Alfredo Sáenz Abad – Second Vice Chairman and CEO
José Antonio Álvarez Álvarez – EVP-Financial Management and IR
Banco Santander, S.A. (STD) Q1 2011 Earnings Conference Call April 28, 2011 9:00 AM ET
Alfredo Sáenz Abad
[Interpreted] Good morning, we are going to begin our results presentation. I’ll be reviewing the general main features of the quarter and the Group’s results and then Jose Antonio Alvarez will look in more detail at the results of the business area. And finally, I will conclude with our view of the coming quarters.
I’ll focus on the five main aspects of the quarter which I will cover in detail in the following slides. First, the Santander Group’s capacity to keep on generating strong return results in a market which remains very difficult. We’ve once again surpassed EUR2.1 billion in quarterly profit and this was very much bolstered by our commercial retail revenues.
Second, we ended the first quarter with very solid capital ratio. RBIS ratio was at 13.7% and our core capital rose to 9.66% after rising 86 basis points in the quarter.
Thirdly, the Group’s NPL ratio remained almost the same as in December as all large units, except for Spain and Portugal further improved their NPL ratios in the quarter.
Fourth, we’ve once again improved our liquidity position. Deposits captured in a very active issues policy have enabled us to exceed by EUR20 billion the business needs and the maturities of the quarter.
And fifth, we continue to diversify and improve our business portfolio. Let’s look at each of these points in more detail.
Results. Beginning with profit in the first year, we have remained on target with 2.1 billion, which although is still slightly below that of Q1 of last year, it is slightly larger than the figure for the third quarter and significantly larger than the figure for the fourth quarter. Business model positioning and diversification are still the key drivers that have enabled us to weather the crisis while maintaining a high degree of recurrence in our results.
And I’d like to emphasize diversification; in the central chart – in this slide you have the best example of that. Brazil is contributing 25% of the profit of the operating area, the rest of Latin America 18%, Santander U.K. 17%, and Santander Consumer Finance has increased to 12%, while the Retail Networks in Spain bring in 13% and Sovereign is now 4%.
Emerging markets have shown significant profit growth. Brazil rose by 16% year on year, local currency and before minority interest. After that, attributable profit after minority interest increased by 12%. The rest of Latin America has also performed very well with 14% growth rate before minority interest. Attributable profit, taking into account our increased ownership in Mexico, rose to 27%. Santander U.K. and Sovereign have increased their combined profits by 8%. Strong costs in Sovereign and the U.K.; however, year on year comparison is affected by regulatory changes.
Finally, Continental Europe, in a very complicated macroeconomic environment, was down 14%, very much due to Spain and Portugal since Santander consumer finance had an excellent performance. Jose Antonio Alvarez will discuss in more detail the results of the different business units.
The most positive aspect of the results for the quarter is the change of trend in our basic revenues. Business growth rates were higher than in the first part of 2010; plus, there was an improvement in our retail spreads for the whole of the group in the last few months, particularly in lending. Also in the quarter, we see a better performance of fee income from services and also of our insurance revenues.
The net effect is an improvement of gross income very much bolstered by the change in trends observed in Spain which we expected to continue in the next few quarters given the loan and deposit spread management policies of recent months and the current interest rate environment as well as due to the excellent evolution of Brazil, which reflects a faster growth in volumes.
The second point to be emphasized is the improvement in our solvency ratios. We ended the quarter with core capital at 9.66% rising over 86 basis points versus the end of the December. The main three factors behind this strong increase are 21 basis points from organic capital generation, 38 basis points from the additional steps taken in the optimization plan for risk-weighted assets, lower trading positions and not recording subsidiaries’ capital as risk-weighted assets when the assets are in the same currency, 28 basis points from the incorporation as capital of the convertible bonds issue in Brazil in Q4 2010 after obtaining authorization from the Bank of Spain.
And finally, there have been some small positive and negative impacts with the incorporation of SEB, the disposal of our minority interest in Santander Chile, which pretty much offset one another. This increase has reinforced our capital position and gives us a very solid ratio in accordance with our business model and our risk profile. And we start from a very comfortable position in order to meet regulator’s requirements.
Finally, I’d like to remind you that in April the Zachodni Bank was incorporated to the group, with an estimated impact on our capital 58 basis points.
The third item in the first slide was about risk quality. Our active risk management is enabling a good evolution of NPL entries in the group. We closed the quarter at EUR3.1 billion as compared to an average of about 4 billion in the last two years, this improvement has been seen in the major units, whose entries have continued on a downward trend and in all cases much lower than those of 2009. As for our risk premium, it has also improved significantly and is now clearly below 2% for the group, and all the main groups have improved versus last year.
This strength has meant a significant reduction in the pace of increase of the group’s NPL ratio. It rose by over 100 basis points in 2008, 31 basis points in 2009 and only six basis points in the first quarter of 2011; this because almost all the large units have been improving their ratios in the last quarter. Of note were the drops in Santander Consumer Finance Sovereign in Latin America. This has enabled us to offset the rise in the NPL ratio in Spain and Portugal which, as we pointed out in previous results presentations, we expect to continue for a few more months. Finally, our NPL coverage for the group has remained stable in the last months at over 70%.
Coverage by geographical area has evolved in a very similar way to our NPL ratio. Strong improvement in Q1 in sovereign and Latin America, both in Brazil and all the other countries, it has stayed well above 100%. Santander Consumer Finance has an excellent 122%, and the U.K., which has a lower coverage rate because of the larger proportion of mortgage in its portfolio, has remained stable. On the other hand, Spain’s coverage continues to reflect the phase of the cycle. In summary, we have controlled our nonperforming loans, have them well positioned and we do not expect any significant deterioration.
I’ll move on to Point 4 in my presentation, liquidity. As we emphasized in our last results presentation, in the last years we’ve improved the group’s financing structure and liquidity ratios, putting us at the beginning of 2011 in a very comfortable position with needs that are much lower than the maturities envisaged. We’ve begun the quarter with the same strategy, deleveraging in mature markets and a strong activity in issues, enabling us to once again generate this quarter EUR20 billion more funds are needed, with the following breakdown.
We’ve reduced our commercial gap by EUR14.7 billion. We’ve issued EUR5 billion more than the amount maturing in the quarter for medium and long-term issues and we’ve additionally placed EUR4.2 billion in securitizations. As a result, we have continued to reduce our loan-to-deposit ratio, which is now at 115%, to compare with the end of 2008 when it was 150%. Lastly and over and above these figures, we have immediate discounting capacity in central banks for some EUR100 billion.
Finally, the last point in my initial slide, business portfolio management. In the start of the year, we’ve completed two operations that were underway. In Germany, we’ve integrated SEB’s Retail business at the Skandinaviska Enskilda Banken, which has increased our base for growth in retail banking beyond consumer finance in the largest market in Europe. In Germany, we have almost EUR30 billion in loans already and EUR28 billion in deposits and a distribution network with 400 points of sale serving seven million customers.
And in Poland, we have successfully completed the Zachodni Bank takeover, which will enable us to consolidate its results by Q2. With the Zachodni Bank, which is Poland’s third largest bank in branches and profit, and with our Consumer Finance Unit, which is the second largest specialized finance institution, the Santander has a very solid position in the largest economy in Eastern Europe and the one with the most potential, with a market share between 7% and 8%.
