In the year-on-year, this explains all of the fall in gross income and net operating income. If we eliminate the impact, gross income increased by 4.2%, net operating income increased by 5%, and profit before tax and attributable profit grew at double-digit rates.
We see a very similar evolution for the first quarter, attributable profit over the fourth quarter, which after collecting the impact of exchange rates, rose 26%. This growth was due, as we have seen, to increase in commercial revenues and lower costs, which enabled net operating income to rise by 9%. Lower provisions -- also helped. You should also remember as I've said before, that the capital gains generated on the sale of the stake in Altamira platform, €300 million and the reconsolidation of Santander Consumer that is €730 million. So all together, €1.1 billion are not reflected on the quarter profit, and we've made a chart for an equivalent amount for a fund that is a pending allocation. -- the context in which business -- conducted and the strategy in the recent years.
Loans, we see growth in every country except for Portugal and Brazil. The year-on-year comparison, of course, is affected by deleveraging in some countries in 2013, which hides the growth in all Latin American units. Comparing fourth quarter last year to first quarter, we see growth, as I was mentioning before, in every country except for these two: Portugal and Brazil.
For the first time, lending rose slightly in Spain and also in the U.K. It increased also in the U.S., not only at Santander Consumer but also at Santander Bank. Santander Customer Finance is also improving.
Here we see the impact of the operation with El Corte Inglés, but leaving this aside, Santander Consumer Finance will be also growing. There's a small reduction in Brazil, 1%, that is affected by lower than envisaged growth, but also by -- we are preparing a new value proposition for SMEs, and definitely, this segment has been affected in terms of growth over this quarter.
Other units have maintained or speed up their growth with annualized rates of close to, or more than 10%, which makes us be optimistic with respect to the rest of the year. Similar comment for funds, where the aggregate of deposits and market of mutual funds improved its trend in this first quarter. After the large volumes that we captured in previous years, the focus in 2013 was mainly on reducing the cost of deposits and moving some part for certain clients to mutual funds. This led to a drop in deposits and a rise in mutual funds. In the first quarter, mutual funds continued to rise, mainly in Spain, Brazil, Mexico, in Chile, but there was some recovery in deposits noticeable in Poland, Chile, the U.S. and Brazil.
In Spain, we see an increase in deposits. This is affected by some wholesale deposits. Actually, retail deposits have decreased 4.4 billion, out of which 3.1 billion have been moved into mutual funds. As the new production for term deposits as Jose Antonio will show, is already below 1%, there are certain type of clients that are already looking for some yield and are moving into some mutual funds.
With respect to the group credit quality, the total non-performing loan ratio was 5.52%, 9 basis points lower than in the previous quarter. This fall was due to a smaller volume of entries which amounted, as I mentioned before, to around €2.5 billion compared to an average of €4 billion for every quarter of last year.
Coverage increased to 66%, which we consider is a high level for the mix of our portfolio, where about half of the loans have a real warranty, requiring of course, lower coverage. And the units with the lower weight of real warranties such as Santander Consumer Finance, Brazil and Mexico, have a coverage to close or above 100%. It is noticeable, Santander Consumer U.S.A., which after the provisioning effort made last quarter by -- as I mentioned before, the provision considering expected loss, the actual coverage is 279%.
With respect to credit quality, our non-performing loan ratio for the main units, the large units that represent 75% of our portfolio, we see a much slower pace growth in Spain, with the non-performing loans growing 10 basis points in the quarter due to lower non-performing loan entries in this quarter, and a much more stable denominator.
A further improvement in non-performing loan ratios in the U.K. and in the U.S. confirming the trends that we were seeing last year. And in Brazil, after the sharp fall that we saw during the last few quarters, which enabled us to close the gap with our peers in the country, there was a slight rise in the ratio as you see the -- of 10 basis points on one side, due to the -- basically, due to the reduction of the denominator. We see definitely, no signs of deterioration on the portfolio.
Solvency ratios, the Core Equity Tier 1, in accordance with the new regulations was 10.6% in the first quarter, a little lower than the pro forma estimated at the end of 2013, due to the net between the recurring generation, 15 basis points, and the negative impact already announced of the consolidation of Santander Consumer U.S.A. by the global method and Brazil capital's optimization operation. We maintain our forecast of ending the year with a ratio around 11%.
On the other side, the Tier 1 reflects a favorable impact of the issuance of a €1.5 billion of additional Tier 1 in March, which was well-received by the market. The total capital ratio is over 12%. Leverage ratio remain at 4.6%, exactly the same as the beginning of the year. And in liquidity, the loan to deposit ratio stood at 112%.
On a like-for-like basis, it was unchanged during the quarter. And the liquidity coverage ratio was exceeded 100% at group level, and in the group's main units, much higher than the minimum requirement of 60% that will be needed in 2015. In short, we are very comfortable with the capital ratios, with the liquidity levels and our capacity to improve them organically.
Let me now ask Jose Antonio to comment in more detail on the different group units.
Jose Antonio Alvarez
Thank you, Javier. Good morning to everyone. Let me go quickly through the different business areas starting with the usual pie we show, where the profits come from in the different units. Some changes this time in favor of what we so call mature markets that are gaining share, particularly due to the increased share of Spain and also in the U.K.
As of today, in the first quarter, U.K. and Brazil represent 20% each one of the profits. Spain, 14% and the U.S. 9%. The four countries that contribute between 5% and 7%, Mexico, Chile, Poland and Germany. The main change has been the shift towards more profit generation in mature markets. Starting with Spain, on the activities side, on the volumes side, we are close or around inflection point on the deleverage that has been happening in the last couple of years. Now we are more on a stable basis we grew a little bit in the first quarter, but it's the first time that we expect to continue in the coming quarters.
