Banco Santander Central Hispano SA Q3 2007 Earnings Call Transcript

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Banco Santander Central Hispano SA (STD) Q3 2007 Earnings Call October 25, 2007 ET

Executives

Alfredo Sáenz Abad - Second Vice Chairman and CEO

José Antonio Alvarez - CFO and EVP, Financial Director

Analysts

Alfredo Sáenz Abad - Second Vice Chairman and Chief Executive Officer

Good morning. We will divide this brochure of the third quarter results, but first we will trend the group in the first nine months. After that we'll set for something [indiscernible]. We'll explain in more detail the numbers of the different business areas. And then we will explain the current state of the operation topped by ABN AMRO. Lastly, I will sum up.

The first idea I want to designate is that this was one another excellent quarter for Santander and the drivers were the same as those in previous quarters. The illustration with the 5 drivers in the slide is exactly the same as the second quarter. There is only one addition and that is the result obtained in a much more complex environment when many of the world big banks are now shoved forth in the proxy.

We believe therefore that the group performance, which is good, has even more value in strategic terms. First, the sole growth in earnings in particular the earnings per share, there is sustainability and quality. As I have mentioned in previous presentations, the high quality growth of our earnings is fundamental because is the firms condition for continued growth.

Of note is the slant of recurrent revenues throughout the group unit, okay. Our provisions are maintained with the dictations, okay. There has been an increase that is driven basically that chain in the mix of the different business units. There is also an impact of the perimeter due to the integration of Drive.

Finally, we would like to trend the soundness of the partnership. I'll start to talk about the main process under main increase in the lines. The growth in profit has been 22% more than in the same period of 2006. The profit is earnings per share is €33.90 for the third quarter. So we maintain the strong growth in profit of the last quarter.

The main difference in this quarter is basically Spain. The third quarter in Spain is weaker on a previous quarter. This happens in Portugal, okay. The difference mainly with the second quarter was reduced as happened between the second and third quarter because of seasonal effects. Somebody in Spain of lower collection of dividends as the second quarter is the main period for them.

Okay, as we told [ph] profit excluding capital gains exceeded to €2 million for the second time in the group history. As average [ph], our total profit for the first nine months was €6000 million before capital gains, and is still growing at more than 20% including capital gains of €866 million generated in the second quarter from the sale of estate in Antena, San Paolo. Total profit for first nine months was €6572 million, 32.8% more than in the same period of 2006.

I would like also to emphasize that this figure only includes the capital gains of San Paolo. The sales of the pension fund units in Latan [ph] or buildings in Spain are not included yet.

In terms of the quality of the P&L, I would like to mention that the growth in gross operation income of more than 20% doubled the rise in cost as net operating income increased by 31%. Loan loss provision increased 34% compared with 37% in the first half.

Net operating income, net of provisions rose 30.6% at the same pace as gross operating income. The incorporation of other income and provisions brought gross and profit from alternative QEC to 27%.

Lower down the income statement, the impact of this continued operation in 2006 under sale of minority [indiscernible] brought growth in profit excluding capital gains to 21%. These increases were negatively impacted by exchange rates, which for the whole of the group took away about 2% points.

On the other hand, the entry of drive had a positive effect of 2% points. The overall exchange rate on [indiscernible]. In terms of horizontal quality, all the areas have a very adequate growth. By geographical areas, Continental Europe grew 35% with a good performance in all the units. Santander Branch network, Banesto, Portugal and global wholesale banking in Europe grew by more than 20%.

Abbey [ph] rose 2% on a like-for-like basis. Latin America rose 23% the profit in dollars. And in terms of business units, retail banking increased the result by 27%, wholesale banking by 43% and asset management and insurance increased by 6%, so in result, all the units both geographically and by business areas, the growth has been very sound.

If we split the different lines of the P&L, the net interest income has had a very strong growth. Income has been growing very strongly. Net interest income plus fees has been very solid. The net interest income grew 24%, insurance contribution had a growth of 40%. Fess grew basically very strongly despite of a no... basically the prophecy of no charge in fees in Spain and Portugal.

Gains on financial transactions increased by 39.2% similar to the first half, okay. So revenues in somebody were driven by merger companies once. On top of that, the revenues were very consistent in the different quarter. If we look at the core revenues driven by the recurring business, you see that there has been a consistent growth quarter after quarter. And currently, this growth of the quarterly revenues has been the consequence of market in terms of volume.

We have strong growth rates of lending and customer funds. And of course it is also the consequence of their appropriate strength [ph] management, which has been favored obviously in some markets because of rising interest rates.