In Latin America, we’ve entered into a strategic alliance with insurance group Zurich in the five main markets in which we operate. The goal is to derive additional synergies and take advantage of the full potential of the bancassurance business in the region, combining the Santander’s retail capabilities with Zurich’s product development. This operation also adds value to one of our global businesses which is usually less visible. The value of 100% of the business is $4.1 billion, which will bring in around 1.2 billion in capital gains for the group once the operation is complete. With these transactions, the Santander group continues to build an ever more diversified business portfolio and one with greater potential than our competitors, which will mean greater capacity to generate recurring profits medium term.
Moving on to the group’s results, on the slide you can see the usual format of our P&L account. First column is the accounting figures with a small perimeter effect and with the exchange rate impact. In the second column, we have subtracted these impacts. The underlying aspects show the same trends that I mentioned in the previous slides solid, consistent, basic revenues, improving with an environment of low growth in lending, with interest rates still low in developed markets, and with a sharp rise in funding costs in the year-on-year comparison.
The growth in gross income came almost completely from our most commercial revenues, since our ROFs have gone down; differentiated cost management, depending on the situation in each unit, as you will see, very stable costs in our retail networks in Europe and larger growth in the growing – in the expansion area. Double digit drops in provisions, and this growing improved risk quality in most of the group, and the net of these three items in our P&L account have resulted in a 8% rise in net operating income, which is not reflected in our final profit because of higher tax pressure, which takes up 6 basis – percentage points of our growth, and because of higher provisions.
Let’s look at more detail at the different items in the account. As for total gross income, we’ve already seen the trend in our most basic revenues and their recovery in this quarter. For the future, net interest income will benefit from the faster pace of lending in Latin America, from a pricing policy that is improving our spreads and taking advantage of rising interest rates in Europe. Our fee income is also beginning to improve in a more favorable economic environment. As for costs, subtracting the perimeter and exchange rate effect, they have risen 6.5% year-on-year and 1% in comparison with Q4.
By units, you can see that there is a very different trend, as I’ve mentioned. All the European and U.K. retail units show around zero increases in real terms, or even falls, more reflecting a sharp decline over the last quarter of 2010, particularly in Portugal, which was down 6%.
In Latin America, costs have risen because of new branches being opened. We’ve opened 138 branches in 12 months, and the signing of wage agreements in an inflationary environment in some countries. In Brazil, wages have risen by 7% and they’ve risen over 20% in Argentina. And in this environment, we’ve had particularly excellent performance of Mexico.
Finally, Sovereign’s year-on-year increase reflects the impact of investments in IT and systems began in the second half of 2010 as well as the increase in our sales staff, which have not increased since Q4.
The third point I’ll mention, provisions, we have seen a year-on-year reduction of 8% in specific provisions versus the first quarter last year, and a similar consumption of generic provisions. Combined net specific and generic provisions have dropped by 10% year-on-year, a drop that would be 15% subtracting the exchange rate of perimeter effects. This drop reflects the strong decline of NPL ratios in Santander Consumer Sovereign in the U.K. and Latin America, excluding Brazil, which confirm the trends in nonperforming loans.
And now, Jose Antonio Alvarez, our CFO, will discuss the different business areas.
José Antonio Álvarez
[Interpreted] Good morning. Continuing with this presentation, let me review in more detail the different business units. There’s some additional information that you can find in the website if you want more details than I’m now going to present by unit.
Beginning, as usual, with Continental Europe, the income statement basically reflects the difficult environment in these markets. Gross income was still 2% lower year-over-year although the good news is that was better than in the three previous quarters. The operating expenses of our retail networks were basically flat, but increased in global businesses because of the investments we’ve been making, particularly in some areas to distribute fixed-income products, and they’ve also risen in Santander Consumer Finance, mostly due to changes in the perimeter. Provisions have improved due to specifics and as a result, attributable profit in the quarter was EUR1.054 billion, which was 14% less than in Q1 2010 but clearly better than in Q4 2010.
This change as regards Q1 of 2010 and the improvement over our Q3 and Q4 have been observed in all three retail networks and also in GBM Europe. On the other hand, Santander Consumer Finance has had an excellent performance, which I will discuss in more detail in a moment.
Looking at the different units, first looking at the Santander branch network, what we see is the strong deleveraging of the Spanish economy, deposits growing at 7.5% year on year; lending has continued to decline, in this case by 3%.
If we look at the results, there’s been a significant change of trend in gross income, basically with an improvement in our financial net interest margin which is already higher than that of previous quarters. This improvement in net interest margin is due exclusively to the larger spreads for lending and deposits, new production. There’s also a favorable impact of rising rates in repricing of mortgages when they talked about minimum rates for mortgages. Our back book has no minimum rates and so any drop or rise in rates is applied immediately.
It’s also been a good quarter for fee income. Costs have continued to register negative growth. Provisions were lower than in Q3 and Q4 due to specific provisions which were the lowest in the last seven quarters and which will continue to drop in the coming quarters. The underlying business is therefore doing well, pointing to higher gross income in the coming quarters with flat or slightly dropping costs and with specific provisions continuing on the downward path that we’ve observed in the previous quarters.
I’m not going to go into too much detail about Banesto since they’ve already presented their results. I would say that their trends are very similar to those of the Santander branch networks with improved spreads, costs under control, provisions dropping after the large efforts made in the previous quarters.
I will now discuss in a bit more detail the loan portfolio in Spain. First, as I’ve mentioned about Banesto and the Santander branches already, portfolio loans has continued to drop by 2.5% this quarter in all segments. As for the structure of the portfolio, you can see it on this slide, and we want to refer in detail to our exposure to the construction and real estate sectors. Volumes dropped by 4% in the quarter, and its percentage is now only 11% of our total portfolio in Spain and 3.6% of the group’s total portfolio.
Looking at credit quality, you can see that total NPL ratio was at 4.57%. As you see in this slide, almost 90% of the portfolio has excellent NPL ratios of 3.3% or less; of note, our residential mortgages with NPL rates this quarter still of only 2.4%. Loans with a real estate purpose are the only ones with a higher NPL ratio. Non-performing loans of this portfolio, which you see in this slide, were EUR4.9 billion, 50% of which are actually up to date with payments, and the substandard ones, which by definition are all up to date with payments were EUR4.6 billion, with a coverage overall of 25% which is very reasonable considering that they are all up to date with payments.
Moving on to the foreclosed real estate assets, first entries in the quarter were moderate, EUR156 million net. Sales and rentals were EUR250 million. Coverage increased is 32%. We think that the coverage each quarter reflects reasonable sale value for the assets. If we look at the structure, the coverage is different depending on the type of asset; 25% for finished buildings and buildings under construction, and 40% or slightly higher for buildings in design and land. So the coverage, we believe, reflects a prudent sale value of these assets.
Moving on to Portugal, I will spend a few minutes on Portugal given the difficult economic circumstances of the country. To start, three points. First, Santander Total is in a very good position comparatively. It is the top of the list of its peers in efficiency, profitability, credit quality and sovereignty. Second, we have continued to implement our deleveraging policy backed by attracting deposits and lower lending. We will see the details of that in a moment. And the third point is that Santander Total’s performance in terms of business and profit in Q1 similar to those of the networks in Spain; continued deleveraging, better trends in revenues than in previous quarters with improving spreads again; costs going down strongly and higher provisions to manage prudently the expected worsening in credit quality ratios.
