Banco Santander's (SAN) CEO José Antonio on Q4 2015 Results - Earnings Call Transcript

| About: Banco Santander (SAN)

Banco Santander SA (NYSE:SAN)

Q4 2015 Earnings Conference Call

January 27, 2016 05:00 AM ET

Executives

Sergio Gamez - Head, IR

Ana Botin - Executive Chairman

José Antonio - Group CEO

Analysts

Andrea Unzueta - Credit Suisse

Ignacio Ulargui - BBVA

Carlos Peixoto - BPI

Mario Ropero - Identic

Alvaro Serrano - Morgan Stanley

Johan De Mulder - Bernstein

Daragh Quinn - KBW

Sergio Gamez

It's 10 o'clock Madrid time, I think we are ready to kick off. Good morning, everyone. This is Sergio Gamez, Santander Global Head of Investor Relations. Thanks for attending the Santander's 2015 earnings conference call.

Our Executive Chairman will kick off the results presentation by reviewing our accomplishments in 2015. After that, our CEO will provide with more details on the Group and subsidiaries earnings. And finally our Executive Chairman will conclude by providing the strategic views and Group priorities for the years ahead. We'll have time for a Q&A after the presentation. Our total time should be around an hour and 15 minutes. With no further delays, Ana, the floor is yours.

Ana Botin

Good morning, everybody, and thank you very much again for joining us. As Sergio just said, I will first review what we did in 2015 in terms of both the financial metrics and the customer-focused business transformation process. Following the CEO's presentation, I will provide a strategic overview of our business and our priorities for the years ahead, and specifically our vision for 2016.

In 2015 Santander improved all its financial metrics and delivered on plan on what we committed a year ago when we did our capital raise, and then again in September. In terms of the income statement, net interest income and fee income grew by 8%. Underlying profit was up by close to 13%.

Thanks to these results we were able to generate 50 basis points of core capital organically. We are above the 10% we set as a target for 2015 yearend. This would be 10.15% excluding the PPI and above 10% including it, and on track to exceed 11% by 2018 as we committed at the Investor Day. And this capital, very important, is generated thanks to the high and growing profitability of our business at around 11%, which enables us to grow the business in a profitable way, generate organic capital and grow dividends.

We have increased net tangible asset value per share by 11 basis points to 3% -- sorry, plus 3%. And last but not least, we have increased cash DPS by 79% -- sorry, I meant $0.11 in terms of our net tangible asset value per share. The 2015 income statement, which you can see on the screen, shows growth in quality earnings again driven by the performance of our commercial activity with customers and a positive trend in the credit quality of our balance sheet. Gross income up by more than 6% despite a decline of almost 10% in financial operations, and I would like to highlight the normalization in provisions with a reduction of more than 4% in 2015. As a result, underlying profit excluding again PPI, has risen by almost 13% year-on-year.

During this year both lending, plus 6.4%, and customer savings, plus 7.5%, increased strengthening the recurring earnings base and the franchise with enhanced credit quality with non-performing loans ratio decreasing for the eighth consecutive quarter, reducing the cost of risk by 18 basis points and that includes flat cost of risk in Brazil at 4.5 as we gave guidance on this at the Investors Day.

I mentioned already that we have exceeded the target for this year in terms of CET1 and that is despite extraordinary negative impacts in the fourth quarter. This shows we can generate organic capital at a rate of approximately 10 basis points per quarter again as we gave this guidance, without giving up business growth or profitability and still also offer attractive remuneration for our shareholders. Again considering our underlying results, the bank's 11% return on tangible equity in 2015 is above our peers. We improve this return on tangible equity with a higher capital base.

In summary on our capital position, it is strong, it is strong for our risk profile. Our business model is geographic diversified. And of our 805 billion in loans, 87% are in Europe and North America, 13% in South America. It is a model founded on retail and commercial banking which offers medium-low risk profile. And this is what enables Santander to have a more recurring income statement than our peers, as we have shown generating profits throughout the cycle. It makes us more resilient to external shocks, as was demonstrated during the financial crisis, in stress tests such as the AQR where we had an adjustment of just 4 basis points, the lowest among our peers.

And clearly cycles are going to vary from country to country and from one market to another. But our model has enabled us to pay dividends consistently over the past 50 years. It is the high levels of pre-provision profit and current provisions that are more than sufficient to cover expected losses, and therefore this means we have lower capital needs than other banks as acknowledged by our supervisors.

I'd like to spend a few more minutes on our model. We have two main pillars. We have mentioned this in the past. We are large but we are a simple bank. We do not operate in every market nor do we aspire to do so. We do retail and commercial banking in nine countries in Europe and North and South America. In every single one of those we have critical mass.

We run the leading consuming finance operation in Europe, starting from a very strong base in Germany with a 14% market share and Santander consumer in the U.S. Our subsidiaries are autonomous in capital and liquidity, and are located in markets where they have potential to be or already are among the top three players. Second, very important, we have a corporate center which enables us to attract talent, share best practices, best-in-class information and control systems and maximize the value of our global brand. In a global digital area this is important for the business, and we are a sector benchmark with a cost/income at 47.6%, more or less stable year on year.

This geographically diversified business model you have a bit more detail in terms of our P&L and our income statement, again which allows us to absorb cyclical impacts with contribution to Group profit as you can see in the slide. As I mentioned the result is a more predictable through the cycle income statement than our peers, allowing for consistent capital generation and should lead to a lower cost of capital. And this is another way to look at what Santander is in terms of our assets. You can see they have a different ways to profits. Europe represents 72% of the total assets, North America that's Mexico and U.S. 15% roughly half each, and South America 13%. Most of our income again comes from retail and commercial banking. And of course the bulk of our assets are also retail and commercial banking.

So as a summary to this first section I have said this and we have committed this as a new management team already, we will be focusing on the per share financial metrics. We have as shareholders, a bank that has a book value that is 3% higher than one year ago after taking into account the dividend paid out of 2015 profit, and cash dividend per share has increased by 79% to €0.16

I would like now, as I mentioned, to share with you how we are progressing on our structural transformation, commercial transformation around the customer. And this is quite a big change in our model. We are building the new bank around the customer and not traditionally as we had done around the branch, even though branches still have a very important role of course.

I will not go over these one by one, but just to show you we have delivered on all our commitments in terms of our strategic commercial transformation. We have delivered this, and it is important for us, in a way that is simple, personal and fair to all our stakeholders. And these are the plans that will allow us to be successful and compete successfully into the new decade. And let me cover our progress in some of these during 2015.

For the second consecutive year we have conducted an anonymous survey of all our teams in all our countries. By September 150,000 employees out of a total of 191,000 had taken part. And I would like to highlight the following, we have a lot more information of course, but we think this is important. First is that there is a strong support for the bank's new corporate culture. Again, in an area where we need to attract the best talent in new areas this is very, very important to us. Second, and in spite of all the changes we made this year, the level of commitment to the bank is increasing. And the positive gap, and we measured this against our peers and financial system, continues to widen. And three very important, our employees are achieving a better work/life balance of plus 22 points. And this greater commitment of our teams is allowing us to deliver better for our customers. We are meeting our goals in terms of increasing loyal customers in the countries. And at the Group level we grew loyal customers by 1.2 million. And I would like to share with you here the UK example. It is sometimes said that we are looking to gain market share with our strategies in retail banking. That is not the case. We want to grow of course but we want to grow profitably. And I think the UK example shows that this is what we are doing, that the increase in customers, loyal customers, is leading actually even in the short term, to improved financials.