Efficiency; efficiency for us, it's always an essential aspect. It's a crucial driver of our results. And I've been speaking about these mandibles for quite a few years. But you can see that in 2007, we haven't just maintained lease mandibles but have opened them even more than in 2006. Efficiency, we've gone from 48% in September to 44.4% now, so we've improved on the results of June and we will continue along these lines.

And by the end of the year, we'll improve our efficiency ratio, our cost income ratio across income ratio even more, and not in every market. In Continental Europe, we are already below 38%. Abbey is already at 50%, so we are also within the group of the British Bank. And in Latin America, it is almost 40%, which is a ratio that I'm very sure we would have seen and think above even for Europe.

Cost, which is another of the key aspect in order to maintain these strong gross levels and these costing cum improvements, we have also always tried to selectively improve our cost. If you look at the different units, we can see that the cost has grown only very moderately in real terms especially if we consider that we are undergoing strong network expansions, we have increased our high price to 12% in the last month.

Santander consumer and finances has grown even more. It's grown 20% in its cost but that's due to two major component; first growth projects and secondly, the parameter effect because of the inclusion of Drive. And if we were to subtract this, the cost would have only grown, well there would be 13% points less cost growth than what you see in this chart.

Abbey is still rationalizing its cost there successfully. We've reduced our cost by 4% in Sterling in there currency. And in Latin America basically the budget are being met. The Latin American countries are experiencing cost growth in line with their budgets. And I off course want to remind in Latin America, we are continuing to develop our regional branches. We've increased the number of branches by 8%.

We have opened 1300 new ATMs versus September last year and obviously has an impact on the cost. It is an area and which was still investing in our retail structure apart from this as you know, we also have strong development projects both for our businesses and our brand and technology, and these of course have had an impact on the cost in 2007.

As for point number 4 in this structure, we saw earlier we can see that provisions have grown in the group by 29 % in the third quarter in comparison with the third quarter 2006, there has been something on an acceleration in the growth rate and as a result the nine months accumulated have increased by 34%, which is slightly lower than the first half which was 37%.

But if we were to subtract the impact of the integration of Drive into the parameter, the growth would have been only 13 % which is same as in line with the growth and groups lending or in other words the growth in our provision and in our lending are fairly much in line.

Looking at Drive independently because obviously, we need to keep an eye on Drive; Drive has remained stable with around €100 million to €110 million per quarter in provision. And of course all of these provisions, volume of provisions very much in line with the performance of the groups most recurrent results as you can see in the chart on the right.

Our net operating income of provisions compared to the growth of provision itself, so nothing new in this area of provisions in comparison with what we have been saying in the first and second quarters and with what we said in the investors day back in September.

Nothing new either in terms of a more detailed analysis of these provisions by business areas in 2007 and the comparison with 2006. When we look at the growth in specific provisions we will see that on the one hand, the change is due to the consolidation of Drive which represents more than half the increase in Europe. We've included Drive in Europe so as not to break up... something that consumer finance European units. And the increase in Latin America has been the result mostly of the impact in Mexico of the NPO ratio in credit cards, which has already stabilized in terms of the risk premium.

We have seen significant reductions in wholesale banking due precisely to the effect of the generic provisions and also we are seeing smaller provision in the Santander network. Therefore higher provisions in Latin America, Brazil and Chile because of greater lending; Mexico because of the credit card business and the primitive effect due to Drive's entry.

Finally point five of this structure as we showed you at the beginning in order to structure our presentation of the results of the said quarter, we said that another key was the strength of the balance sheet. The NPO ratio has remained stable. There was a slight increase in the quarter, but it has remained pretty much at the same level that we had in the third quarter of 2006, so very stable.

Coverage is still very high at 158% unless in numbers means that we have generic provisions more than 9 billion, sorry almost 6 billion in generic provisions with a total coverage of almost 9 billion. 6 billion generic, 9 billion total. And together with this very effective risk management, another of our priorities is an efficient use of capital.

And in this contact, our capital [ph] will remains to 6.2% obviously before the ABN acquisition. And so these were the basic ideas of this third quarter and of the nine months of the year. And now I'm going to give the floor to José Antonio Alvarez, so he can continue to tell you about the different business areas and business units in the group.

José Antonio Alvarez - Chief Financial Officer and Executive Vice President, Financial Director

: Good morning. As Alfredo [ph] was telling you as our CEO is telling you, I'm going to now go over the base business areas and units after CMD totals on the general figures of the group. It is to be expected that the behavior of the different business areas and units will also be very good as it has been in the previous courses.