Since there’s a lot of interest in Portuguese market right now, let me go into a bit more detail about the left hand side of this slide. It just lists the latest events which have brought Portugal to positioning, which I had mentioned, government until the elections in July and awaiting a bail-out package from EU.
I’d just like to mention a couple of things about the Portuguese economy which I think relevant for our sector. First, Portugal did not grow very significantly in the last 10 years. In fact, even during fast growth periods in Europe, it only grew by 1.5% between 2000 and 2007 and since then, whenever it’s been in recession, so there’s no – not been any sort of bubble in the Portuguese economy. Second message shown clearly in the employment rates, which have risen three points but have remained at relatively moderate rates, especially if we compare them with, for instance, Spain.
Moving down to Santander’s quarter balance sheet, it represents 4% of the group’s balance sheet and 3% of the profit. It had the credit portfolio of EUR30 billion, 54% of that are individual mortgages and our exposure to sovereign risk is of EUR1.6 billion. All of this is available for sale since following group policy, there is no portfolio held to maturity.
And finally as far as liquidity, as I said we’ve be deleveraging our balance sheets significantly. The loan to profit ratio has dropped significantly. Our financing position has improved significantly and the process continues. In fact, this year we expect deposits to grow EUR2 million more in loans; in Q1 they grew by EUR600 million more so we are on target with our end of year objective and our maturities are for EUR1.5 billion in 2011.
If we look at the credit portfolio or lending portfolio, we see that it has decreased 6.4% drop in 2010 and 1.3. The debt is quite contained; it’s significantly below the system. Residential home mortgages, 93% of loans are for the first home is 2.7, the ratio. The ratio for companies is 1.3%, very, very low. Our exposure to the real estate sector in Portugal is lower than the average for the system; and mortgage loans had a high ratio, but they take up very little of the portfolios, it’s EUR1.2 billion.
So although it’s logical to think that the economic situation will have an impact on the ratio and on the income of the group, the loan – the lending portfolio, et cetera, we are reasonably optimistic in the sense that it will allow the bank to continue to make a profit and we won’t be affected by – the sovereignty of the bank won’t be affected. The group, the impact on the whole group, will be quite low.
If we go to the last part of Europe, at Continental Europe Santander Consumer Finance, well this is a radically different perspective; very strong growth in deposits and other areas. There is a – there are some changes, but the elements that are behind this excellent evolution are a faster pace in new loans and volumes. We’re entering new businesses. The sustained improvement in spreads in this area; flat costs, excluding the perimeter effect, a reduced amount for loan loss provisions in line with the fall in the risk premium and the improvement in credit quality. The whole business of consumption has a coverage of 122%.
All this produced profit growth particular – in general, particularly in Germany, Spain, the Nordic countries, the U.S. and Poland, which have allowed us to reach EUR359 million in the first quarter although this quarter, I would say, cannot be extrapolated to the future mainly because of the big improvement of the credit risk of the U.S. portfolios, which has enabled us to make provisions. But we won’t get growth levels of 80%, 90%, but we do believe that we’ll believe that we’ll be at around 20% to 30% growth rates.
Now, if we go to the U.K., the U.K. we’ve got on the one hand what you see here is on the slide are two accounts. One has no regulatory impact, and the other one does include that, and the difference basically is £490 million as regard to the net profit. The most important part is new FSCS requirements, and the increase of the financial servicing scheme, which is about 10 million or 15 million, and the bank levy, which is about 20 million, 25 million in the P&L account so we’re talking about 100 million after taxes.
If we do away with those effects, we’ve got an account, a P&L account, where the results are quite – operating expenses are quite flat, which is in line – more or less in line with inflation. And there are going to be much lower provisions, and this would give us a margin after provisions and profits of around 20% minus two as regards to the quarter. That’s the worst-case scenario. None of these three regulatory aspects were present in the first quarter of 2010. It’s true that as the year moves forward, we’ll have a better comparison with 2010 and we expect a positive dynamic in the U.K. over the next few quarters.
Now, the business trend, well, I would say we know the GDP value in the U.K. is very low after the last quarter of last year, which was still in recession with a negative growth. The mortgages, the stock was 2% higher than in the first quarter of 2010, and our market share of gross lending in the quarter remained at 14% in a property market that is still weak. The loans to companies are growing well, 13% growth in the part aligned with the commercial strategy; also 29% rise year-on-year in SMEs. That’s an improvement in the market share from 3% to 3.7%. Deposits are growing plus 4% year-on-year in a very competitive market in terms of prices.
As regards results, gross income was lower than in the first quarter of 2010 because of the higher cost of wholesale funding, and the FSA has increased liquidity requirements. This can be clearly seen in the decline in the net interest margin, which has hardly changed in the last few quarters, excluding these requirements. On the other hand, very positive impact of lower needs for provisions which have been declining in recent quarters. In short, a good evolution of profits in a complicated environment which is not reflected in year-on-year terms because of higher regulatory requirements.
Let’s now go to Brazil. I would say that Brazil and Latin America in general have a growth trend as regards commercial pace, loans, deposits, et cetera. They’re growing quarter-on-quarter. Brazil, the last quarter was a good trend in profits, business growth and credit quality. We see an acceleration of net interest income plus free income growth by 13%. There’s a cost increase. There is a rise in inflation in the country, 6.3% retail, more than 10% wholesale. And the collective bargaining agreement in the country was 7.5%; and general expenses, which have to do more with wholesale inflation, are growing above 10%.
In addition to that, we’ve opened 116 branches in the last 12 months, 3% of the network, and we’ve incorporated more business managers. So we’ve got good trend. There are pressures in the country because of the expansion, more than the situation with the inflation, and provisions only increased 1% year-on-year and there’s been an improvement in the risk premium and in the NPL ratio. That leads to a net operating income after provisions that rose to 18% and profit before minority interests to 16%. I would say that we are very strong in Brazil, with a net – with a margin that is going up quarter-on-quarter, very much supported by the commercial side of the business.
If we look at, as I said, the rhythm of loans, we’re growing at 18% lending. Last year, we were growing negatively. This year we are growing 18%. So that’s a tremendous growth, and that is taking place in businesses, the 18%. Private individuals, 22%. Growth was also faster than in 2010, with a greater focus on demand deposits. This is positive; and bearing in mind that there’s an environment of rises in interest rates. In addition, Santander Brazil is being very active in placing bonds in the domestic market, which help to maintain a comfortable liquidity.
The faster pace of activity and the stable spreads led to a growing upward trend in basic revenues, doubling 2010 growth, and these higher revenues absorbed the rising costs and the moderate growth in provisions, a very moderate growth in provisions, so net operating income after provisions rose from about $1.7 billion in the first and second quarters of 2010 to $2 billion in the first quarter of the present year.
Let’s now go over to the rest of Latin America, South America. We got profit, attributable profit for the rest of the region was 27% higher, benefiting from lower minority interests in Mexico. The performance was similar to the trends seen in Brazil, faster growth in gross income and low provisions, especially in retail banking. By countries, good evolution in Mexico and Chile, which we will see in greater detail, and also Argentina whose profit increased by 10%.