On the liabilities side, the CEO already mentioned, Javier already mentioned that our main focus have been deposit cost. We reduced a little bit the retail deposits and we increased the wholesale deposits, but the main target here has been the cost, deposit costs. The results, as a result of this policy, the NII increased in the quarter 4% compared with the previous quarter, the main driver being deposit cost.
On the other side, the lower cost due to the synergies of the integration along with the lower provisions, will produce a significant improvement in the profit after taxes. We see the same trends in the coming quarters: solid commercial revenue, lower costs and provisions, normalized towards the levels we guided to you in the previous quarters, going from 150 basis point cost of risk towards the levels between 100 and 120 basis points for the whole 2014.
If we review the volumes, it's what I said before, lending was lower in the first quarter, but only due to the repo agreements. If you take out the repo agreements, it was flat, the lending remained flat compared with the previous quarter. In the deposit side, we grew all the deposits and the loan to deposit remaining a solid 85%. While in those quarters, we have had expensive deposits that were not renewed. And some of them translate, as the CEO mentioned, to mutual funds that we've been gaining significant market share in the mutual funds, 200 basis points, more than 200 basis points in the last 12 months.
In relation to the credit quality, that is one of the main issues in the Spanish business. We're at around or close to the inflection point. The NPL ratio rise a little bit, but is fairly stable. What is more important on the right side of the slide, you have a change in trend in the entries, in the gross entries into NPLs. We've been seeing, particularly on the companies with our real estate purpose, a continuous upward trend, until this quarter that start to come down. The same that the mortgage is on the consumer lending did a couple of quarters ago. So this is a remarkable change that goes in line that anticipate probably the lower cost of risk that we were telling, anticipating to you.
Going to Portugal, while we have better macroeconomic prospects in the country, the country is recovering very fast or faster than the majority of the people was anticipating, still a deleveraging going on. We are gaining market share even if we are losing volumes, so the deleverage is still pretty significant. We reduced significantly the deposit costs, although the levels are still relatively high, 1.72%, the cost of the new term deposits in the quarter are relatively high. In credit quality, the NPLs are lower, and there has been a substantial improvement in the cost of credit. We see a strong upturn in profits as shown by the 68% growth we show when compare with the first quarter of the previous year. We are relatively confident in the developments in the country and we expect to be translating this better environment into the P&L in the coming quarters.
Going to Poland, different environment here, so the recovery is going on. The interest rates are still at very low levels, the lowest ever in Poland, 2.5%. In this country, -- is performing extremely well, volumes are rising on the right side. And lending to companies we are growing at 6%, demand deposit growing at 10%, the results -- we are translating this into the results, basically through a reduction on volumes, a reduction of the deposit cost. Fincom performed well and we pushed the revenues in Fincom by 15% year-on-year. Costs reflect the synergies of the integration with KB and provisions are basically stable. So we continue to stand the franchise, improve the productivity, commercial activity and efficiency and the recovery of the economy is helping this process. All of these makes us optimistic about the outlook of this journey.
Consumer Finance, the business is performing well. We continue to gain market share across the board. So, the car sales in our footprint are growing 7% year-on-year, our production is growing at 12%, so continuous gains in market share. The new lending rose 13% and the stock 2%. In results, significant growth year-on-year, 24% and also 5% compared with the previous quarter.
By country, we have double-digit growth in profits year-on-year -- and all the peripherical countries, Portugal, Spain and Italy. The area return on assets is higher than our competitors and it continues to work on, to maintain this advantage. In the first quarter, we incorporated the business of Financiera El Corte Inglés and began negotiations with PSA to create a joint venture that will be incorporated unit we expect in 2015.
Finally, going to Spain run off real estate. Well, the balance represents 3% of the assets in Spain, now less than 1% of the group assets. The balance was reduced by 14% in the last 12 months and this we expect to reduce between 15% and 20% in the coming years. The reduction in the last few quarters had been mainly in loans, minus 24% year-on-year. Coverage ratios remain above 50% and losses, we reduced the losses from €170 million last year to €146 million in the first quarter. We plan to continue to reduce the exposure at the pace I already mentioned.
U.K., well, I will say we are in process of the transformation of the franchise, as you know, and is reflected in volumes and results, as long as the good macro environment in the U.K. is helping. There was a good trend in the first quarter in volumes. It's the first time we saw some growth in bulk deposits and loans and we expect to continue to show some growth in the coming quarters.
The profit was £311 million in the quarter, 63% year-on-year growth, based on net interest income, based on the deposit reduction in the deposits and wholesale funding costs mainly. Still relatively high and stable spread in mortgages and more corporate loans that we are growing in significant pace. The cost are, in the quarter, very significant because we're investing in business center to grow our market share, as we are targeting in the corporate world. And finally, lower provisions due to the very good macro environment that translate into significant improvements in asset quality.
If we look at the numbers, if we look at what they so call, the transformation of the franchise, we have been having selective growth in several segments where we are focused. We are working in getting greater linkage of the customers and enhance the service quality. The pilots of this strategy are the range of 123 products, where we are growing, as you can see in the charts. We are the leader in capturing switchers in the last two quarters and we continue to strengthen our relationship with companies that we are growing at 12% in the corporate book, while the market is relatively flattish.
In short, good dynamics in business and revenues, net interest income, enhanced efficiency and good trend in provisions; these factors and a GDP growth around 2% makes us optimistic for the performing of this unit in the rest of the year. The States, well, the combined Santander Bank and Puerto Rico, -- we include here as we state and we send to you one month ago, we include here Santander Bank, Puerto Rico and SCUSA, the consumer business in the U.S. The combined Santander Bank in Puerto Rico increased volumes in the first quarter both in loans and deposits. This means that there's a change in trend by the start up of auto finance operation and development of new products. In SCUSA, we are growing very fast as a result of the agreement with Chrysler, a strong growth in new loans, 157% compared with the previous year and the balance is growing at 36% compared with March 2015.