Starting with the different geographies specifically with Continental Europe, attributable profit has been €3.53 billion that's including that small change of EBITDA due to Drive, which we include in Santander Consumer Finance minus Drive. Our profits would had grown by 52%. We can see that we are still experiencing strong income growth over 29%. Our costs are growing at 14%, so... and operating income is 1.6%. The difference between the net operating income and our profits are due to that increase in provisioning which the CEO was telling you about.

In the chart, you can see that retail banking business is still generating revenues on a very good rate. There has been a slight seasonal effect of the second quarter and we've included the investment of the PI [ph], that's €77 million. But the rest of the business as we will see also for other units especially for wholesale banking and somewhat for Latin America 2007 in comparison with 2006 basically is the market variables. The second and third quarters for market... the second quarter was worst than the third while in 2007 it's been the opposite in the third quarter which was worst than the second. That's because of the evolution of the markets.

If we take another step further and look at the different units, Continental Europe, we can see reasonably homogenous behavior of all the units, of all the experience with similar revenue growth, operating income grew by about 15% or more. Net operating income rose by over 20% and in attributable profits was very good growth. We see some peculiarity for the Santander branch network was seen 29% growth solely supported by the growth of our net interest income which grew by 21% and fees grew by 10% after absorbing the expansion of the bank plan, but net profit grew by 13%. And here we have the order based impact with interrupted or discontinued operations but without that profits were up 25%.

As for Santander consumer finance, I'll talk about this in a bit more detail later. Bottom line, it has gone up 30% but of course here drives entry has a greater impact. Without Drive, it would have grown by 12%. I'll explain a little more what the consumer finance division is doing. Portugal rose by 24%. Here the impact of the capital gain from the sale of BPI was minor because it was mostly applied to anticipate cost and provisions for possible contingences. Outside these four main units, we have what we call the reminder and that's the combination of asset management insurance, private banking and global wholesale banking.

Global wholesale banking is the larger part as you can see on the screen and global wholesale banking is still performing very well in Europe because of the good performance of customer revenues and also because of lower need for generic provisions as has already been explained, so if you look at the different units in a bit more detail you can see that the Santander branch network, we are at record highs, very good rate of generation of income. Our net interest income has gone up 21% that's the main driver for the profit the growth of our net interest income is of course a combination of growth and volume and increase in spreads.

Volumes are slowing down mostly because the mortgage business is only growing at 12% but there is a significant improvement in the spreads. Our customer spread has improved by 53 basis points versus the nine months of 2007 versus the nine months of 2006 and although it doesn't actually have an impact of the numbers for the quarter, doesn't have a direct impact, it could have indirect impact the success with [indiscernible] now where we placed as you know €7 billion or paper convertible into bank shares demonstrate, I think it's a very clear demonstration of our enormous placement ability through our branch network.

Overall, incomes growing double the rate of course and as a result for first time, the efficiency ratio, the cost income ratio is below 40% with an improvement of 2.5% points and it's already below 40%. Currently, we have a 120 more branches in a year ago and we think we have increased our network by 4%, nevertheless, we are achieving these significant cost income ratio improvements. We have reduced provisions because of lesser need for generic provisions while specific provisions remain at very low levels. The annualize cost of credit to the Santander network is only 0.8%.

Banesto is also showing similar evolution. Net interest is growing at 18%. Cost are growing at 5%, volumes are growing very significantly 25% and there is an improvement in our cost income ratio 4.1% and it's currently at 41.7%. Credit quality is still excellent. NPO ratios are still at historic low. And there is year-on-year growth of provisions in line with that of lending. Annualized cost of credit for Banesto is 0.06% or 6 basis points.

On the left you can see that lending is growing at 25% greatly driven by SMEs and [indiscernible] which are offsetting the slow growth in mortgages. So in short, an excellent quarter for Banesto and their results were [Technical Difficulty] represented by its management. Santander consumer finance, I will separate Santander consumer finance Europe from Drive in the U.S., so we can compare like with like. I'll talk specifically about Drive.

In Europe this business is facing strong pressures or some pressures on it's spreads as we did last year because of rising interest rates. We have been discussing this in all of our presentations plus we have had a fall in cash sales both in Germany and in Spain and this environment, which is a challenging market environment. Our gross operating income nevertheless grew by 10% are driven mostly by cross selling. Net fees grew by 35%. Provisions remain stable, NPR ratio is stable at 2.8% also stable in the quarter and so our attributable profits grew by 12% without drive that's the year-on-year attributable profit growth, which compares very favorably with that of our consumers in this market segment who are going substantially less.