As regards to business, we see a better loan profile in all segments except cards in Mexico where we still see a drop in the inter-annual like-for-like comparison, although in the last two quarters it’s relatively stable. As regards saving, there’s a two-digit growth and as regards results, there’s higher volumes, management of spreads, which seeks to counter the change of mix toward lower-risk products in the new scenario of interest rates in Mexico and in Chile; Mexico more because of the lower weight of cards, no, lower cost of credit. And this is reflected in growth in net operating income after provisions that has gone from $900 million to around $1 billion in the quarter.
If we go to Mexico, I would say that the most relevant thing has been the change of trend in gross income. We’ve had negative income for quite a few quarters in the P&L account and the positive effect of this has spread all though the account. We are increasing by 3.7% our income over the previous period, and the lending spree is speeding up, and we are gaining market share in all segments except for cards that continue to fall. This growth offset the fall in the spread of credits, the relative float weight, due to the larger proportion of low-risk products, especially cards replaced with other products in the Corporate segment. Deposits also rose strongly, particularly demand ones.
Operating expenses remained controlled and their growth lower than that of inflation. Provisions declined substantially and in line with improvement of the NPL ratio from 1.9% at March 2010 to 1.6% a year later. And above all, the risk premium was reduced almost by half in 12 months. As a result, net operating income after provisions increased 30% year-on-year and then goes up to 68% in attributable profit from lower minority interests and the operation with the Bank of America since September last year. So there was good performance in Mexico with very good trends, which will get even better in the next few quarters.
Chile. Now Chile is, I would say, very similar scenario to Mexico with a very big difference. There’s an increase of rates in Chile. They’ve gone from 0.5% to 4.5% currently, and we think that they will still go up until the – before the end of the year. The growth of the country is very high and there is some tension with inflation and the National Bank is reacting against that. So similar trends to Mexico in activity and provisions, net operating income after provisions and attributable profit rose 13%, 14% after only 5% in 2010. Key aspects were faster growth in lending with gains in market share, sharp rise in the spreads on deposits in the quarter, which offset – partially offset the fall in those in spreads on some products, especially active products, because regulations have been applied to those products.
Activity in spreads pushed up gross income about 3%, offset by the lower gains on financial transactions in the first quarter. Operating costs were higher year-on-year, but were flat compared to the three previous quarters. Lower provisions, as I’ve said. So after the initial negative impact of the interest rate increase, we think that growth in income will continue to accelerate and will be at about 15%, 20% by the end of the year, which are clearly higher than the rates we have currently.
Now if we go to Sovereign, I would say that they’re doing a very good job. They started very well and we’ve got significant better – significantly better activity. We’ve got positive growth rates. You must remember that when we bought this, 20% of this lending portfolio was discontinued. It went down to, from – it went down to 3000 million and that drop in that portfolio has been made up for with a sound evolution of business in multi-family, residential, home loans, 13% growth; and loans to SMEs which is – which are growing at a rate of 7%, which makes up for the drop in the portfolio that I’ve just mentioned.
Good acquisition of – and a very good improvement of spreads, 22 basis points improvement as regard to the previous quarters. This leads us to a P&L account which grows by 8.4% year on year. Costs after the big adjustments in 2009 and ‘10 increased because of investments in IT. And there’s been also a rise of 200 in head count, mainly business staff. It is a fact there’s been very much a great improvement in credit quality, minus 100 basis points in 12 months, and coverage has gone from 65% to 82% in 12 months and we are narrowing the gap in both with our competitors. Attributable profit in the first quarter was $176 million, almost double that of a year earlier. In short, we are doing our homework in order to become a true retail banking franchise in the style of Santander as we set our objectives two years ago.
Corporate activities, well, we have to look at the differences. The net interest income is 100 – minus 118 million because of two things. One was the increase of interest rates Euribor, basically, which is the reference rate went up 33 basis points coupled with the rise in spreads on issues. For example, in Santander Group almost doubled from 70 basis points in Q1 of 2010 to 135 in Q1 of 2011. Also, Santander’s very prudent policy for the group’s liquidity position and there’s a greater buffer of liquidity in the corporate center, which has a cost, which also led to a drop in – or as regards this part, the P&L account.
The second factor was higher provisions made in the quarter, EUR127 million more than Q1 in 2010, basically due to increased coverage of foreclosed assets that I pointed out in the presentation, mainly land. The rest were less significant movements. Gains on financial transactions were similar to those in 2010 due to the net difference between a positive impact from hedging of exchange rates and a negative effect in dividends and valuation of portfolios. So this quarterly net interest income has undergone a very slight variation.
And now I will go – pass the floor to our CEO, who will tell us about the trends for this year.
Alfredo Sáenz Abad
[Interpreted]. We’ve looked at – we have reviewed the Group’s strategy and performance, and of the Group’s main business units. I will end with my view of the business trends for the coming quarters.
Beginning with the units that face a more complex environment, Spain will continue to improve its commercial revenues, taking advantage of the upward trend in interest rates and the management of prices underway. We already see NPLs close to the peak, as specific provisions point to a downward trend. In Portugal, the greater adjustments resulting from the EU’s aid mechanism, together with those already set out, paint a picture of stagnation which will impact on commercial revenues and on nonperforming loans.
But anyway, Santander Total, however, is very well prepared. NPL ratios is half that of the sector, it has a higher coverage and much more capital. Score capital is 2 percentage points more than the average of its competitors. More importantly, its income statement is solid, giving it a greater capacity to absorb provisions and deliver an acceptable profit.
Santander Consumer Finance will continue to perform the best, with high profits in coming quarter. And although we cannot extrapolate the first quarter results, we continue to see profit growth of between 20% and 30% for the whole year. The United Kingdom will maintain a solid performance in recurring profits in an environment that is still weak and very competitive. Comparison of profits on an accounting basis with 2010 will continue to reflect in the coming quarters the impact of regulatory requirements on liquidity, the deposit currency fund and taxes, which are much higher than at the beginning of last year.
All our units in Latin America are gathering speed. Good evolution in deposits and faster growth in lending with good quality of risk, which is reducing the cost of credit. All this is beginning to be reflected in basic revenues and to a greater extent in net operating income after provisions. Meanwhile, we will have to manage greater pressure on costs due to the environment of strong growth and high inflation in some countries, which is already affecting wage bargaining agreements and our suppliers; and also the impact of the expansion of business and branches that Santander is developing in its main countries.
Lastly, Sovereign will continue to deliver well at the same time as it takes further steps to build up its commercial franchise and invests in company account managers, technology and global businesses. We have contribution from the good evolution of NPLs in an environment of low credit demand and good performance of deposits, both by volume and structure, which is contributing to sharply reduce the cost of funds.
Thus, I expect Sovereign’s profit to continue to be back by the top part of the income statement with larger revenues leveraged by lower provisions. This growth in revenues is a differential feature against most U.S. banks which have published results so far. In short, I think we face the coming quarters with most of the units improving their underlying profit and I feel confident and positive about the group’s performance throughout the year. Thank you very much.
José Antonio Álvarez
[Interpreted] Good morning. We’re going to start with the questions we’ve got from – through the web. We’ll organize these questions based in topics or divided into topics and we’ll try to cover all the questions that have been arriving since we started the webcast. First series of questions is on strategy, capital and regulation. We start with a question from Antonio Ramirez of Keefe on NMEI in Spain. If we consider – if we would consider to buy any of the savings banks, the casas? What’s your vision as regards the restructuring of the sector in general?