This is the plan we are now executing in Spain, where growth in loyal customers will lead to an increasing profitability, the value of the franchise, and of course to a even less capital intensive model. This is -- I wanted to share this with you because in some of our markets we already have high loyalty levels and precisely in these markets we tend to have higher ROEs. I just show -- shown you the example of the UK but it is not the only one. We have four countries plus Santander consumer at the top of the slide where -- which are in an even better place with loyal customers that represent between 40% to 50% of the active customers. These countries where we already have a strong position account for about 30% of the Group's underlying profits.

At the bottom of the slide, you see the organic growth opportunity. This is what Santander offers you today, organic growth with our current franchise, organic growth in the bigger countries like Brazil, like Spain. These countries in terms of balance sheet, contribution to the income statement, population, active customers is where we have the most potential to improve and drive organic growth for higher revenues and profitability.

In terms of what we are doing for our customers and how we are improving the franchise, our digital transformation is very important. We are already investing since a couple of years, and it is helping us to drive higher customer loyalty and maintain our cost/income roughly flat this year against last year. It enables us also to know our customers better, to offer them better services and to improve the customer experience. In 2015 the number of digital customers grew by 17%. That is 2.5 million more than the year before.

And as we call it squaring the circle, higher customer satisfaction and enhanced efficiency is only possible thanks to, of course, our technology but mostly to the corporate center, a corporate center that generates value for the operating units. As you can see here, in 2015 we achieved 4 percentage points improvement in customer satisfaction. And we know that this is directly linked to the increase in our customer revenues, net interest margin plus fees of close to 8% that I mentioned earlier.

We have also made progress in 2015 regarding the transparency of the group’s corporate center. We discussed this at our Investor Day in September. We have done better than what we said. Our goal was to be at 25% in terms of the corporate center attributable loss as a percentage of underlying profit were at 23% and driving this lower for the next couple of years.

It is clear that the current regulatory and legal environment penalizes global banks. However, Santander’s model generates more than enough tangible benefits to compensate for these adverse effects. And moving forward we are committed to continue, as I said, adding more value from the corporate center and to create more value for our subsidiaries.

I would like to end this section on shareholders by reminding you of the changes we have made during this year in terms of corporate governance. We think this is very important in today’s environment. And we have not just strengthened the corporate governance at the group level we have also done this with our subsidiaries. We have reinforced many of our boards, including the U.S. and others. And we have reviewed and enhanced the corporate relationship with our subsidiaries and reinforced in general many areas in this side.

So as I was mentioning before our stakeholders include of course our communities. And I would like to finish by saying that it is very important for us to be very embedded in the communities. Again in this global age being very local through our branches and our teams is important. It is helping us to increase employee commitment and of course customer loyalty to us. We continue to develop programs as our education and universities program, encouraging access to higher education.

We have supported around 7,000 entrepreneurs and about 500 start-ups in 2015 and continued to invest in our micro-credit programs for example in Brazil where we helped 250,000 micro-enterprises over the last few years. We have also done work, as I committed at the AGM last year, around our sustainability policies and enhanced many of these in sensitive sectors including the environment. We are convinced that what we do in this area, it’s not just about what you do with your profits but about how you generate them.

So in summary, in 2015 we achieved profitable customer-based business growth. We said when we raised capital we would grow our lending in the mid-single-digits. That’s exactly what we’ve done. We’ve grown our profits. We have also reinforced our balance sheet. Our CET1 continues to grow organically. And we have increased our tangible net asset value per share while increasing the cash dividend per share to our shareholders by 79%.

So I would now leave you with José Antonio to review in more detail our numbers and performance for 2015, and I will then continue with our 2016 and 2018 priorities.

José Antonio

Good morning. As Ana has analyzed the strategy in 2015 and the evolution of the main finance figures, I’m going to focus more in the performance of the different units and to explain how do we match the INA quite manager for banking activity. I’m going to elaborate only in the main units as usual, only in the four or five main units. But you have in the package we gave to you all the information, all the usual information about all of them.

First, a few words about environment, environment has been challenging, the growth has been lower in 2015 in the world than it was in 2014. The emerging markets have been in a significant slowdown all across, commodity prices are falling. And as a result of these we have had a significant volatility in the market and combined with a lower for longer interest rate that is quite demanding for banking activities.

So in this environment that it was not easy, we were able to combine and we are proud of this organizational change that we made during the year, we develop a new commercial transformation across the units. And at the same time we were able to achieve, as Ana said, all the targets we established for the year.

Let me to start with the figures in relation with the activity. We put, we were telling you in the Investor Day that our focus was to increase our, the number of loyal customers given the fact that the profitability of those customers is much higher than the average customers, and we got these targets, we got into the figures we were telling you.

We are growing around 10%, double-digit in loyal customers both in individuals and in SMEs through different strategies that the majority of you already know, the 1-2-3 strategy in several countries for retail And the SME initiatives we launched already in several, in almost all the countries for SMEs and corporates. As a result of this, we are showing consistent double-digit growth in the number of loyal customers.

The other item we were referring to you in the commercial transformation was about the number of digital customers, or how to grow the digital customer. Digital customers is about, as we were telling to you, is about customer satisfaction. It's about also, about the cost income, it's quite demanding in the sense that you need to face investments at the same time you are in the transformation process while you have a significant physical infrastructure at the same time you are investing in digital challenge. But when we look at the numbers at the end of the year we have grown the digital customers close to 20%. That is very much in line with the figures we gave to you when we were talking about this particular item in the Investor Day.

Most important how this translate into financial figures, we were able to grow loan book by 6% well across the board, a little bit more in SMEs than corporate where we are gaining market share in some of our main markets, in the UK particularly intense, gaining market share where in a second language which we are weaker than the average market share of our bank in the UK. At the same time we start to grow in Brazil in a difficult environment in SMEs while in the previous years we were -- I think you've seen the loan book in Brazil in this particular segment. At the same time, we continue to grow and gain market share in Portugal, Poland, in Mexico, in SMEs, that is particularly important as this is one of the key segments we are targeting as a bank.

On the liability side growth in customer funds was 7%. All the business units increased. The growth was produced mainly, it's not a surprise, mutual funds and demand deposits given the low level of interest rates is -- time deposits are not attractive at this day, in these days for the customers. And we are shifting those mainly to demand deposits and also in some extension to mutual funds.

We are growing not only in zero interest environment countries, we are growing and gaining share in demand deposits in countries like Chile and Mexico where the interest rates are not at the zero level like in the mature markets. So we are happy with what we got in the activity, and we are growing as we were saying to you our -- this is a bank that is -- the proposal to you at the Investor Day was we want to grow the activity and we are growing in line with what we told you.