On the other hand, Drive is still developing very successfully. It has generated €78 million and attributable profits in the quarter surpassing our initial forecasts and overall the consumer finance business is the business, which has gone from generating €114 million to generating €180 million to €200 million quarter. So very good performance in a more challenging context especially in Europe because of rise in interest rates and the foreign car sales in Spain and Germany.

As for Portugal, we still have growth, very good growth in the retail part of the business individual and SMEs, in corporate growth has decreased but the individual and SMEs business is growing at a very good rate. As a result, income is growing also line driven mostly by the net interest income on our customers from Santander global connect, which we are already mentioned we were developing in Portugal in previous presentations, and as a result we have a very reasonable gross operating income situation and by controlling our cost, our net operating income is growing at 20%. Lower provisions because of higher recoveries and the sale of certain portfolios as a result of which our attributable profits have been... we have seen on previous quarters by about 20 % and versus the same quarter 2006, and the same as in the previous quarters.

Moving on now to Abbey, the profile of the account is the same that I showed you in the first quarter. We are currently at €613 million, which is 21% more than in 2006. Profit before discontinued operations as the CEO pointed out as growing at 42% despite 19% rise in net operating income and lower loan loss provisions, which we will discuss in more detail later.

The growth in our net operating income is due to a very good behavior. Our gross operating income which was at 6.5% in a concept in which personal financial services in the U.K is a market that's been growing at an average 2%-3%. Cost drop in by 4% annual and that means our profits and net operating income and our net profits are growing a great deal. Moving on because of course Abbey is outperforming its market very significantly, there some highlights of the business which are strongly connected to its ability to launch new products but also customer management ability because of the tax and on deployment which is still in course. And all of this has enabled us to improve our overall view of the customers and we are beginning to be able to carry out processes which were common in other areas of the bank, which mostly to do with cross selling.

Our management is much more focused on spread and in volumes. As a result we have been enabled to improve our revenues in retail banking. Our net interest income is growing at double digit gross in that area, which is particularly remarkable in market like the U.K. Our costing income ratio is at 50%. It's already as I said at 50% that's 5% points better than in the last year. And the risk quality at Abbey is substantially better than the average sector and PL ratio for mortgages is 0.61... the average for the sector is over 1% and so we have been able to keep provisions in line with us for the three previous quarters. 22% lower than the previous year because if you remember, we discontinued [indiscernible] personal loan business in August 2006 and now is the business, which had more provision requirements.

Moving on to the different businesses, in Abbey, we see that mortgages have grown. The last quarter was especially good in terms of net production. Our market share was up to 11%. We're not actually actively competing for market share we're focus more on our spreads as I said the mortgage business spread has dropped by 7 basis points. In the other business lines, in the customers funds, in deposits and investment business have been performing well. We had zero growth and now we're growing at 5% but the significant improvement in our net flows and the spread is now 12 basis points in a portfolio of a significant size because we're talking about a portfolio 71 billion pounds.

In personnel lending I mentioned that we discontinued the Cahote [ph] business as a result there's been drop in volumes but a very significant improvement in the spreads at 71 basis points, which is a lot more significant in a context where as you know, the Bank of England has raised interest rates by 100 basis points which means that we're not just been able to transfer those to basis points but also improved our spread further. In client accounts we're growing at a very good rate balance is growing at 8% with an improvement in the spreads, and this is derived mostly in this case.

The rise in interest rates that I have mentioned has helped a great deal. As result in Abbey we have a context of improving spreads for all the liability products on a very good control of our mix, volume spread growth and our mortgage business. Moving on to Latin America, the third quarter in Latin America was very good. Currently, theirs quite a lot of concerns in terms of emerging markets and specifically in Latin America performing very well.

Customer business is performing excellently. There is a very growth in the retail business. In this quarter our financial revenues were lower than in the previous quarter because of market conditions in previous quarters we had sharp drops in rates especially in Brazil, which has slowed down somewhat in the third quarter but in any case, the region overall has grown at a very strong rates and as a result we have been able to grow our profits in dollars 23% in comparison with 2006. As far as are profit before taxes were to subtract the impact of the taxation rates, we are growing at rates of 30% specifically 29% so strong income growth 33% top all that than the rising cost, net operating income 45%, up strong growth in volumes, change in the business mix as we have seen in previous quarters with a higher cost of provisions.