Well the answer is, cannot be very accurate because it’s a speculative question. We don’t have a clear scenario of what’s going to happen as regards possibilities of savings banks coming on the market or being auctioned and we don’t know data. We don’t really have the information that we need so I can’t answer the question accurately.
Now, there’s a series of questions on capital. Sergio Gamez from Merrill Lynch and Francisco Enriquez of Damas Uno asked about the internal generation of capital for the next quarters. Do we think that we’re going to talk about 15, 20 basis points per quarter? We’re going to continue to talk about that figure.
Let’s deal with this first. Well, the answer logically is yes, yeah, yes. We expect the same rate of profits and generation of capital will be more or less the same as it has been.
Several questions on the definition of capital and the Bank of Spain; what would our levels, as defined by the Bank of Spain, be? The reasons for the getting ahead of the convertibles in Brazil, Francisco Ramirez, Antonio Ramirez, Carlos Peixoto of BPI, they’re all asking this question what’s the reason. Is there a decrease or not of profits as a result of this advancement? Whether, what’s the accounts as regards minority products and whether these convertible products are eligible? That’s the questions or the series of questions on that area.
I’m going to pass this onto Jose Antonio Alvarez. I think that there will be more questions like that; maybe would be a good idea to answer them at the same time Bank of Spain, Basel, convertibles in Brazil and minorities in Brazil. Are there more questions about that? Maybe we could answer them all together.
Well, yes, capital. Well, first of all the definition of the Bank of Spain that was applied for the stress test exercise that was done by the Bank of Spain in January is the definition that includes Basel III, the Basel III agreements. I clarify this because I’ve seen that sometimes people add Basel III to the definition of the Bank of Spain. Bank of Spain’s definition includes Basel III.
Now as regards capital in the next few quarters in the quarter, well, there were three elements, an organic element that we mentioned and said that we’re talking about 10-15 basis points per quarter but higher this quarter. But that depends, more or less, on the evolution of credit and loans. But we’re still more or less in the same level, and that’s the normal level.
The second part, which is the reduction of the risk assets, this part includes three elements. One element, which is the drop in credits and loans, there’s been a drop of EUR10 billion in the quarter in loans. That has an impact, one to one, almost, impact as regards risk assets.
Second element, which is you’ll have seen in the P&L account, which is the decreasing trading positions, 6 billion, 8 billion; and this is – this include – all these elements are scattered through different units. And the third element, which results from the consideration of the exchange risk of the associated companies, until now as regards to the exchange rate, what we consider the exchange risk, included conversions in these associated companies and trading funds. But now since we’ve got asset risks in that – in those same currencies, in capital in the same currency, we consider that that doesn’t generate exchange risk and that’s led to a reduction which is in the corporate center in the risk assets. So this is a one off thing, if you like.
Lending, the other two elements, lending and trading positions. It will depend on the business trends. Foreseeably, the growth in lending won’t be very significant. We do expect significant growth in lending in Latin America. We still expect deleveraging to continue in Europe, so overall we do not expect a lot of capital consumption. So that’s the second impact to reduce risk-weighted assets.
And the third, convertibles, an aspect of the – an accountability request. We asked the Bank of Spain, and it’s now authorized us to account it as capital.
Where are those accounted for?
The costs on the top part of the income statement as interest, because they are paying interest, and therefore, profit.
But then does that dilute the last line in the income statement until they are converted? The financial costs is at the top part.
About capital, there are some additional questions about the impact of Basel III, which you’ve already mentioned in the past. It’s 75 basis points in January 2013. A significant part are intangibles, plus an additional three or four basis points a year due to minority interests between 2013 and 2018. But there’s been no change in that in terms of what we’ve been saying over the last quarters.
There’s also some questions about the impact of the scrip dividend on capital. I’ll just mention that we are estimating an impact of about seven basis points a quarter. That’s the only possible change that you will see in the way we account for the scrip dividend in 2011 and beyond, with an average of one or two scrip dividends a year.
And that concludes the questions about capital. There’s some questions about IPOs for subsidiaries. Santio Ramos, Rajit Chandra and Daragh Quinn from Merrill Lynch, Barclays and Nomura respectively are asking about IPOs in the U.K. and Argentina. Whether our current strong capital position means that we may change the calendar? And do we have any plans to report?
And I’ll just say that since the IPO in Argentina is an operation which is underway, for legal reasons we are unable to make any comment at this point. And so all I can say really is about the U.K., then.
No, Mexico they’re asking about too? And in general.
Well, the group’s policies are, I think, well known. However, at this point, apart from Argentina, where (inaudible) has already explained, is underway, and so we are not authorized to comment. We have the U.K.’s IPO. The plan is still to do that in the second semester of 2011.
And then about regulation, Britta Schmidt is asking whether we have any views on the regulation proposed for deposit guarantee? And could it affect our business in Spain? Could you elaborate?
Well, that’s a discussion which has been going on for a long time and there’s very different positions held in different countries. In general, I think this is something that in Spain is actually not very controversial. It doesn’t really raise much concern amongst the sector or the customers. And so that question about what kind of impact it could have if these regulations were to come are not very significant in any case.
As for capital gains from the sale of insurance, Luis Peña from (inaudible), Rajeev Chandra from Barclays and (inaudible) are asking whether those capital gains, are there or not? And when will they be? And what calendar do you have to finalize that operation?
Those capital gains are not yet there. They will be accounted for throughout the year as they are received.
And then a question about generic provisions in Spain; these are about 400 million, but they’re asking if we’re going to use these generic provisions for any sort of increase in our generic funds in Spain, or our generic reserves in Spain?
Well as Alfredo said initially, capital gains will be reflected as they appear as the transactions are formalized, sales are formalized. Right now, they’re just pending some regulatory authorizations and permits in each of the countries. As these happen, the capital gains will be reflected and we will, of course, at the time report how we are going to apply them. The basic idea, without being too specific about where we will be using those, the plan generally is to use them to reinforce the balance sheet overall.
Okay. There’s some questions, a bit more detail, Matteo Ramenghi from UBS is asking about the capital gains from the divestment of 1.9% of Santander Chile? Is that in the trading income or in the corporate center?
Well, accounting standards changed a year and some ago, and now these kinds of capital gains have to be accounted directly into capital and not in the income statement.
And then he’s asking, also Matteo, about the driver for the rise in 2 billion of intangible assets?
That’s the same thing that’s happened in other quarters. It’s the effect of the exchange rate on our goodwill, which would explain at other times too.
And there’s some questions about the stress test, or level, and what is our position, opinion? How do we think it’s going to impact? And what do we expect in general?
Well, as you know there is a process of stress tests underway. It’s the EVA which are leading the process, but we interact with the Bank of Spain, and we’re just finalizing the process of the stress test. Just based, as a general comment about the stress tests, I’d say that the parameters are all predefined, both the macroeconomic scenarios and the scenarios for losses and the evolution of the different variables, interest rates, asset prices and so on. So we’re just applying those scenarios to the bank. Basically, I think the bank will show the same results as in the previous stress test last year. Our profit, our operating margin before provisions is very strong.
Usually in stress tests the main effect is a strong rise in the cost of lending. And so that, of course, affects profit generation but I’d say that in general terms, our business doesn’t change significantly with respect to the results of the stress test last year. There are some new elements; basically, about what you consider or don’t consider as capital at different points. Last year it was about Tier 1, this year it’s about core, with a specific definition.