How this translates into P&L, let me to show you in the P&L what you see is we translate this growth in activity into a significant growth in the revenue lines, in the more commercial revenue lines, so the net interest income and fees. Commercial revenues are growing consistently. We elaborate a little bit on this later on.

Cost control and operational excellence in a quite demanding regulatory environment. As you know, we established a target to grow costs on a like-for-like basis in line with inflation. We grew a little bit higher than that, but very much in line with this. And at the same time we reduce the cost of credit to a level that is close to the target that we gave to you in the Investor Day. We are slightly above 120% overall as a Group. That was our target.

When it comes to the -- before looking to the different lines of the P&L let me to elaborate a little bit on the positive and negative non-recurring items that are in the P&L account. You have in page 84 in the presentation the detail we normally provide to you in order not to do a presentation very large it's in the annex, but you have all the information. Let me to elaborate on this, the positive ones, the positive non-recurring items were 1.1 billion. You remember that we recorded 835 million in the second quarter in Brazil, and we generate a bad will in the [indiscernible] of assets and liabilities of Banif in Portugal of 283 million that were recorded at the end of the year.

The negative ones, the negative non-recurring items all of them in the four quarter amounted 1.7 billion and are mainly charged to the intangibles 680 million, 600 million for the PPI in the UK, payment protection insurance in the UK, and 435 million mainly for goodwill and other items, the goodwill is half of this is related with Puerto Rico consumer finance activities where we charged 140 million - 150 million. So the net non-recurring items within the year were minus 600 million that we charged in the P&L that brings the attributable profit to €5.966 billion.

I'll now go back to the underlying numbers. I'm going to elaborate on the different lines in the P&L starting by revenues. As I said before commercial revenues are growing well, NII is growing, net interest income is growing based on higher volumes and lower cost of funding mainly, some margin pressures as we see later on in the asset side in some countries but we had particular good developments in consumer finance Mexico, Brazil, U.S. and UK on this line.

Fee income, basically we are low on 4% that is quite a good number given the environment. The pressure here comes mainly from the regulatory front, we suffer mainly in Europe there some impacts for regulations that prevent us to charge more in some businesses that we were charging more like credit cards. The underlying gains on financial transactions came down 12%, 5% in gains on financial transactions, 5% minus and the other income that is mainly impacted by the contribution to deposit guarantee funds and the resolution funds that I will elaborate later on, on these numbers specific of this line of the P&L. Well, this is probably the slide that shows better what we are talking about. So NII consistently growing, fees consistently growing quarter after quarter. This is what shows probably the best track record, our track record in progressing in the commercial transformation quarter-after-quarter.

When it comes to gains on financial transactions, the drop in the fourth quarter is due to the provisions for deposit guarantee funds. As I mentioned before, during the year we made contributions to all the deposit guarantee funds and resolution guarantee funds of almost 300 million that were a figure that was almost 200 million higher than in 2014. Costs, basically, well, when we have an efficiency plan that is very well known by all of you, we have several countries growing significantly below inflation in real terms falling particularly in Brazil where for two or three years in a row we've been growing the cost significantly less than inflation. At the same time in Spain and Portugal we continue to reduce the costs as a nominal basis. On the other side we are growing, still growing the costs significantly in the US due to the regulatory requirements we are facing there. But overall we are growing the cost base with 1% excluding inflation and perimeter.

Our efficiency, as Ana mentioned, is best in class. But this is true that we have tension here. We are making significant investment for regulatory purposes and at the same time for the utilization, at the same time we need to save on the traditional business in order to keep our best-in-class efficiency ratio and to achieve our target of 45% for 2018 in that cost income ratio. Loan loss provision, consistent with our guidance, the guidance we gave to you, fell 4% during the year. While credit quality is improving across the board, you will see in all our numbers, particularly intense was UK, Spain, Europe in general, and real estate activity in Spain, as you can expect. So [inaudible] that is the provisions, nominal provisions are growing in line with the volumes in Mexico and Argentina. And Brazil probably has rose 5% when the portfolio grew 9%, so the behavior of Brazil is better probably than the market was expecting in terms of credit quality.

So, I'm going to the cost of credit, I said before is 1.25%. Our guidance to you was around 1.20%. We are heading into this number. And excluding SCUSA, a unit that is relatively small but big hike in cost of credit due to the activity, we have we are 0.9%. Still some room to get into the target we set but we are close to this. NPLs falling consistent with the credit quality improvement all across the board, almost all across the board, particularly intense in Spain, Poland, consumer finance in Portugal and Europe as I said before. The coverage went up to 73%, so good developments on asset quality.

Capital, well, let me to show two different slides. Sometimes there is some confusion between what is required and the market view. The requirements that we have on the regulatory front are expressed in this slide. The ECB requires us to have 9.75% including the systemic buffer for is recommending us for 2016. And, well, compared with this, the number compared with this is 12.55%. That means that we have a surplus of over around 280 basis points over the minimum required by 2016. This is the view, the regulatory view. When it comes to the Core Equity Tier 1 fully loaded, Ana already gave you the figures. I want to stress that we are in line with our guidance to you that we continue to generate around 10 basis points per quarter. Naturally there is some volatility coming from available-for-sale portfolios and other adjustments but we are in line with and we think that we continue to be line, in this line of generating 10 basis points per quarter of Core Equity Tier 1 fully loaded. The total capital ratio went up more because we issued some AT1 and AT2 and Tier 2 issuance during the year. So very good progress on capital in line with what we told you when we raised capital one year ago.

On the financial ratios and particularly important in capital allocation, we are focusing on the return on risk weighted assets, they are always something that we follow unit by unit and is the main driver of capital allocation across the Group. Our underlying return on risk weighted assets grew from 1.27% to 1.30% in this environment. The tangible net asset value grew 3% and the cash dividend we increased significantly during the year, so good news, good returns for the shareholders on its own on this basis.

Elaborating on the businesses, this is a pie that normally we show to you. Well, just to elaborate on where the profits are coming from. 56% of the profits coming from Europe mainly UK, Spain and Santander consumer finance, 29% from Latin America, 15% from Mexico and the U.S., 7% Mexico and 8% of the U.S. Well, UK is a little bit stronger than it used to be, and Brazil has started to be a little bit weaker and Spain gaining ground in this regard. Starting with Spain, what we have in Spain is an environment of relatively low growth. What we have on the left side and we are going to have this kind of information in every country in which I will elaborate, is the figures and the strategic metrics performance we provide you in the Investor Day and that we -- naturally we follow in order to see if we are in line or complied with what we -- our expectations that we shared to you in the Investor Day. You have the 1/2/3 accounts, 860,000 comes from the 1/2/3 accounts we opened in Spain in seven months. We are happy with the performance here, while as you know we have a -- this is not about a [problem] this is always a strategy of having more transactional more loyal customers in the bank in Spain. Customer satisfaction grew significantly.