But overall, the net operating income net of provision is still growing at a very solid 30%. So net operating income, net of provisions is still at 30%. The impact against the euro exchange rate is 6% points minus 6 point when we transfer these numbers into euros. But looking at the main business units Brazil, Mexico Chile you can see that all the units performed very well both in terms of net operating income and net interest income, there has been a growth of over 50% in Brazil and Mexico 18% and Chile 27% in the other countries so a very good performance.

Indeed net attributable profit grow anyway [ph] successfully also 26% in Brazil from 58% to 26% but that's because of extraordinary funds and a higher tax save Mexico grow in at 40% well above market averages, Chile 29% and if we take into account the sale of minority interest, the growth would have been 38 %. Remember last year, we divested 7% of the banks business. The rest and I am going to speak about the rest attributable profit is down 9% even though our net operating income is up 27%, but I will just give you few more details about this.

In Argentina, the business has grown 24% profits same thing in Venezuela which is growing at 20%. The effects... the negative effects are due to the fact that in 2006, we sold off Bolivia and Peru pension funds and so the capital gains were included in this area for Latin America and they were some extraordinary revenues in Columbia in 2006, which we didn't have this year. But the only real impact in terms of business is the larger provisioning of Puerto Rico, which is an economy which as you know is undergoing a recession with a very significant rise in the cost of credit.

On the other hand, Santander private banking has continued to grow its income very well at 25% in terms of operating income and profits. Moving on to the different geographies in Brazil, we've had very good economic environment. There has been a significant drop in interest rates in comparison with those of 2006. 260 basis points, the systems is growing well, credit at 25, lending customer funds at 21%. Santander Banespa is growing very much of 27%. Total growth in lending to individuals, SMEs and corporate all growing at a very good rate.

And in customer funds we have seen an increase in investment funds and also deposits very significant cost income ratio improvement from 46% to 39%, as also very good contribution of the IRF throughout the year, but in the last quarter we didn't reach the record levels per second but overall, income is growing at 39% which is more than twice the rise of cost and that gives us a cost income ratio as I mentioned earlier.

As for provisions, again to say that they have grown versus 2006 because of the increase in lending and the change in the product mix, but the risk premium has remained stable in the last quarter. It's remained stable for three, four now at around 3.3%, 3.4%. Mexico, the macroeconomic environment is still solid and you can see this in the improving rating of the country. Interest rates have risen slightly by 25 basis points. The system is growing strongly, lending at 26%, deposits also growing sharply. Our brand is doing very well.

We have had a lot of new customers almost 960,000 new customers linked almost 300,000 payroll checks, credit cards growing very significantly. Credit cards are now 5 millions and we are growing a lot faster then... individuals. And this is reflected in an increase in our net interest income of 39% and 29% in fees and insurance. Costs are growing because of the new branches, the 43 new branches we've opened and the over 500 new ATMs opened in last 12 months. But the gross is well below that of gross operating income as a result of which efficiency ratio is 33.8.

Excellent evolution of our net operating income, which has surged by 74%, 53 % net of provisions because as we have said there has been a rise in the cost of credit for cards, so our net operating income is up, net by 53%, which has meant attributable profit has grown as we said before. Very significantly, finally Chile the macroeconomic conditions in Chile are extremely solid. The only negative has been the inflation rate, which was significantly in the country. As a result of which, these central bank raised interest rates by 75 basis points. They are currently up 5.75%. Financial systems have been growing around 20%. We've been growing slightly below that system average. But percentage of net income interest income has grown and if you compare that with factor of our competitors, we are probably 200 basis points in... and I'm above peer group, which begets our greater focus on the retail business, this with our competitors. We are not growing in the more wholesale product of the business.

[Foreign language]

Gross and income is growing by 16% with two different behaviors and the customers buy 23% and the others have been at lower levels, and there has been sustained growth customer treasury, increase in investment banking and in global transaction banking, there has been growth of 15% with custody of management above the average on the second matter for provisions as been already mentioned has been releases because of the present indication as already mentioned in previous quarters.

And in the third quarter, the provisions are not normal and this development in provisioning means that the profit in this area has grown by 43% after provisioning in assets and insurance management finally, we have growth in income of 17% with very good performance in insurance, which is growing by 22% and this is now the area which is providing most to the total business and in investment fund in Europe or in two digit. Abbey is growing very well their income of program by 25% and North America is growing by 20%, and in the pension funds growth is lower and in fact there has been a drop of 9% basically because of the business that we have divested in Latin America over the quarterly accounts do not include this.