And results, the profit was €216 million, which is growing 4% compared with the previous quarter, year-on-year comparison gross income rose 16%. Cost increased because we are building the franchise of the Santander Bank and expenses linked with the regulatory requirements in the U.S. Provisions doubled, this is mainly is in line with the rise of the new lending and due to SCUSA, they made the provisions -- for the expected losses of one year and when you grow the production very fast, you charge out against the P&L in provisions upfront. In short, business growth in both units will continue in the coming quarters. Profits should recover quarter on-quarter, once the provisions normalize in the SCUSA business.
Brazil, well, in fact, the macro environment in Brazil is similar to 2013. The economy is growing between 1% and 2%. Inflation is around 6% and interest rates stand at 11%. The Central Bank has been increasing rates around 2013 and 2014. Lending up 6% year-on-year. In the quarter, we reduced the lending 1%, basically because the economic -- partially because the economic slowdown. Better trend in deposits, where we are still growing. We are also growing at 23% in mutual funds.
The main developments in results in the first quarter were net interest income was virtually unchanged over the fourth quarter due to stabilization in the spread. This is remarkable development. For the first time in the last six, seven quarters, we have flattish spreads. Cost dropped over the fourth quarter and their increase in the year will be minimal, will be a very low rate, not only well below inflation, close to zero. Provisions fell for the fourth quarter running and the cost of credit improved. Attributable profit stood at €364 million, a growth of 24% compared with the previous quarter.
When we look in to the details, what we have is true facts. Stabilization is flat on the loan book. This is -- you have in the charts stand at 9.9%. The shortfall in NPLs 116 basis points compared with March 2013 and provisions declined in line and the cost of credit was at low levels. So stabilization of revenues, lower provisions and good cost control are the main drivers of the P&L in Brazil.
In short, in Brazil, we see a country with underlying strength, although we have a period in which the growth is below potential. Some pressure in revenues with stability in gross spreads and we are working on improving efficiency. The cost of credit, we'll continue to see this going down. And with these trends, our main objectives are in the retail arena, to work on the customer side and plans to improve the productivity and the commercial efficiency.
In Mexico, well, Mexico is not -- is growing well below consensus. For one year, we've been talking about Mexico growing 3.5%, 4%. And as a matter of fact, it's growing close to 1% than 3.5% to 4%. So this is reflected in the activity. Although the volumes are growing well, so you see the loan book growing at 15% and deposits, some mutual funds growing 7%. We are gaining market share on those. So I think this is relatively good and we are growing in a faster pace than the market.
As a result of some seasonality, the first quarter, the net interest income was lower than the previous quarter, but I will not take this as a trend for the next quarters -- we will see a recovery here. The cost rose year-on-year because we are adding branches and ATMs. We are at 7% more branches and 5% more ATMs, so we are investing in the franchise. Provisions year-on-year increased, but compared with the previous quarters are going down after the house builders -- we made last year.
And the net result was lower compared with the previous year after taxes. There's going to be a big divergence this year between profit before taxes and some profit after taxes in Mexico, due to the increase in the tax rate from mid, top mid 12%, 13%, 14% to close to 30%. So this year, you should expect a significant growth in profit before taxes and profit after taxes be much weaker due to the increase in the tax rate.
In coming quarters, we see faster economic growth. We've been saying this for a couple of quarters, we expect this time to materialize. In this environment, we expect that the P&L of the coming quarters to be significantly better than this one, -- this is a recurring base for the next quarters. In Chile, a very good quarter, so volumes are growing well, they're stable and the cost of risk is improving. So as a result, we have a P&L that reflects this environment. It's true that the inflation has helped this quarter like in the previous one, inflation was relatively high. As you know, we have a long position in U.S. that is linked with inflation against the nominal rates and this position provide extra interest income in the quarter.
But behind these, the underlying -- of the franchise is you can see in the numbers: good growth in volumes, relatively healthy spreads, lower provisions and the cost more and more under control, this produce a very good outcome in the bottom line where the profits are growing at 4% compared with the previous year and 12% compared with the previous quarter. You can now translate exactly this into the coming quarters because we do not expect the inflation to be as high as what it was in the first quarter, but we expect good results in the unit in the coming quarters.
Other Latin American units, little to say here, we have Argentina, the profit €56 million, plus 1% year-on-year. Uruguay increasing 15%, Peru 16% higher and we start the business in Colombia with our group new subsidiary that began to operate in January this year and we will incorporate in the next quarters. In corporate center, corporate activities, nothing special to comment here. The loss is €405 million, a little bit better net interest income due to the lower wholesale funding costs is the main issue. Greater trading gains due to the disposal of some exchange rate difference and the disposal of some available for sale portfolios.
This is €100 million coming from the available for sale portfolios, and the provisions and other allowance were almost zero compared with around €100 million in the previous quarters. So overall, a loss of €405 million, that is very much in line with the previous quarters.
Now I hand over to the CEO to elaborate about the conclusions of this first quarter result presentation.
Javier Marin Romano
Thank you, Jose Antonio. Let me end just summing up the first quarter and my view on the coming quarters. As mentioned in previous quarters, at the beginning of the year, Santander confirmed an improvement of its basic trends in profits, both at the group level and its principal units in a more favorable economic scenario.
In the first quarter, the group recorded commercial revenues growing well year-on-year and over the fourth quarter in almost all units, underscored either by higher revenues or by stabilization in those units where they were falling. Lower costs in real terms in some of the group's principal units, even before restructuring, 100% of the potential savings of ongoing efficiency plans. A sustained drop in provisions in 6 out of 10 core markets, with cost of credit improving in most units, as a result of the better credit quality.