The cost of credit we end up in 0.62%, very much in line with expected loss across the cycle in Spain, probably some over [indiscernible] or significant overshooting may be expected in 2016 in this particular figure. And we are progressing well in market share and in return on tangible equity.

When it comes to the P&L, weak NII due to lower volumes and significant margin pressure coming mainly from the lower level of Euribor on one side but also from the competition we've been talking to you in the previous quarter on the asset side.

Operating expenses almost 2% down, loan loss provisions 43% down and translating to a bottom line of almost 20% growth in net profits in Spain in 2015. When it comes to activity, volumes slightly down in loan book mainly driven by institutional lending. Institutional lending, the government in Spain is funding directly the regions and the institutions, set of course around zero cost and lending to public institutions fell 22% and probably is going to continue to fall in the coming year. On the other side we are in a -- relatively flat as we're only [indiscernible] companies and relatively -- slightly down in global corporate banking. And in household even we are mortgages, even we are growing the production, new production. When we compare the production of 2015 with 2014 we are growing in new lending individuals 27%; it's not enough to offset the amortization of the large portfolio we have in mortgages.

On the liability side we grew 1%. As I said before, time deposits are not attractive. But demand deposits are around 9% and mutual funds at 11%. Well, spreads going down on the asset side, so I mentioned Euribor plus the competition, and the deposit costs flat, we mentioned to you basically flat 1 basis point or 2 basis points down and relatively flat as in the last two or three quarters. NPL ratio good news on this side, and the cost of credit falling that we expect to keep falling in the previous quarters -- in the next quarter, sorry.

In the UK, well, you have our strategic metrics there. But in general good developments there, we are growing faster than -- the activity is growing faster than in previous years and we translate basically this into the P&L. The NII has good developments due to volumes more than spreads, spreads are relatively flat and the impact of the [SBR] goes to the P&L. While very good news on the asset quality side where the provisions fell 70% and this translates into a growth at the bottom line of 14%. So we made this provision of -- for PPI following the FCA consultation paper. This is our current best estimate of the remaining costs of the -- all the payment protection claims that we may have till this process expires. When we look at the activity, as I said, volumes are picking up 5% loans and 6% funds, banking NIM relatively flattish. 1/2/3 continues to work very well, so and you see the development there. And we keep gaining share in corporate loans. This is an important development for us; this is one of the key, our keys to take priority in the UK, gaining share in SME loans. Of note, we are top three in customer satisfaction, and we are keeping this level for a couple of quarters in a row.

Brazil probably one of the countries that has more attention of the markets in these days, when we look at the numbers it comes to -- the numbers are I would say very good, so compared particularly with what the market has in mind so we are growing revenues at double-digit. And more than that, I do think that we have improved significantly the quality of our commercial franchise in the country. We continue this transformation. But today we have a more sustainable business model, more clients, more loyal clients, more recurrent revenues, greater efficiency and better risk profile.

The results were 1.6 billion, 32.7% up, 33% up. Well, this is change in perimeter, but before taxes we are growing at 20%. We have a significant good development in commercial revenues that are growing consistently. Costs well under control, remember that inflation in Brazil is 10% and we are growing costs in local currency 5.3%. Loan loss provisions were growing 5% while the portfolio is growing up 20%, so good development.

Allow me to elaborate a little bit more on what’s going on in the ground business activity. As I said, loans grew 9%, funds 12%. And you see the growth in the loans, we are growing in relatively low risk segments more than in other segments. We are growing in large companies 14% and in mortgage 21% while in consumer finance we are decreasing the loan book by 7%.

To understand the dynamics particularly on the asset quality side you should follow the significant changes we have made in the last two years. So in the most risky segments like the kind of overdraft that we were talking a lot about in the past our market share that was close to 20% two or three years ago now is 12%, so significant shift here that helps to explain the behavior on the asset quality.

This has naturally have an impact in the spreads, but good. We compare the spread and you have in the middle of that spread. In the fourth quarter of 2014, our average spread was 8%. Fourth quarter 2015 was 7.8%, so some change in mix. But at the same time what is happening in Brazil is on a like-for-like basis the spreads are going up significant payroll loans 60 basis points, cars 53 basis points, SMEs 250 basis points, up so significant re-pricing on the asset side that helps to offset a low growth environment in which we are moving.

When it comes to NPLs you have the figures there. So we are in comparison with the national those are local criteria, it’s not the NPLs under the Spanish criteria that you have in the papers we provide to you, but this is in order to compare with the local banks. Our NPL ratio is 3.2% while the market is about 4.5%. So we feel in, as you know, a difficult environment in the country, relatively comfortable that we are going to keep delivering and being able to grow the profits in local currency in 2016 in a single-digit growth.

In U.S., we are taking several actions at the same time that is having an impact on revenues and cost. Integration of the holding company is underway. They increase significantly the costs. We are investing in the banking franchise. And we are on the consumer side we have focused our unit in auto business. We are discontinuing the business of, as the company mentioned to you back in November, the business of unsecured personal lending.

So as a result of this, we have good news on the activity side. The Santander Bank, both in Santander Bank and the SCUSA are growing nicely, 6%, 7%, and 11%, 10%, both. On the other side, we have pressure, significant pressure on cost that we expect to reduce going forward. And loan loss provision is, well, in the quarter, as we classify for sale some activities, the discontinued activities of unsecured personal lending, is necessary to chart, to put, to mark those portfolios at the worst of the costs or the sale price. And we did this and this result in a charge in the SCUSA businesses.

So overall, this reflects a better business environment where we still have plenty of work to do. And at the same time, a challenging environment for, in terms of costs to comply with the regulatory requirements we have in the country and to improve the commercial banking franchise.

Consumer finance, Ana mentioned good news here. This is a leading franchise in Europe, performing very well, so growth, well there’s a change in perimeter here. We had, in 2015, PSA. PSA is Spain, Portugal, UK, France and Switzerland. In 2016, we include Germany, Italy, Holland, Belgium, Poland and Austria. That will come in 2016.

Overall, very good developments here, so this is a great franchise that is still very profitable. The return on risk-weighted assets is close to 2%, so it’s, and we have, we keep gaining market share in this activity all across the countries in Europe. When it comes to the profits and you have in the presentation, we are getting almost 400 million net profit in Germany, 230 million in Nordic countries and in Spain 169 million that are the main contributors to the P&L of this unit.

The corporate center, one comment on the gains on financial transactions. All the numbers are very much in line with the previous year. Gains on financial transactions in 2014, we had some portfolios here that we haven't had this year. In this year, the gains on financial transactions come from the hedges of exchange risk that were in the region of 200 million when we hedged, as we shared with you in the past, the Brazilian real -- the expected profits in Brazilian reais.

All the other countries few words. Mexico had a very good quarter, the fourth quarter being the better in the year, good progress in the commercial side. In Chile, well, developments continue to be very much in line with the previous quarters, with good growth in volumes and customers and volumes. Argentina, well, probably in Argentina, the change in the institutional framework probably is going to allow the bank to develop faster than in the case of the balance sheet that it was in the past, where the profits were good, growing 22%.