These are still things that are being discussed and evolving, and I think until the results of the stress test are published, the final version, we’re sending information in now and until there’s published I suppose will be, I guess, still will request for information. But ultimately, we don’t expect in our underlying fundamentals any significant change from the results of our stress test last year.
Any part of the question which – I know we didn’t say anything about convertibles, where they’re in or not?
Well, I referred to that indirectly when I said that the definition of capital last year was more about Tier 1 and this year it’s more about core capital. There’s a debate about what kind of convertibles will be included or not. And that is something that may vary but the staffing point and the end, not what happens in between, the change is the same and in our case the staffing point might vary if they decide not to consider convertibles as capital; but not the end point because, as you know, our convertibles are mandatory convertibles in October 2012, if I’m not mistaken, as it seems the stress test is for 2011 and 2012, either at the beginning or in the middle
The only thing is that if they’re not in the beginning and they’re in the middle, in the stress test you’ll have capital that will then rise a lot even in the worst case scenario. And if you include them at the beginning, then the capital ratio will rise, probably will rise less throughout the stress test.
Okay. And to close this part about regulations and capital and so on, Tania Gold is asking about capital levels under the Bank of Spain’s criteria.
We’ve mentioned this already, but in any case we expect our capital ratio to remain above nine this year and the next, including different regulations.
Arturo de Frias asks in connection with the IPOs and so on is asking – there’s more questions, he’s asking about the risk of discount. Do we think that’s real or not and what are the pros and cons of the policy of listing subsidiaries and the like? I don’t know if you want to respond to that.
Well, that’s an area where there’s a discount by – for holding when you’re talking about a conglomerate and so there’s a discount when there’s a conglomerate. We are not a conglomerate in any case because our business is the same everywhere and that’s a significant difference with conglomerates, which were traditionally given a holding discount.
So since we’re not a conglomerate and since we manage in the same way with or without minority stakes, we think that the conglomerate discount will not occur in any case. Although, in part, of course the market feels that that risk is there but we hope to prove with facts and I think we have proven the facts and there’s the Chilean subsidiary with the spectacular performance, which has had minority interests for a long time. So that’s really the main con but because of our management, there’s no real difference.
And as for pros, certainly the flexibility with capital and everything else is significantly greater since we already operate in an environment which has the same restrictions as there are for minority interests. We don’t have inter-unit funding except for Consumer Finance. Each unit is – owns its own capital and it finances itself in the market.
And so we don’t have the cons for working as a group so we do have the pros of complete flexibility by having these different listed units which also bring in – the management in each unit has a very clear vision of how the market is perceiving their performance. And so I know there’s a concern in the market over any potential discounts but I have to point out that we are not a conglomerate. We still basically operate retail banking businesses in the different units under the same model and the same parameters. So I think that’s quite different from a traditional conglomerate.
Last question has come in from Carlo Digrandi from HSBC and (inaudible) from Execution about the SIFIs. Can we elaborate on our interpretation? Do we think there’s going to be additional requirements for us and for the sector and what do we expect the regulation to look like in the future?
Well that is still very much an open question, still being discussed and negotiated and it’s really very hard to predict how it will end. There will be, I think, some additional charge for SIFIs, but that’s not really the important thing; but which banks are going to be considered SIFIs or whether there’s going to be different extra requirements or the same for all.
Our position is twofold. First, the concept of SIFIs has to be applied to a very large number of banks, not 20 or 30. We believe that it would probably be applicable to at least 100 financial companies in the world, even those which are not international, but which are locally very powerful, and therefore would have a global impact because of their local presence.
And second set of ideas we defend, that not all SIFIs or global or potentially systemic banks are the same. And the characteristics of this non-homogeneity are due to, on the one hand, things such as their business models, their risk profiles, and therefore the nature of those risks and systemic elements. That’s one thing. But then on the other hand, also the legal structure is very important. And in fact, Jose Antonio Alvarez was just talking about how we are a group whose units or subsidiaries are wholly independent in terms of capital and financing, and there is no intercompany funding, only a very tiny amount, which means that we manage our group with the concept of subsidiaries and not branches.
Our tax flow is allocated to each of these subsidiaries and funding too is, in each subsidiary, self-funding. As a result, we’re very different from entities which are structured globally with single capital unit and then liquidity travels freely throughout the jurisdictions. We’re talking, of course, about living wills basically, which would be quite different in the two cases.
I don’t want to go into too much detail, because of course this is a very controversial issue. It’s still being debated. We hope that when eventually certain excess capital requirements are set, which we feel will be set, that they will at least distinguish between those banks that are highly systemic or potentially highly systemic, because their business model and the risk models and their activities and their structures and legal configuration are of a certain type than those which are of a different type. And we think that although we are large as a group, our characteristics in the way we’re organized, and the way we do business make us actually less systemic amongst the large global groups in a very long list. That’s our opinion.
Okay. Moving on to the second part of financial management and liquidity, there’s a couple of questions about the sensitivity of our balance sheet to rising rates. Sergio Gamez from Merrill Lynch and Raoul Leonard from RBS are asking whether we can talk about the sensitivity of your margins and spreads in Europe to rising rates? And also, if the curve flattens, one month, 12 months; I suppose he means three months, 12 months; I don’t know, Raoul. And then there’s a second part of Sergio’s question about the impact of this potential rise of interest rates on credit quality in general. The margins on the one hand and then credit quality on the other?
As for rising rates, in the Santander branch network and Banesto in Portugal, all of our networks are positioned to capture the benefit of rising rates. So in general if rates go up, perhaps the first quarter, depending on what kind of a rise and whether the markets anticipated it or not, but in general, overall they will all show a significantly positive impact if rates rise.
The second question about the slope, I guess – on the gradient, I guess that depends on the markets. In Spain, which I guess is what you’re referring to, we have a long position, as you know, over 12 months Euribor funded in our case, basically, with deposits, or with wholesale finance normally six months, or a bit at three. So we are a bit long on 12 months and short on six or three. And so it’s true that now, the slope, the gradient of the curve is steeper, which traditionally in these periods is between 12 and three at 40-some basis points, and now we are at almost double, 70, 80 basis points. So it does have – it would have a positive effect if the market predicts correctly that the ECB is going to raise rates slowly.
If the rates rise faster than the market is expecting, then it would be negative; but in absolute terms, positive impact. In relative terms, it will depend on whether the market discounts more or less than will actually happen. It’s not the same exactly in Portugal because their mortgages are re-priced every six months, so the effect is very minimal in Portugal.
And finally, we have an element in Europe, the Consumer Finance business, which although usually has a fixed interest rate of new production, the elasticity is much lower than the financing costs throughout the business which generally, if interest rates rise, is completely or partially offset by increase in turnover or improvement in turnover. But overall, if rates rise, it will have a positive impact on the gradient as I’ve explained, depending whether the curve is above or below expectations.
And as for credit quality, I guess the question is about mortgages in Spain. I’d like to remind you of one important thing. If we look back, when we look at the mortgage portfolio, the bank’s mortgage portfolio in Spain to 60 billion or so, this portfolio in one way or another, 90% or 95%, this portfolio at some point in time, customers already paid a 5% yield. I’ll remind you that in 2009, one year Euribor was between four-and-some percent and five-and-some percent at the time of the crisis, 2008. So in 2009 all of these clients were paying yields of five-and-some percent.