The combination of these trends is reflected in a significant turnaround in net operating income after provisions which grew in constant euros at double-digit rates year-on-year in the first quarter of 2014, compared to the sharp falls of previous years, almost 20% in 2012 and almost 10% in 2013.
All this places Group Santander in the path toward recovery in profits and profitability that will continue in the coming years and will spread to all units. Specifically, in Spain and Portugal, we see a recovery in revenues that will continue and join lower costs from the plans underway and reduced provisions due to the better environment.
In the U.K., we will continue to improve the franchise with growth in target segments and products, including SMEs and companies, without losing the focus on spreads. Today, we are well-placed to take advantage of the country's faster pace of growth and the likely change of a scenario in interest rates.
In Brazil, in an environment of economic slowdown and high inflation, we have stabilized the spreads, controlled costs and reduced provisions. We have plans and the potential to grow in a profitable way in this phase of the cycle, backed by greater customer linkage. A good example is the investment in the acquiring business, GetNet, with high growth potential. We acquired this in the first quarter of 2014. It's a leader in IT solution and services for business with electronic payments, with a market share of 6% and growth expectations of high double-digits. Our goal is to provide our customer, our corporate customers with a new and more comprehensive business proposal with an integrated Santander account that joins GetNet products.
As regards to consumer business in Europe, we see continued trends in revenues and provisions in a more favorable environment for this business, enabling us to grow organically and inorganically. A key element for the future is the agreement and other negotiation or more under implementation with Banque PSA, which is Group PSA Peugeot Citroën, to finance the acquisition of vehicles on 11 European countries, which is expected to be completed on the second half of 2015. Its materialization via local alliances will boost Santander Consumer Finance's presence in markets where we already have critical mass, like Germany, Spain and the U.K., as well as the entry into other markets like France and Switzerland.
In the U.S., we will continue to grow on two fronts. First, we need to complete the franchise at Santander Bank, investing in commercial systems, service quality, adapting to regulations. As you know, we had the -- the Federal Reserve pointed out some deficiencies, organizational deficiencies in our capital plan which are in the process to be solved.
And we are already, and we need to recover more growth levels with a more balanced business mix. In the case of Santander Consumer U.S.A., the objective is to transfer to profits the greater lending and revenues made possible by the agreement with Chrysler once the pace of provisions returns to normal. As I mentioned before, we will see this already in the second half of this year.
Mexico will continue to grow faster than the market in its target segments backed by the expansion of its branch network. The likely acceleration of the economy in the second half of this year and the efficiency plans underway will spur revenues and profits. Chile, business remains good, which is enabling the bank to gain market share and recover leadership positions. Higher volumes and high inflation will help maintain strong revenues that will feed through the whole income statement. Lastly, Poland points to growth in revenues and results based on greater business, higher productivity and lower costs from the merger. In other words, we see a very favorable outlook in the coming quarters. Thank you very much.
Let us start with the Q&A. So, Angel, if you want to conduct the session?
Thank you, Javier. Good morning. As always, we will start with the Q&A. All the questions we have received through the web and if there are any at the end, we will cover those on the telephone line. And as always, we organize and we will organize the questions by themes starting with strategy, regulation and perspectives.
So in the first group, first question would be with regards to regulation in Europe and AQR, Sergio Gamez from Merrill Lynch, Bank of America Merrill Lynch and Britta Schmidt from Autonomous. They both asked about the AQR and the stress test results. What do we expect from there and the impact in P&L, as well as the new resolution mechanism, if we expect a quantitative impact in P&L?
Javier Marin Romano
Okay. Now with respect to AQR and the stress test, we will see this morning, this morning there's a press conference where we should know about the process and the economic scenario to be dealt with during this stress test. We've grown already through some parts of the asset quality review. We don't expect any impact on the P&L. And we think that with respect to the stress test, where we believe that we will see a very tough economic scenario, we will go through very, very well. So we don't expect any impact either on the P&L and we look forward to get out of this stress test reinforced.
With respect to the cost of the resolution mechanism, we don't see any increased costs with respect to what we are doing before, as basically we will have now two funds and the allocation that we are doing today only to one, will be a split between the two of them. So one in the Spanish level, and the other one at the European level. So no impact.
With regards to dividends, Daragh Quinn from Nomura. He asks about the guidelines given by Bank of Spain compared to our current dividend policy of €0.06 per share. If we are considering that scrip to be maintained compared to the limit of payout and what is our dividend strategy in general terms?
Javier Marin Romano
Okay. Well, you know the dividend policy of the bank is approved in the General Shareholders' Meeting, so the dividend policy for this year has already been approved, €0.60 on four scrips. For next year, it will go to next year General Shareholders' Meeting. So this is the -- and I don't see any limitations to our dividend policy because of the recommendation of Bank of Spain.
Okay. Moving to the Santander Brasil operation we announced this morning. There are several questions. I will try to probably summarize them in three or four. Juan Calvo from Espirito Santo, Antonio Ramirez from Keefe, Raoul Leonard from Deutsche Bank, David Vaamonde from MainFirst, Mario Lodos from Sabadell Bolsa, Frédéric Teschner from Natixis and Sergio Gamez from Bank of America Merrill Lynch. They basically ask four questions.
First is, with regards to our strategy of quoted subsidiaries, if this changes that strategy and if we are still thinking of IPO-ing the U.K. subsidiary or other subsidiaries or if there is a read across to the rest of the minorities that are currently quoted in Mexico, Chile or Poland. That will be the first question.
The second question would be capital benefits. I think they had been summarized throughout the presentation. But if you want to elaborate there in terms of what are the capital benefits for the group.
Third group of questions is if there are going to be more management changes in the subsidiary, we think that there will be some there.