Poland, bad year, on the bottom of the P&L. But in comparison, in relative terms, we are doing much better than the competitors. Environment and very low interest rates and we were hurt, as other banks, by a special contribution to the deposit guarantee scheme due to the failure of one competitive bank.

And Portugal, profits went up 63%. More importantly, the profit that has significant capital gains is we are increasing customers, market share. And the franchise is progressing very well in the country before we acquired assets and liabilities of Banif.

And I leave here. I hand to Ana that is going to elaborate on the conclusions of this presentation.

Ana Botin

So I would like now to finish, as I mentioned, focusing on the strategic priorities for the Group, not just for the next three years, but also our vision, how we see 2016. And I would like to start by saying that as I showed before our teams in all the countries share our vision on how we want to do things at Santander going forward. I mentioned that in the latest survey more than 75% of the Group employees share this vision.

And having a clear purpose is important. Our purpose is to help people and businesses prosper. We know what we want to be, and that is the best retail and commercial bank that earns the lasting loyalty of our people, our customers, our shareholders and our communities.

And I would like to stress that for us the best bank is not necessarily the biggest, but rather a combination of many factors; profitability, doing things in the right way. And I would like to stress that trust is the key to building long-term relationships with our customers, but also with our people and our communities and that what we want to do is important, but how we are doing it matters a lot too.

Yes. And in terms of how we want to do things, we've mentioned before we want to do things in a way that is simple, personal and fair. And I'd like just to remind everyone that -- what we mean by simple. Simple is about offering value-added, easy-to-understand services to our customers whenever and however they decide to use them. And a simple bank strives to upgrade its processes every day in order to make them simpler and clearer for its customers and employees.

What we mean by personal banking is that we want to treat our customers as individuals, offering them a professional, personal and reliable service. A personal bank supports its employees so that they can realize their full potential and achieve their career goals.

And a fair bank treats people the way they want to be treated and generates an adequate, sustainable return for its investors while contributing to the development of communities. And this is how we want to do things.

José Antonio mentioned already the context. We're not operating in an easy context. And going forward we believe it's going to continue to be challenging, but we also see it full of opportunities. We will face slower growth in the world, but the slowdown will have a different effect in different regions. We believe it will have a lower effect on our core markets. As we've seen, we're mostly investing -- our assets are mostly in Europe and North America, and therefore we see that this impact of slower growth will have less of an impact in our core markets.

And in this context, how we offer a differentiated growth profile compared to our peers, we have seen that already. For us it's critical that we operate with critical mass, and for us that means to being around 10% or at least 10% average market share. And we operate, again, in markets with a lot of opportunity to grow and markets with over a billion people. We will continue to be focused on organic growth, growing recurring revenues on the back of increased customer loyalty.

And I would like to point out also that in this environment the higher structural growth in emerging markets despite the current conditions also is going to be very important for us going forward. Again, this is a model that allows us, through the cycle, and this is important, to generate capital enough to fund our growth, to grow our dividends and to generate a surplus of excess capital.

So in terms of our priorities, strategic priorities, I'd like to give you an update for the year. We'll continue -- and these are the things that are going to occupy us most. It's about execution. We have the franchise, we have a strategy, we have the plans. I'm not saying it's easy, but our challenge is mostly about execution and it's about executing this customer facing, commercial and digital transformation. I mentioned our culture and our purpose. That is going to be the base of our growth, and again, a great opportunity to achieve profitable, sustainable, organic growth in our main franchises. Let me cover one at a time. I would like to again stress what we mean by our commercial model. Our commercial model is based on increasing loyalty. And this, as opposed to the free banking model, we're offering pay for value. If we offer added value to our customers, our customers are happy to pay for our services. And again, this is what we are pursuing now in Spain and will do in other countries with our 1, 2, 3 strategy. This is giving us results. And again, going forward in our strategic plans, I want to reaffirm our 2018 targets. We said this in September. Our environment, the environment, as we mentioned, is not as good as it was then. It's slightly worse, or its worse. We are still committing to these targets. We are basing our strategy on growing loyal customers, digital customers. As you can see on the slide, 18.6 million in the case of loyal, and 30 million, which is a bit number, in the case of digital.

Again, efficiency, it's been pretty stable this year. For next year, we will be probably around that, but the goal is, for 2018, to be below 45%. And one of the key targets we have I know you can see the positive trends José Antonio has shared with you is fee income, which is already starting to grow in countries like Spain. The way to achieve this strategy is by constantly improving the customer experience and customer loyalty. We're working very hard on this. We've made progress. We have more work to do. And we are aiming to be, by 2018, with most of our countries, top three in customer satisfaction. The corporate center we've discussed quite a few times. I'd like to give you a bit more visibility as to how and what things we see that are achievable in the next couple of years. We have already a corporate center that adds value in control and compliance. We're sharing some of the investments in terms of our regulatory projects, but we believe there's more to do on the revenue side. And so we're launching business initiatives. We have a couple already this year, in 2015, but we're going to have a few more in 2016. These are just some of the examples we're looking at. And the message here is that this is a large opportunity. In a world that is increasingly global and increasingly digital, Santander has a unique and large opportunity.

Supply chain finance, we already do this business. It's a business that generates hundreds of millions of revenues for the Bank. If we were to achieve our natural market share this would mean €2.5 billion. I'm not saying this is something we have in our plans, I'm just trying to give a sense of the opportunity here. There's other areas, for example, in payments, global mobile payments. We, as of today, have 7 million as José Antonio mentioned, 7 million mobile banking customers. That's 50% more than a year ago. We see a big opportunity here, again, to work together. And another one is our trade portal. We are starting from a customer base of SMEs in our core franchises, SMEs with whom we have a strong relationship of 3.3 million. And we are already trying to link these SMEs together in quite a unique way. Again, we are one of the only banks or the only bank that can achieve this at this level and this size.

Of course I'd like to reiterate our capital and per share delivery. You can see here that the consequence of delivering for our customers is that we can grow our profits, increasing both earnings per share and dividends per share, continuing to accumulate capital organically and increasing the tangible asset value per share over the next three years. We have exceeded our commitments for 2015 as a whole, and this includes some inorganic growth of course, PSA, as was mentioned, and Portugal. The goal is to continue in 2016 to be above 11% CET1 by 2018 on an organic basis, but growing. I will then give you the 2016 targets. Just very briefly, the some of our main countries. And this is forward looking. This is 2016. José Antonio has covered our achievements this year. In Spain, against a background of economic growth, we're estimating between 2.5% to 3% growth in 2016, actually close to 3%. In the retail segment, we are achieving more than 100,000 new 1, 2, 3 accounts each month. SMEs, we have registered 50,000 new 1, 2, 3 accounts in just 2 months. And our target is to reach 2 million 1, 2, 3 accounts and a 22% market share in SMEs in 2016.