Then there was a strong drop, and now it could go up again. But I don’t think that the rises the market is discounting today, which are moderate rate rises, what the ECB is talking about, will really imply material change in the NPL rates of our mortgage portfolio which as we saw in the presentation is 2.4%. Additionally, I’d like to remind you that as time goes by, with mortgages that are paying principal plus interest from time zero, the risk of default drops significantly. We are now already four years from the peak crisis for homes in Spain, so as time goes by, this probability drops as well. So we really don’t feel that much concern about this.
Okay, there’s two or three additional questions; Antonio Ramirez from Keefe and Neil from West LB about the exposure of our Alco portfolios. Can we give an update on mix and volume and contribution to our net interest income? I suppose by geography.
The question by Santiago López about corporate center and its losses and whether these can be allocated to business areas or not? Connected to a corporate center, could you elaborate? Raoul Leonard from RBS is asking since we’ve changed the TTI, with respect to the different businesses, particularly in Spain, is this affecting our price policy in some way? Or what would be our price policy for the different products? And have we seen any change in the product mix?
Well, first question about the ALCO portfolios, I don’t think there’s been any significant change in the quarter. Available for sale, 68 billion, 70 billion I think. I think there’s been maybe a slight drop, very small, of maybe 1 billion or 2 billion. I seem to recall – and the mix has not changed significantly. We still have, I don’t know, talk in dollars for Latin American euros for Europe, $5 billion position in Mexico, around $20 billion in sovereign Brazilian debt, all in local currency of course in each case. The Mexican is in Mexican pesos and it’s in reals in Brazil, and $2 billion or $3 billion in Chile. These are our positions in Latin America, which are relatively stable. We are under covered in Mexico, but relatively stable, underweighted in Mexico.
And in Europe, we still have about 20 billion in debt in Spain, 20 billion, 21 billion in the Santander plus Banesto. Spanish portfolios, we talked about the 1.6 billion of Portuguese debt. And I think that’s pretty much it.
And their contribution to our net interest income hasn’t changed significantly. These are portfolios that are invested at 3% and some, 4% in Europe, and therefore that’s the carry. The short term rate, basically, that’s the effect on our net interest income, which in the parent company goes to the corporate center in Banesto to its accounts, in Portugal to its accounts, and in the different countries to its respective statements. So, that’s basically the first question.
And as for losses in the corporate center and whether that’s allocatable to the unit or not, I’d say no. Perhaps we could argue about the 120 million in real estate asset write-downs if we were to leave the assets where they were – the loans were originated, that could be the only argument; the rest clearly not. If those foreclosed assets instead of being in the corporate centers were in the originating units, we could maybe have that discussion.
The change in the TTI, we’ve reset everything. But if we hadn’t changed the TTI, the absolute numbers would change a little but the trends are exactly the same. The trends, probably the most relevant trend in terms of your assessment of our results, which is the turning point of revenues in Spain, is exactly the same with and without the TTI change.
And whether this affects our pricing policy? Well, of course. That’s the plan. The plan is to apply the right incentives to the different units. We thought that we were providing the wrong incentives and so the reason for the change is that the new or the different networks, branches, and territories and all our sales force will have the right incentives for current market circumstances.
Okay. There’s another question from Raoul Leonard from RBS about costs and income and the differential? He feels that operating leverage was negative, or seems negative. Can we give some additional detail on our growth policies, growth or not for costs? Are they structural?
I can answer that question. At the group level, the number is as you say; however, I should emphasize the differences between the units, because the units that are growing faster in terms of revenue and volumes, which are basically the Latin American units, are increasing their costs significantly. Why? Because they’re opening new branches. They’re growing. They’re investing. They’re recruiting new people, especially sales, growing their ATM networks and so on. And that, of course, means higher costs for the group overall. But again, those units and businesses which are not growing so fast, Spain, Portugal, Banesto, in the presentation I think I showed you a breakdown.
There was a breakdown by unit, and their costs are flat or even showing negative growth. So as far as costs go, the group’s cost management is diverse, naturally, depending on the units, and overall costs have risen. But when you look at each unit, you can see that there’s consistent cost management and it’s directly proportional to revenue growth.
So costs are rising more in those units where revenues and profits are growing more. Unless costs are growing less or not growing at all in those units whose profit is not growing. But of course if you look at the totals, the group totals might seem a little confusing.
Let’s go to risk quality. Past quality risk, there were several questions on the trend, expected trend of risk cost and the ratios? David Vaamonde from Fidentiis, Carlos Berastain of Deutsche Bank, and Frédéric Teschner from Natixis ask whether the cost of risk is sustainable that we have now in the network, in consumer finance, in Mexico and the U.K.? What our expectations are for risk cost at group level? Are you going to go down? Continue to go down or not?
And then there’s questions about Spain, what’s the trend specifically in Spain? In the last conference call, we spoke about 4.5, 4.7 maximum ratio in Spain. We’re at a level of 4.57. What’s the trend? What could be the trend this year?
Well, at group level we see clearly that there’s an improvement in the cost of loans. That’s in the figures and in the future it’s also going to happen, and in some countries very strongly, because the causes of the cost of higher credit have been eliminated. In Mexico, for instance, the credit card effect has been done away with, which affected these variables a lot last year and the year before that.
So the trend in the group is clear, we’re going to reduce the credit cost provisions, specific provisions. So we are reducing the specific provisions, and there’s a trend. The only exception I think is Brazil. I’m speaking from memory, but in Brazil that trend has been broken up, not because of the quality of loans, but because of the growth of investment. Loans are growing a lot, and ratios, debt ratios are going up. But the cost of credit and loans is going down in the whole group, and it will continue to do so because we don’t see any change in those trends. We see that they’re going to continue.
And in Spain, well, we still think what we’ve already said in the last presentations of results. We think that we are very near the peak of the ratio, but we don’t think we’ve reached it completely. We think that we’re still going to have ratio growth in the second and third quarters. And we think that by the third quarter is when the peak will be reached, and then probably will be flat for one quarter or two, and then drop.
And that’s the idea, and that’s what we’ve been saying as the best opinion. We’ve been telling the market in the last few times that we’ve spoken about this. And as regards to what it might be, or what is our best forecast for the ratio figures in Spain, well it’s very difficult to put forward a figure, but we said before the previous presentation of results that we expected not to reach 5%. And I insist, I think, I confirm that forecast. In Spain, we’ll reach a peak probably in the third quarter and that peak will not reach 5%.
Good. Carlos Berastain from Deutsche Bank has asked about other results next to income, whether we can tell people anything more?
80% of this comes from three parts, Brazil, U.K., the bank levy that as you know has been introduced, and what Jose Antonio said in the presentation on assets and real estate, assets in the corporates; that accounts for 80% of that.
There are two questions on real estate assets from Nomura and Arturo de Frias from Evolution. They talk about the increase in that portfolio, whether we – more, is it going to change or not and what the results are in the sales that we’re doing. That it’s, are we selling above or below the net value and what’s the impact of that?
Yes. Real estate assets have gone up this quarter; we haven’t practically bought anything like we’ve done before but foreclosures and these issues are high, together with work sales flow which is not the same as the inflow. The outflow is not the same as the inflow, so there’s greater growth in what’s going out than what’s coming in. I think that this will change in 2011 as quarter by quarter we make progress to see that the sales figures will be – will exceed the incoming figures. That’s what we can see in the pipeline. And that’s an idea that I think I can confirm for 2011.