And the fourth, which is made by Mario Lodos is with regards to valuation, and he says that in the IPO, we value the division at circa €30 billion, if we have to make an adjustment. I can address this last one because we didn't revalue on the IPO. It was done at book value, considering the regulation at that time. So we did not do any revaluation of the stake.
Javier Marin Romano
So we move to three questions, the strategy. The strategy of the bank is to have affiliates that are independent in capital, independent in financing and quoted in the markets. And this strategy is not going to change. We're not going to squeeze out Santander Brasil. It will continue to be quoted, and we have exactly the same strategy with some of our affiliates. So our affiliates should be quoted in the markets. So we keep our plans with respect to the IPO of the U.K. However, as I mentioned on previous presentations, this is a midterm operation, the quotation of Santander U.K. So it will take place.
Is there any read across to buy out some of the affiliates? Well, no, this is now the case for Brazil. We're talking about Brazil, so let me stress that the strategy in terms of independent affiliates in terms of capital, in terms of financing and quoted in the markets is not changing. With respect to the capital benefits, I think I already talked about this. It's on the presentation, where it's two basis points on the Core Equity Tier 1, plus in five years, an increase of 20 basis points due to the reduction of the excess of minorities.
With respect to management changes, as I've said through the presentation, we have very clear ideas of what needs to be done in Brazil. We have the appropriate team in place and there's not going to be any further management change. I think now what we need to do is to implement and to materialize the plans that have already been prepared.
Okay. With regards to our cost plan, Raoul Leonard from DB asks about group P&L costs, if how should we extrapolate or should the market extrapolate the excellent performance in first Q 2014, if we are seeing some trend in cost synergies, and what will come from our investment programs in that sense? It's the same one, it's all around costs. How can we extrapolate the good performance of the first Q results going forward and how do we see synergies and what is the investment results?
Javier Marin Romano
The efficiency plans that we have of €1.5 billion for these three years are yielding their first results. So, we should see, during the year, an acceleration of the cost efficiencies, but are supposed to be implemented this year, but let me remember that they account for €750 million, which is half of this three-year plan.
First quarter has been very good in terms of the implementation of new plans. So, let me point out, as I said during the fourth quarter that I'm not only confident to make this €750 million a year of savings, but probably to be on top of this figure.
To finalize this first section, we have Andrea Filtri from Mediobanca asking two questions. With regards to the banking union, how would the establishment of a full banking union change our strategy -- change? And the second one is what are our expectations for a QE European program from the ECB?
Javier Marin Romano
Well, first thing, full banking union. I don't think it's going to change dramatically our plans. So, with respect to the QE program, my belief -- I believe that the risk of deflations are not huge, however, it's good to know that the ECB is there to tackle that. So, we will see. However, we don't have big expectations for this.
Okay. Moving to capital and financial management, there are several questions. Well, there has been some questions around dividends that have already been addressed. I didn't mention Andrea Filtri, Ignacio Cerezo and Santiago López from Exane and Credit Suisse, but I guess that they are speaking about dividends and strategy with regards to Santander Brasil minorities that have already been addressed.
As I said, moving to the financial arena, we have a question from Raoul Leonard with regards to where are the capital gains from SCUSA and Altamira, where have they been registered and netted. They have been netted, and they are in the lower part of the P&L in other provisions. But you will not see them because they are netted and will not impact net profit in 2014. With regards to activity and volumes and balance sheet, there is a question around loan growth and total assets that we have grown for the first time since second Q 2012. If we see this as a turning point in strategy or in loan evolution and if we can provide some high-level view on this issue because we will be addressing afterwards division by division.
Javier Marin Romano
Well, a couple of things. First thing, we're seeing an improvement in the economic environment, right? So this should definitely help in terms of growth of our loan book. The behavior is very different by geographies. However, what we expect for this year is good growth in all the geographies. So we should see the change in trend being confirmed both in Spain and in the U.K.
We should see definitely an acceleration in Brazil. We're looking forward to growth of low double-digits in Brazil even though we had a decrease of 1% during the first quarter. So we are still optimistic with respect to the loan growth in the country. We should see good double-digit growth in Mexico and in Chile. We're seeing good growth in the U.S. So I would say that for the next quarters, we should see an accelerating pattern on the loan book for the group.
With regards to capital, I would say that there are basically two questions, and a third one on risk-weighted assets. But let me first address the ones on capital. They are made by Antonio Ramirez from Keefe, Carlos Peixoto from BPI, Benjie Creelan from Macquarie, Carlo Digrandi from HSBC, Frédéric Teschner from Natixis, Juan Calvo from ES, Espirito Santo and Sergio Gamez.
They asked basically, as they said, two things. One is the fully-loaded amount, how do we see, where is the stance? What is going to be the evolution of the fully-loaded capital ratio under the Basel III rules? And the second one is the evolution of the capital in the quarter. You mentioned it on the presentation but if you can elaborate on how the capital has evolved and that drop of the 30 basis points in this quarter.
Javier Marin Romano
Very good. Now with respect to the Basel III fully loaded, our plans have not changed. So we already stated that we were looking forward to have by year-end a 9% fully-loaded capital, fully-loaded Core Equity Tier 1. That is exactly our plans. So we stand to our plans to have, to be at 9% by year-end. With respect to the evolution of capital during this quarter, I mentioned this during the presentation, we had 15 basis points of organic generation of capital. But we had the deductions from the minority operations in Brazil, the operations in Santander Consumer, which basically brought us to this decrease of 30 basis points during the quarter.