Continuing to work on operational excellence, we have dozens of simplification projects in Spain, where we aim to do better for our customers and simplify the bank, and continuing improvement in 2016 in risk. The goal is to lower the cost of credit even further to be below the 0.62% that we delivered this year. In the UK, we are the only non incumbent bank with significant size, what we call a scale challenger. Our priorities going forward will be to continue executing on the loyalty strategy; again, like this year, to grow SMEs faster than the market, gaining market share; continue to invest in digital. One out of three products is sold through digital channels. The UK as a market, the infrastructure is one of the more advanced markets and we want to continue to be one of the leaders and accelerate this transformation. The UK will continue to work on simplification. This is again good, not just for our cost/income ratio, but is good for our customer experience. And one of the key things and financial guidance we want to give for the UK is to grow fee income in 2016 somewhere between 5% to 10% in the year.

Brazil, again, I mentioned in my presentation at the beginning we see a big opportunity in Brazil to improve the loyalty. You saw that in the slide I shared with you earlier. We can improve the franchise. We can grow. And this is in spite of a complex and challenging environment. We anticipate '16 and most of '17 to be difficult on the macro side. The consensus for GDP contraction in '16 is around 3%. I want to stress again that we not just have a 10% market share, circa 10%, but we have interesting businesses that are low-risk businesses, for example, the acquiring business, where again in 2016 we aspire to get to a 10% market share. So our goals here will be to maintain our leadership and acquiring business in corporate banking without losing focus on cost, where we have done a good job over the last couple of years, and credit quality. So our aim is to maintain NPLs at the level of our peers and deliver, and this is important, higher profits again in '16 compared with '15, in local currency. So growing our profits in the next year in Brazil. In the U.S., we're making significant progress on our regulatory agenda. This is the goal for 2016. I am confident that this will be achieved.

In terms of our businesses, we have two very distinct businesses, Santander consumer finance, which is the third largest player in retail auto lending, which has critical mass in its core business. It's a business which is part, as you've seen, of Santander's core competencies. We're the leader in Europe. And the goal is to continue improving this business as we run it with a new team. At Santander Bank, offering a new digital proposition to our customers. We are growing our top line in the Bank already and improving the Bank, reducing cost also, which this year, as you see, have gone up due to regulatory reasons. And in Santander consumer, finally, this is one of the Group's differentiated assets. Our goal is to continue to deliver profitable organic growth with a low -- even though we have the integration of some of the PSA businesses, with a low-risk profile, delivering PBT in 2015 of 1.5% and continuing to grow our bottom line in 2016. We have delivered, consistently, profits in SCF over the last 13 years. It's a business that we believe has still a lot of potential going forward.

So as a summary, what we're aiming for in 2016 at the Group level, we aim to show further progress in this commercial transformation and that this shows up in our customer metrics and that it has a positive income on growth. Our goals here are to grow our loyal customers and our digital customers again, as we did last year. Here you have the numbers, at 9% and 21%. And most of our markets increased SME and corporate market shares, and all of this with a declining cost of credit again for the Group. Our strategy will result in an acceleration of fee income. This is one of the main goals, and again, it's driven by loyalty and more or less a stable cost/income. And as a result, to grow net asset value per share and dividend and earnings per share again in 2016.

So as a summary, you have here the goals that we set for ourselves for 2018 summarized. We're on track. 2015 shows that these are achievable goals, for our employees, for our customers, and very importantly, for our shareholders and for our communities. Again I want to reiterate that we are on track to reach or to be above 11% CET1 in 2018 and annual increase in dividends per share and earnings per share for this period, while continuing to support education and the communities in which we operate. So this just to show again that we're delivering on the targets we set for our shareholders and that this means that I'm confident that we can reaffirm our 2018 goals.

So in terms of the key takeaways, 2015 has been a year of significant changes. We have laid the foundations, built the team that will lead the transformation of our commercial model and our Bank. At the same time, we have delivered on all the financial and commercial targets that we committed to in January 2015 and during our Investor Day in September. Despite the macro deterioration since then, we are confident that we will deliver on our 2016 targets, focusing on value creation per share and profitable growth. And the progress in 2016 in fulfilling our strategic targets of commercial transformation, culture, customer satisfaction, I am sure will keep us on track to achieve our vision for 2018.

So thank you very much and we are now ready to answer your questions.

Sergio Gamez

Thanks, José Antonio. Indeed, we have time now for Q&A. Before kicking off, I will appreciate if you identify with your name and your house name, as well as leaving the number of -- limiting the number of questions, that you ask two questions per caller. So open it up, please, and we'll take the first question now.

Question-and-Answer Session

Operator

Gentlemen, the Q&A session starts now. [Operator Instructions] First question comes from Andrea Unzueta from Credit Suisse. Please go ahead, sir.

Andrea Unzueta

Hi. Good morning. I just have two questions. The first one is on the UK and specifically on fees. There is a 12% quarterly decline. I was wondering what explains that. And the second question is on capital, if you could explain the close to 1 billion increased that you have on your regulatory capital numerator. Thank you.

Ana Botin

Yes. So can you hear me? Hello. Yes. So on the UK that we have, the fees are falling partly because of the reduction in interchange fees.

José Antonio

Is the only explanation.

Ana Botin

That’s the explanation, yes. On the capital…

José Antonio

Yes. Yes, the quarterly evolution.

Ana Botin

Yes. In terms of capital, the quarterly evolution --

José Antonio

Yes. Well, as I said, normally we have on capital, on average, we have a generation, as I show in the presentation. Recurrent generation in the year was 50 basis points and extraordinary items took off 10 basis points. Specifically in the quarter, this has to do with the evolution of the exchange rates that in some cases, particularly in Brazil, in some cases translate into a negative charge and some other occasions into a positive charge. And in the quarter also the evolution of the available for sale in the previous quarters was negative was not negative in the quarter, was basically flat. And this was the reason of the capital generation in the quarter. It was normalization I would say. In the previous quarters we had pressure from available for sale mark-to-market and the generation of the DTAs in different geographies, while in the quarter was. this was not negative. This is the reason to growth, in the growth of the quarter.

Sergio Gamez

Yes. Next question, please.

Operator

Next question comes from Ignacio Ulargui from BBVA. Please go ahead, sir.

Ignacio Ulargui

Hi. Good morning. This is Ignacio Ulargui from BBVA. Relating to the capital generation of the quarter, you have done 25 basis points increase in the quarter. What would we expect for the coming quarters? Will you stick to the 10 basis points quarterly generation for ’16? And the second question is linked to Brazil. Did you have, have you seen any deterioration in the KPIs, in the key performance indicators of Brazil that could lead to a change in the cost of risk that you expect for 2016 or you stick to the messages of the Investors Day? Thanks.

Ana Botin

Yes. On capital, I think it’s important to look at the yearly evolution. There’s obviously plus and minus in some of the quarterly numbers. I want to stress that we do not need and we do not, we’re not going to raise capital and we're not planning to sell assets. And just three key very important points again on capital, the first is that we’re above the regulatory minimums. The 280 basis points, to give you a sense, is 16 billion excess. Just to put it into context, that’s about a third of our market cap today. And this is a comfortable buffer today.