And as regards discounts, well, there’s nothing new to be added to what we’ve said. We’ve got discounts of about 26%, 28% on prices and those discount levels have been maintained. We’ve maintained them for quite some time now; they haven’t changed.
And there are several questions about Spain as a situation, which have been partially answered. We’ve got people from J.P., from Barclays, from different groups that would like to know what the – why the generics have gone down, why – how much generics we’ve got in Spain left and the drop in the general balance account of generics is because of the use in Spain and the exchange rate variations, with about 400 million generics left in Spain.
And also questions about the use of a typical production, Zurich, et cetera. We’ve had questions before. There’s a question on substandards in Spain. We’re going to break down of real estate substandards in Spain? And then there’s a question from Marcello Zanardo from Sanford Bernstein on the restructured assets in Spain and Portugal? We’ve given data about this before. It’s usually below 0.5% of the total portfolio, with very little impact on ratio.
And I think this is the last question about risk quality. There’s a question about the ratio in Portugal. You’ve spoken about Portugal, but what about the future? What’s going to happen in Portugal in the immediate future?
Well, it’s a bit premature to say, to discuss – well, a rescue plan is being discussed, and we still don’t know exactly what it’s going to be like. We don’t know what the effect will be on the macro level. But any plan will have effects on the economy and we do expect that the debt ratio goes up, and that will have an effect on the P&L account. But we don’t think it will be – it will be significant at the level in Portugal, but we expect the bank to continue to generate significant profits, less than in the past.
And there’s not much more to say. Our starting point is good. Our debt level is about 3%. The quality of the portfolio, we’ve seen it. Corporate exposure is very low. We’ve got a relatively low market share in the corporate world. And we do have a high exposure in terms of residential mortgages, but they’ll be an increase of the debt ratio and credit – loans will cost more, undoubtedly, but there won’t be significant changes in that regard.
Good. We’re going to go to – we’re a bit pressed for time, so I’m going to try and include and round up most of the questions. I think in Spain there are two questions, Deutsche, Merrill Lynch, N+1; one question is what are the reasons for the increase in the financial margin? What do we think? Is this going to continue like this or not? And then the deposit campaign, how is this going? Retention and impact of cost on the financial margin,
Well, the improvement of the margin, the financial margin, is quite obvious. The margin improves either by volume or by spread. By volume, the economic activity is not leading to or is not propitiating an increase; credit – or loans are going down, so this is all based basically on the recovery of spreads. And this is applicable to the assets and the liabilities for different reasons; on the asset side, because there’s a recovery of asset margins and on the liability side, because there is less competition. In other words, the open wall of liabilities has come to an end and that, obviously, has a direct influence on the margins.
And is this sustainable? It will be, probably at a different rate. But it will be sustainable, because we still have effects to integrate, but in the month of February, when we spoke about this and explained this to the market, the campaign, probably we would renew 70% to 75%. And at this time we haven’t yet finished the pace of renewal, but at this time we are renewing above 75%, so we’re losing less than 25%. Although I repeat that our forecasts in budget terms were normally to renew about 70% to 75%. So we’re doing better than we thought although there’s still some time before this plan is completed.
Good. A question from Spain, the difference in the results published by Banesto and our results?
This has been happening in the last few quarters. The focus on our campaign we’ve explained in other previous quarters.
We’ve got a question as to whether we’re going to do an IPO in Poland to increase the free flow?
I think we’ve mentioned it. Our idea is to reach 25% back without any timeframe, specific timeframe.
Santiago Lopez from Exane tells us about consumer finance in Europe, and what comes from the U.S.?
15% is what comes from the U.S.
In Brazil, there’s two or three questions on Brazil from Francesca Tondi from Morgan Stanley and also from JPMorgan who ask us about – well, it’s a bit of a similar question. What is our behavior, expected behavior? Why are we growing less than our competitors? Whether we expect the book to grow or not? Growth expectations in general? Individual growth, compared growth?
In Brazil, it’s true that we are having – our performance is lower than our competitors. It’s also true that we are undergoing or going through a very complex process and this is requiring a lot of effort and energy. Technological integration was only achieved last month, and that is not all the problem, but it is a very important conditioning factor.
But we didn’t even have that ready. That leads to a situation where although there is – we’ve got to recognize and see and accept that Brazil is accelerating its growth, it’s rate of growth in terms of income, and the business is also increasing clearly, the growth of loans is accelerated, is very fast this quarter, and the growth of income too. But we are not catching up; we’re not growing like our peers. And it’s probably still going to take us some time before we catch up with them.
As regards – it’s going to take a few quarters to get similar growth rates to those of our main competitors in Brazil, but clearly if you look at the evolution of Brazil at a more micro level, so to speak, we see clearly that we are doing things better in terms of expenses than our competitors and that we are increasing income very quickly, and which will in the future lead – we’ve got to recognize that integration is taking a lot of effort, and that is why the bank is not doing as well as other competing units or competitors are. We’re not doing as well as they are, like some of the larger Brazilian banks, which are much more in tune with the situation.
There were questions from Arturo de Frias from Evolution, from Macquarie, there’s a question on Mexico as to whether we’ve consolidated the portfolio there?
The answer is yes.
There’s a question from Brazil as regards to the volume, what we expect it to grow, the loan volume in 2011?
We continue to say that we think it will grow about 15% as we’ve already said.
From the point of view of – there’s a question about the deleveraging process in Spain and Portugal, and what do we expect? Will that be done by segments or what?
Well, it’s obvious that Spain has to deleverage, and that both at company level and private individual – level of private individuals. We’ve been saying that for some time.
How long should that last?
Well, probably quite a long time yet. The whole of this year and probably next year, and that is going to directly influence the volumes of activity. But we must all understand that this is good for the economy and for the system as a whole. And this will allow the country to develop steady growth. But it’s unavoidable.
There’s a question about Santander Consumer Finance as regards whether growth is organic or inorganic?
Well, in part it’s inorganic, because it includes the consolidation process in Poland that we’ve spoken about, which has an organic and an inorganic part.
To finish with the U.K., there are questions from Barclays, from Macquarie and from the Corporation about the evolution of liquidity requirements, whether we believe that it’s going to affect the financial margin more or less in the future and whether we can make up for that impact? And I think that that’s – basically those are the questions on the U.K.
Well, the impact of liquidity, most of it will be absorbed. It’s a one-off thing and what it will do will be – it will produce a lower level of results this quarter. But on the other hand, after now what will be – the normal situation will be for the business, the results, to develop in parallel to the development and progress of the business as a whole but in terms of activity spreads and loan credit quality. So basically, not arithmetically because these things are not a question of arithmetic, but the impact of regulations as regards the liquidity, the bank levy, et cetera, that impact has been absorbed.
There’s a question from Benji on the U.K., when do we think we’re going to finish the RBS operation? First quarter of the next year?
Yes, yes, yes. That’s the same. And I think risk quality generates generics in the balance for about 5 billion. I think it’s a question about how many we have left in the credit quality, loan quality in Mexico. The improvement comes especially as a result of credit cards.
I think we’ve finished. There’s a question on our call through – through the conference call system, but we’re going to have to postpone that, answer that later. I think we’ve gone through practically 90% of questions. If we’ve left any, please address the department and we’ll answer you. Thank you very much.
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