With regards to capital, there is also some questions from Antonio Ramirez, Mario Ropero from Fidentiis and Andrea Filtri from Mediobanca, and Paco or Francisco Riquel from Nmas1. With regards to the goodwill in the Santander operation, if there is any impact from goodwill in Santander Brasil? The answer is no. The impact comes, as Javier mentioned, from the lower deduction from minorities. There is a question on the amount of those minorities by Carlo Digrandi and the answer is €1 billion. The 20 basis points is the excess minorities that we have on Santander Brasil, which is the 20 basis points during the next five years that has been mentioned when the operation was presented.
With regards to risk-weighted assets, also we have Raoul Leonard from Deutsche Bank asking basically two things, if we can explain the movement on risk-weighted assets to almost €100 -- sorry, €540 billion compared to the €490 billion that we had in the previous regulation in the previous year; how we see the comparison between both regulations and if we can give a guidance on risk-weighted assets evolution going forward.
Jose Antonio Alvarez
Well, in the quarter, you have basically a €50 billion growth in risk-weighted assets, which I will say €5 billion is what we so call organic growth and this is probably a little bit kind of a guidance for the next quarters, probably next quarters will be a bit bigger than this, the €5 billion we saw in the first quarter. The other come from SCUSA and El Corte Inglés is like another €10 billion operations, let's call inorganic growth, and the remaining €20 billion, €25 billion comes from different changes in methodology, central and local, and the adjustment in models due to Basel III.
As a matter of fact, the guidance for the next quarter is, the organic growth, the €5 billion we saw in the first quarter is probably a little bit more than that, -- we will see in the next quarters.
There is a negative, but probably you remember is that the operational risk model at some point in the year will be approved, and this will add around 20 basis points capital. That probably, you heard us talk about this in the previous quarters, it's still pending.
With regards to liquidity and to finalize on the equity side, there is a specific question by Raoul Leonard from Deutsche Bank with regards to the improvement in equity adjustments, in valuation that it improved by almost €900 million in the quarter, that's AFS. Remember that in fourth quarter 2013 and during the full year, we had a strong impact coming from forex, negative impacts, so some of them have reverted. Almost -- out of those €900 million, more than €500 million or around €500 million are coming from there and the rest is revaluation of ALCO portfolio, given the mark-to-market normal adjustment that is done to the AFS, to the available for sale portfolio.
Going into liquidity and financing, there is a question by Raoul Leonard about the NII evolution, I guess he refers to the corporate center because he asked for the Q-on-Q improvement in NII, if we can explain that improvement in liquidity. But also we can elaborate, if you want, on general terms in the group.
Javier Marin Romano
Well, basically, it's reduced cost additions. So that explains the lower cost of the net interest income at the corporate center.
And linked to this, Carlos Peixoto from BPI, David Vaamonde from MainFirst and Andrea Filtri from Mediobanca, they asked first an update of the refinancing schedule, the ECB exposure and amount of ECB eligible assets, so that's all on the liquidity/financing side. And the second group of questions is size of ALCO portfolio, if we can give some light in the sovereign holdings and contribution to NII?
Jose Antonio Alvarez
Well, in relation with ECB, we have some financing from the ECB in Portugal and in Consumer Finance, like in previous quarters is €4 billion, €5 billion, nothing more than that. Eligible assets for the ECB, I don't remember the figure, but in total in the central banks, the group has like in excess of €200 billion of eligible assets to be able to discount in the central banks' windows, so it's a pretty large pool of eligible assets to discount in the central banks. The refinancing schedule, I mentioned in the previous quarters that probably we'll refinance probably 30%, 40% of the maturities, no more than that. As of today, the group has issued as a group like €18 billion into the markets including securitizations.
The ALCO portfolio, I assume that you meant -- the total available for sale portfolio that is the, what you call ALCO portfolio, we don't have maturity portfolio at the group, stood at €76 billion in total, of which €24 billion is Spanish sovereign debt, €24 billion is from other sovereigns and mainly Brazil, €14 billion, Poland €3.7 billion, Mexico €3 billion and minor amounts in other jurisdictions. And having very little change in this portfolio, in the previous quarter it was €69 billion; this quarter, €76 billion, mainly due to increase of the size of the portfolio in Brazil. Finally, in relation with this, I forget to mention that we don't have any funding from the ECB in Spain or in any other jurisdiction.
Moving into the next section, which is credit quality and starting with Spain. Again, several questions here: Carlos Peixoto from BPI, Mario Ropero from Fidentiis, Sergio Gamez from Bank of America Merrill Lynch, and they all ask about evolution of NPLs in Spain linked to this cost of risk. How do we see both evolving and how do we see -- and if we see a peak in the NPLs and if we can give some light on the inside of that evolution.
Javier Marin Romano
With respect with the great quality in the Spain and new non-performing loans, I think as Antonio already pointed out by segments and by products, what are the entrances of new non-performing loans, which is significant in this quarter is that we see a big decline in loans to companies without real estate purpose, which is a very important sign. We continue to see reductions in mortgages to individuals and to consumer and individual cards. The cost of risk is still going down but still high, we said that we expected this to move on a normalized basis, to 70 basis points by 2016 and this is exactly the plan that we have.
With regards to again, cost of risk and NPL evolution, we have the same question for three divisions, which are Consumer Finance, Mexico and Brazil. They are asked by Mario Roper from Fidentiis, Carlos Peixoto from BPI and Benjie Creelan from Macquarie.
Again, it's the same question, if we can give some light. With regards to Consumer Finance, how can we explain the credit provisions and how do we expect them to go forward? In Mexico, cost of risk evolution expectations, and in Brazil cost of risk in NPLs, given the small pick-up we have seen in the NPL ratio.
Javier Marin Romano
Let me begin with Santander Consumer Finance. The cost of credit at Santander Consumer Finance is abnormally low. However, the rhythm of growth in terms of new production is also abnormally low. Just remember that the bulk of the business of Santander Consumer Finance is in Germany and in Central Europe and the northern part of Europe. So we should see -- I don't see it right now, in the next quarters, but we should see in the next years some pick-up in this cost of credit. But that should come hand with hand with also an increase in the level of activity.