Second, again, this generation of capital is thanks to a model that, as you’ve seen, we’re growing the top line. It’s thanks to a diversification which allows us to deliver through the cycle even though some countries like Brazil might go through difficult times. We had Spain in the last few years. And again, during the year we included in this capital generation the PSA growth and of course Portugal. So again, profitability, top-line growth. We anticipate lower cost of credit, as I said, for 2016.

All of this is allowing us to guide in terms of this 10 basis points per quarter. It might not be always even, so 40 to 50, I would say basis points per year to fund also our lending growth and as we guided again, growing our dividend next year. And very importantly, by 2018 the 11% plus number gives us, again, comfortable buffers against what we know are the regulatory requirements. And the other question on. Yes. We do reaffirm the guidance we gave for Brazil. We did say that cost of risk would go up next year slightly. Our aim is to be better than our peers.

In terms of the comparable numbers that we have in terms of NPLs, local criteria, the 3.2% compares to 4.5% with our peers. But that 3.2% is better than the private banks also. So we have de-risked the balance sheet. And there will be some deterioration next year. Our commitment is to be at or better than our peers.

Very importantly, we need to look at Brazil as a whole, so margins and spreads tend to go up. Our income is sufficient to, so the increase in our income compensates for the increase in NPLs. And I think it’s important to look at the bottom line. Brazil has delivered a PBT in constant -- as José Antonio mentioned, of plus 20%. And we are saying, as guidance, that next year we will -- our aim is to grow -- our target is to grow our net profits in Brazil in local currency.

Sergio Gamez

Thank you. Next question.

Operator

Next question comes from Carlos Peixoto from BPI, please go ahead sir.

Carlos Peixoto

Hello. Good morning. First, I would like to pose a question on Spain, namely on the potential impact from the recent -- on the draft the Bank of Spain has published for the Circular 4, which revises provisioning standards for Spain. How do you see that impacting Santander, in whether that is already incorporated in the guidance of 60 basis points that you provided for Spain for next year.

Secondly, and still on Brazil, I would also like to ask if you believe that the improvement in income that you are mentioning there that should offset the increase in provisions, on whether it would also be -- or whether you're also incorporating an increase in tax rate after the changes in the CXDF CSLR tax in Brazil or whether that could end up distorting your comparison.

Ana Botin

Yes. I will answer on Brazil and maybe you can answer on the circular. I think there's no effect, but maybe you want to say that after. On Brazil, yes, we are planning next year. And this is the reason why we're guiding towards more or less stable cost income and growing, but not really as much as after that. Because it's not just Brazil, it's the UK is going to have higher taxes and it's a couple of other places.

So we are -- yes, we are taking into consideration everything we know today. If they continue, other countries, to do other things, that's obviously not included. But all the information that's public today on higher taxes in the UK is going to have a negative effect. I think we said the number even. We know the number. It's about 100 million.

At the Group level, the total increase in taxes is about 300 million. There will also be increases in regulatory project investments, hundreds of millions, '16 over '15. And what we are saying is we're going to absorb all those increases not just in Brazil, at the Group level, and still guide towards growing our dividend per share in '16.

On Brazil, I'd also like to say that there are opportunities for us to grow our business in non-lending activities, for example, on the liability side of the balance sheet. Again, this is very much the customer loyalty strategies, improving satisfaction and doing better on the transactional business in Brazil, where we start from a very strong base.

And so, again, we are aiming for a new model. This new model is based on loyalty, delivering for customers. This is what allows us to generate, even in difficult situations, better-than-peer performance.

On the Bank of Spain, can you --?

José Antonio

Well, on the Bank of Spain, as you know, we have been for years making the provisions based on calendars. That are very well known for you. What the Bank of Spain has announced is, going after June, if I am right, incur losses. The calendars and incurred losses should be more or less aligned, so we do not expect any material impact coming from this change in the Bank of Spain.

So we are not talking -- for the purpose of the clarity, we are not talking about IFRS 9. That is going to be -- is going to come in January 2018. So the change from the current Circular 4 to the new system at the Bank of Spain, no materiality at all. The IFRS is still too early to say what is going to be the impact.

Sergio Gamez

Thanks, José Antonio. Operator, go to the next question please.

Operator

Next question comes from Mario Ropero from Identic, please go ahead sir.

Mario Ropero

Hello, good morning. A couple of questions. The first one, in Spain, excluding specific cases, could you please tell us what's the underlying cost of credit in the fourth quarter? And then in Poland, I would like to know what is the impact of the new tax on assets for Santander, and whether you are expecting to implement measures to offset this? Thank you.

Ana Botin

Underlying cost of credit, at least what we published, I understand, right? That is the cost of credit for the Group. We are 1.25 for the year -- oh, Spain. Yes. 0.4. Yes, 0.4 in the quarter. But that's including everything that we know now, right? So.

José Antonio

The 0.4 probably reflects what we're going to have going forward, yes. So I mentioned in the presentation that 62 basis points for the year, but probably that is close to the expected through the cycle. But probably for 2016 we're going to see some overshooting, and 0.4 probably reflects pretty well where we may be in 2016, based on our current information, yes.

Ana Botin

Poland.

José Antonio

In Poland, the new tax was already introduced, as you know. For those who are familiar with this, they introduced a tax on assets of 0.44%, excluding some assets, particularly the sovereign debt. So that means a significant, as you may imagine, it's a significant charge. What we -- what the system is doing is try to do a pass through of this to the pricing both from loans and deposits. It's true that in the very first year we're going to be able to pass probably one third of this tax to the impact is going to be, say, two thirds of the tax in the P&L. And probably in two years, two years and a half, we will be in a position to offset 100% of this tax to the new pricing of the assets and liabilities.

Sergio Gamez

Thank you, José Antonio. Next question please.

Operator

Next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead, sir.

Alvaro Serrano

Hi, good morning. Alvaro Serrano from Morgan Stanley. I've got a question on Spain and then a follow-up on Brazil. In Spain, the NII is down 7% quarter on quarter. Could you update us on the effects of the 1, 2, 3 accounts because I remember from the Investor Day you mentioned that the trough of NII would be in Q1 this year? Are you still expecting that? And if you can give us our NII for the full year.

And also I've seen that the fees didn't move that much. I guess that's a bit unfair because there's also obviously market fee there. But again, any color and update what the impact of fees from the 1, 2, 3 account there would be as well. And on Brazil, I've listened very carefully to your answers, but I just wanted to understand, because the 90 days clearly is contained, but on your corporate definition of NPLs, the NPL deteriorated and the coverage is down 12 basis points. What exactly can you give us a bit of color of the dynamics there [Inaudible] and why you're still quite confident? I think the guidance was flat provisions. Just a bit more color more than quantitative numbers of what's going on in Brazil. Thank you.