Mexico, my view is that we should see a much better second half of the year than first half. We saw an already a decrease in the non-performing loan, especially on the consumer side on this first quarter. The second half, we would already have one year with the change in the pattern of provisioning, when we changed last year, if you remember in June, from incurred loss into expected loss. So we will have a much better comparison during the second half of the year. And there we will see definitely, we look forward to see an improvement of the trend. This, together with the improvement in the economic conditions of the country, makes us be optimistic with respect to this.
And with respect to Brazil, I mentioned during my presentation that the increase this quarter was basically due to the decrease of the denominator because of the decrease of the loan portfolio. We see a slight growth during -- growth of the loan portfolio during the next of the year.
I mentioned before, we expect low double-digit for loan growth during this year. We're growing very well in mortgages. We're growing very well in BNDES in infrastructure.
We're growing also well in the agriculture, even though there are still is big, good growth from small bases. We're growing also very well in large corporate. We need to resume a loan growth again in SMEs, although we have decreased it during this quarter. So I don't see any pattern of deterioration on the credit book in Brazil, so we should see a more -- a very stable loan -- a non-performing loan ratio in Brazil for the next quarters.
With regards to activity and specifically volumes in Spain, starting in Spain by divisions. There are several questions around volumes, being asked by Mario Ropero from Fidentiis, Raoul Leonard from Deutsche Bank and Carlos Peixoto from BPI, basically asking how do we see the loan growth for 2014, given that there has been a small decline in some segments or areas? What is our sense of the new business, the new production? If we can give specifically for segments, there are also some issues around mortgages or SMEs, if we can give some light of how do we see there the volumes, the new production both in the current quarter and going forward.
Javier Marin Romano
Okay, let me see, during this quarter we've had basically, almost flat mortgage book, almost flat, a small increase in loan to companies, except for a discount of receivables where we've seen a small decrease. We've seen an increase in loans to administrations.
What do we see during the next quarters? We said at the beginning of the year, that we expected a small, modest growth this year and this is exactly what we see. In terms of the -- by products or by segments, new production in mortgages has increased 69% over the same period of last year. Good margins, the margins on top of 200 basis -- around 200 basis points. Good credit quality with the loan-to-values very conservative and we see this trend growing.
With respect to SMEs, we expect that with the new advanced proposition that we launched in the country and the focus of the network on SMEs, we should continue to see good growth in this area. We're seeing, of course, some margin compression, but still at very, very good levels. With respect to consumer, we're seeing also a good growth this year. So we are confident to have some modest growth in terms of the overall book, but some growth this year with very good, great patterns.
Moving to the other side of the NII, with regards to spreads. So our question is coming from Mario Ropero from Fidentiis, Carlos García from Société Générale, basically focused on deposits. How do we see spreads in time deposits? In general terms, in deposits, if we could see deposits, time deposits at 0.5% or 0.6%. And if you want to link this last part with NII and NIM, with both net interest income and net interest margin, how do you see both variables, net interest income and net interest margin in Spain going forward, affected by all these variables that we are commenting?
Javier Marin Romano
So first thing with respect to the cost of deposits, Jose Antonio already presented what is the cost of the new production of term deposits. That is around 90 basis points. The cost of the book, of all the book today sits at 1.08% coming down from 1.25% at the beginning of the year. And by year-end, it should be well below 100 basis points. So we see a very good trend in terms of the reduction of the cost of deposits. This will definitely feed into the net interest income and into the margins, so we see a slight increase in the client margin. And then the net interest income continue to grow at double-digits.
Going down into the Spanish P&L, and there is a specific question about cost and cost income ratio by Raoul Leonard from Deutsche Bank. What is our expectation in cost income ratio in Spain going forward? I guess linked also to the evolution of cost. If you want to finalize in Spain with regards to P&L, there is another question by Mario Ropero by Fidentiis, asking for return on equities in the Spain, how do we see profitability of the P&L? So both cost income and return on equities in Spain.
Javier Marin Romano
Well, we talked about this on the presentation we did in London already a year ago, with respect to where we saw the return on tangible equity for Spain, which it was between, normalized between 18% and 20%. And the cost to income, my view is that we should go back to some of the pre-crisis levels that were between 40% and 45%.
Last question about Spain is with regards to loan-to-deposit in the balance sheet. Given that we are at -- sorry, the question is done by Raoul Leonard from Deutsche Bank. Given that we are at 85%, if we do have some expectations, some objectives, where do we see that, if we see it below 80%? So in general terms, those volumes, how are they going to evolve, first; how will the ratio will look like in the future?
Javier Marin Romano
Well, as you mentioned, we are 85%, but we won't lose to grow with clients. So this means that we need to grow, we will grow both in the deposits, we will grow in funds, but we need to grow the book, the loan book. And as the economic environment improves, the loan book should grow.
We don't have any specific target with respect to the loan-to-deposit ratio. We are very comfortable with the levels we have at the group level right now. We've said always that between 110% and 115% will be very comfortable levels. So we don't have a target. What we want to do today is to grow more with clients and this will definitely help in terms of moving our loan-to-deposit ratio slightly higher.
Moving to Brazil. From Carlos Peixoto from BPI, Mario Ropero from Fidentiis and David Vaamonde from MainFirst. I would summarize it in basically two questions. Volumes, specifically on the asset side, loan growth, how do we see, given the performance of the quarter, going forward, if we want to elaborate by segments or where do we stand in what we commented in previous quarters? That's the first one. And the second one will be NII, if we think that the NII is reaching the bottom and how do we expect it to evolve in local currency going forward during the year?
Javier Marin Romano
Let me see, with respect to loan growth, I mentioned during my presentation that aside from the slowdown in the economic activity in Brazil, there's -- specifically, I mentioned one area, there's two areas where we didn't have the loan growth that we expected. We did have the loan growth that we expected, but we did not grow at the same pace as our peers. So, these were on one side, loans related to payables. On the other side, was loan to the SME segment.
I mentioned that we did have what we expected because we have plans for both of these areas in order to make things better, let's say it like this. With respect to SMEs, we are preparing a new value proposition and this is in the process of being implemented. And with respect to the payables, we have some plans that we will announce soon. It's a process, an activity that we reduced at the end of last year, in order to analyze correctly what was the profitability of this activity and how we were conducting it and we will resume this back again on next quarter.
So leaving aside these two areas, we will be growing quite well in Brazil, right? So in individuals, we will be growing at around 11%, and we will be growing also quite well in the corporate side with respect to companies. When we come back with SMEs and with the payroll loans, that is why our expectations for loan growth in Brazil, see that low double-digits for this year. With respect to net interest income, on a like-for-like basis, and I mention this because remember we had the reduction of capital in the country, we expect the growth during this year compared to 2013.
Moving to Mexico, Daragh Quinn from Nomura asks around the slowing growth in Mexico, if we are changing any outlook for the division in terms of loan growth and profitability. And Mario Ropero also from Fidentiis makes a similar question in terms of loan growth, NII guidance, it seemed that the quarter -- if we can extrapolate the quarter or not.
Javier Marin Romano
Well, I think we cannot extrapolate the quarter. In the quarter, we've seen a subdued growth in Mexico, which is the -- actually the growth is accelerating. We look forward to see a much better second half of the year than the first half. So we're looking forward to have a strong loan growth in Mexico. We're not changing any expectations with respect to the P&L or profitability of the unit for this year. So we are confident that Mexico is going to do a, both from a commercial point of view and from a P&L point of view, a very good year compared to last year; considering, of course, that there's a tax impact, as you all know, from 2013 to 2014. So profit before taxes, level of activity, our market shares should behave very, very well this year.
Moving into the run-off division in Spain, the two questions, one by Benjie Creelan from Macquarie and Carlos García from SocGen, if we can elaborate if we are seeing higher entries for mortgages, if we are seeing increasing number of sales, when do we see these trending down? And if we can give details of number of assets being sold in amount in euros?
Javier Marin Romano
Well, first thing, we don't see higher entries for sure. Number of sales were 4,200 during the quarter for €702 million. Of course, what you see is that some of the credit are feeding into the repossessed, and especially on the loans to companies with real estate purpose. So on that area, (ph) the back bank , if you want to call it like that, you will show a reduction in credit and keeping the same figure for the real estate asset, right? And this basically is the net between the credit feeding into the repossessed and the repossessed being sold. So we don't see any higher entries on mortgages to individuals.
There is one unique question about Portugal, if you want to elaborate, made by Andrea Filtri from Mediobanca, if we want to elaborate on deposits, spreads, repricing, if we have any comment there in our Portuguese unit.
Javier Marin Romano
Well, what we have new in Portugal, aside from the competition from our peers is the competition from the government, which is issuing this short-term paper that is paying an extraordinarily high interest rate. However, we see a stabilization on the cost of the new -- of production of new deposits. This will feed well into the average cost of the book. We see a slight decrease in this quarter on deposits due to this – as was mentioned before, due to this competition not only from our peers but also from the government, but we see good trends in Portugal in terms of the P&L for the year.
Moving to U.K., Raoul Leonard from Deutsche Bank, and Stefan Nedialkov from Citi. They asked about volumes, customer loans, how do we plan to grow them or how does the business mix move in terms of SME, retail and if we see any standard variable rate, SVR, cannibalization linked to this, if the deposit repricing is done or if there is much more to do?
Javier Marin Romano
Beginning with deposits. We are very happy with the evolution of this in the U.K., right? First thing because we are on-boarding 100,000 clients every month with the 123 proposition that is feeding our current accounts, which is very, very healthy. Almost 90% of these clients, we're the first bank, so these are transactional accounts, which is very important. We're the number one in the first net winner in terms of the switching of the current accounts in the U.K., which is very, very good. So, we are -- of course, this is helping us to reduce the cost of our term deposits. So, we're losing some of the term deposits, at the same time that we are reducing the rate we pay. That is being compensated by the current accounts that we earn.
We have now the ISA campaign during this quarter. So, we see a strong reduction in the cost of these deposits, which will have an impact on the year. Loan growth, the SMEs is growing very, very well, as well as corporates. We see double-digit growth in both, with the same trend that we're seeing last year. We are beginning – UPLs is growing, although from a very slow base, but we’re beginning to grow well. And the new proposition for UPLs. And mortgages are beginning to -- are stabilizing more.
Is there any cannibalization into the SVR? Of course, there is. However, I think we're managing this very, very well. So, what we basically see is that this quarter, there is a slight increase in the client margin in the U.K. That should be more stable during the next quarters.
Well, as a last point, I would like to address the new situation of the department. As after eight years, that is -- 32 sets of results, as you know, the group has appointed me as Santander Brasil CFO, which I have to say I'm proud and very happy to announce. So first, I would like to thank you all for all these years sharing of ideas, intense discussions and good professionalism that you have shown. It's been a pleasure on my side to have this opportunity.
And secondly, as you know, the new Global Head of Investor Relations that the group has appointed is Jose Manuel Campa. He's already sitting here with us, but you cannot see him. I'm sure he will maintain and even improve the strong commitment that the group has with the market, with analysts and investors. And that you will welcome him as you did with me eight years ago. Thank you very much.
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