Ana Botin

Yes. On the 1, 2, 3 account, we actually are better than plan in terms of our numbers. So the plan we had made in terms of the impact this year is actually better than we expected. And so it's performing very well. What you're seeing in terms of net interest margin, if you go back and look at the past three quarters in Spain, you see relative stability, and on the deposit side, actually improving, and on the net interest margin, i.e. the trends are there. And the reason for the deterioration, as you can see, is on the asset side, not on the liability side.

So there is really not that is not the explanation, it's more the dynamics of the asset side. There's a lot of competition on the corporate side as the government institutions are reducing. And so and also of course the lower LIBOR. So it's more the asset than the liability side that is the explanation for the margin. And it's if you go back and look at the quarterly evolution, you will see that this is there is no change since the launch of the 1, 2, 3.

On the fee side, we are guiding towards higher fee growth next year in Spain. There's pressure, regulatory pressure, in almost every country on the fee side. But actually the trend is positive. If you look at the fees in Spain, it's zero growth for the year, but its plus 0.5 for the quarter. So we're already starting to see a positive impact in terms of our strategy.

In terms of Brazil, maybe you want to give a bit more detail on the NPLs.

José Antonio

Yes. Well, probably in order to understand the our guidance in provision is really to elaborate in 2015. 2015, like what we've had in the provisions, we have had the level of provisions we're expecting, but the composition was significantly better than the one we were expecting. So we took significant charges on the corporate book. And the retail behaved much better than we were expecting. And you see this in the NPLs. What we are seeing well, when it comes to the charge in corporates, a significant portion of them were related with [Lavallato] and all these items. So we do not expect this to repeat next year naturally.

On the contrary, as you rightly pointed, the being the environment quite challenging, we do expect the retail to start demand more provisions, so we took this year BRL1.5 billion more provisions in the corporate book than we were expecting and BRL1.5 billion less in the retail, I'm talking in reais. Probably next year we're going to have more provisions in retail, but the corporate book we are not expecting they're being as demanding in provision as it was in 2015. And for that reason, we are giving you our best view or our best estimate based on the current numbers.

Sergio Gamez

Thank you. Next question please.

Operator

Next question comes from Johan De Mulder from Bernstein. Please go ahead.

Johan De Mulder

Good morning. Johan De Mulder from Bernstein. Two questions. One is a follow-up on the UK, the other one is on operational risk. So in terms of fee income in the UK, you mentioned that the drop was mainly due to interchange fees becoming lower. But at the same time, if you see UK fees have dropped 20%, at the same time, the number of loyal customers has come up 10% over the year, also you've added another million of 1, 2, 3 accounts. I was just wondering, if you take the interchange fees out, how can you explain how the fees have grown basically because at the same time, you are showing good growth in loyal customers at 1, 2, 3 accounts, and whether that reflected the fees? The second one is on operational risk impact. Santander is one of the biggest banks around, so you also the new standards approach is actually more on total revenues and staggered actually in terms of more capital requirements as revenues are bigger. So what would be the operational risk impact for Santander? Thank you.

Ana Botin

In terms of the UK, we've guided for 2016, 5% to 10% fee income growth. I didn't quite understand the question, but we grew 1 million loyal customers in 2015. We've been growing at a very high rate, and we are now launching as we've announced a new investment service, which again is one -- should be one of the drivers in the fee income growth going forward. So, basically, we are 4.5 million, roughly, 4.4 million 1/2/3 customers. This is a very good base to grow fee income going forward as loyalty drives deeper relationships, and we can grow that ex the negatives we've had this year on interchange fees. Operational risk, you want to say something about that?

José Antonio

Yes. Operational risk, you mentioned. Well, it's true that we are operating under the standard methodology on operational risk that basically the operational risk is a percentage of the revenues, and this is penalizing us in some countries where the revenues are extremely high just because the cost of risk is very high. This is particularly true, as you know, in Brazil, also in SCUSA in the States, and somehow in Mexico. But while this is an angle that when I look forward, probably this is an opportunity for us to reduce the capital consumption given the fact that we are running retail operations, we can go from standard method that we use right now, to the standard alternative, provided that more than 90% of the revenues in those jurisdictions come from retail. If that were the case, and this requires the approval of the regulator, we will be in a position to reduce somehow the operational -- the consumption capital due to operational risk. So I do see this more as an opportunity because we are penalized by this standard approach given the high revenues in those jurisdictions.

Sergio Gamez

Thanks, José Antonio. I'm afraid we are running out of time, so we only have time for one more question. So, please go ahead, operator.

Operator

Last question comes from Daragh Quinn from KBW. Please go ahead, sir.

Daragh Quinn

Hi. It's Daragh from KBW. I have a quick question on Spanish revenues, the decline in net interest income in the quarter. You highlighted the pressure on the asset side. I wonder if you could just give us a rough indication of how much is -- of that decline is from lower Euribor rates and how much is from the competitive environment, and what's your outlook for competition on spreads, particularly corporate and SMEs in 2016. And then just one question, on Argentina and the recent devaluation, just what kind of impact did that have on book value?

Ana Botin

On Spain and lending spreads, our strategy, I mentioned, in terms again of the guidance for 2016, our loyalty strategy for SMEs is giving very good results in the first few months. We've acquired 50,000 SME accounts. This is important in terms of our lending growth, so we can do it in a safe way, understanding better our customers. Given the very strong penetration in terms of our branch network and relationship mangers, we believe this could be one of the drivers for next year. We are growing our lending to SMEs on a float basis at 18% and already the stock is growing. So, a plus 1% growth in the stock of SME and small companies lending, even though the overall market and lending is falling. So it's difficult to say, but I think we should expect things to continue to be very competitive. So we're going to focus more on where we are more active. Again, loyalty is the driver not just to increase overall income but also to allow us to defend our spreads. And we think Spain is in a positive cycle, if you look at the numbers on GDP growth. The growth we are seeing in the Spanish economy, I know nobody has asked much about the macro, I mentioned, we both mentioned this in our presentations, but I want to stress that Santander is in markets that are relatively less affected by what's happening in the world. We're a big gainer in terms of the decline in oil prices, a big gainer in terms of interest rates. I mean, average mortgage payments in Spain have fallen by €275 per month over the last four to five years, so, consumption is growing. Again our lending to individuals in Spain is growing at above -- around 27% between mortgages and consumer lending.

So this is what we're going to work on for next year. Having said this, 2016, and José Antonio mentioned this, is still a year where in Spain the two main drivers will probably continue to be cost and reduced cost of credit, as is normal in an environment like this. But you should see positive trends in general in all our business in Spain. Argentina, well, we're very happy with what's happening in Argentina. The Bank of Argentina, the Central Bank, just signed that banks can pay dividends again. So I think that's a very positive and welcome news.

José Antonio

Maybe the question was more related with the impact of the depreciation of the Argentinean peso in our capital position. Well, as we have the capital in Argentinean peso and the risk-weighted assets in Argentinean pesos, when we translate into the Group is not material at all, maybe 1 basis point. Well, it's not material at all, yes.

Sergio Gamez

Okay. Thanks, everyone. I'm afraid we need to leave it here, and obviously the IR team is at your disposal for any follow-up. Thanks for attending today's conference call.

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