And finally, we have insurance which has been very good at performance within Spain with 43%. We have been selling for that products based on insurance and in Latin America where the business is waking up with increase of 40% or so with great potential, for the next two years. And so having gone through all of this and I am going to pass the poll back to the CEO who will now talk about the ABN AMRO operation and the conclusions after the results of the third quarter.

Alfredo Sáenz Abad - Second Vice Chairman and Chief Executive Officer

Okay, well the ABN AMRO operation clearly was still quite... we can't really provide lot of information yet because of the current state of the operation, the acquisition operation but all the same, I am going to go over the main events and also steps will be taken in the near future.

Firstly, I would like to say that this operation is going to be a very positive one for our group because it fits perfectly well in our strategy, and our capacity. So on 5th of October, we completed the initial offering, which was led by the three banks in the consortium. This was accepted by 86% of the capital and therefore we exceeded the minimum that have been established. On the 10th of October, we declared the unconditional bid and we opened up to 31st of October at the area before the rest of the ABN shareholders, so that they could place there shares if they wish at the disposal of the bid. On the 16th of October, we made the initial payment that is we paid out 86% of our share, which represented €16 billion euros, and after that the company created by the three banks, RSS holdings is now the holder, the owner of the majority of the capital of the ABN AMRO.

And the plan is that in the fourth quarter, which will include the... by the equity method results, so our participation in our affairs. The purpose would be made from members for the governing bodies of ABN AMRO, for both the supervisory board and the management board and these members will be ratified in general shareholders meeting to be held by ABN AMRO on 1st November.

And finally I would like to say that the consortium has 60 days... a period of 60 days to present to the Central Bank in Holland, but that supervisory bank has plan for pushing up the different assets amongst the different shareholders.

So this plan for segregation has been carried out in a very precise way. We have a project that... which can be seen here in this graph. We did that creating a structure, which will be dealing with the segregation within ABN. And we in front end benefit that of structure, which we could call a sort of mirror project, so that we can proceed [ph] what is also to us as a result of this plan for segregation.

And this separation plan of certain governing bodies, which include the... let's say the incorporation in the supervisory board of our representative of each of the members of the consortium and the management board will be in charge of carrying out business as usual one as ABN AMRO. Santander has appointed two representatives for this and there's going to be transition management committee, which is sort of front committee, which will be responsible for coordinating and taking decisions throughout the whole process of segregation of assets for each of the members of the consortium, and there is also a office called PMO that is project management office, which will be giving support to this coordination and there'd be a number of working groups with TSG's, which will be responsible for receiving the information and drawing up the plan for separation and as proposed by the transition management committee and the management board.

So as I have said we have created a mirror structure, obviously the main purpose of this mirror is to, project is to maintain the proper functioning of ABN during the transaction period until all the business is separated, and to ensure proper optimization of the businesses in the existing business of all the amends of the consortium. So in summary, I think we could say that we have had an excellent quarter in a complex environment. We have had complications rather in the financial environment as a result of the instability in the international markets because of the prices in confidence and liquidity problems and in this environment, the factors that we have had very good results, especially as I've already said, if we look at what's been happening in other international banks, especially the wholesale banks.

And we have been able to maintain our strong position in result, strong position in our balance sheet and also strong position in liquidity, precisely because of our strength, our basic strength such as our high weight in retail banking, our diversification on a geographic level and also our traditional quality of risk, which is not exposed to very complex products, which are the ones which have really caused the recent crisis and this has allowed us to maintain high level of growth in our results and in our income, especially and this has taken our growth to more than 200%.

So as you have seen in Europe, all the commercial units have had a good quarter in results. In Abbey we are still meeting our objectives, in spite of the fact that the sector in the United Kingdom is showing signs of weakening and in Latin America accompanying a very good performance in credit activity, banking activity throughout the region. And this is allowing us to grow in [Technical Difficulty] there is a certain degree of limiting in questions with regard to possible write-off of the goodwill sovereign as a result of the current [Technical Difficulty].

Question And Answer

Unidentified Company Representative

Well, it's not really necessary to do an impairment because the evaluation of the goodwill is not related to the share price. It's related rather to the capacity for generating profit and the value of the assets that is the value of the bank, so that's the first idea I have to express. But from a technical point of view the impairment is not necessary unless there is a clear reduction in the capacity to generate profit. But I think the goodwill is going to be reviewed at the end of the year. That's when we'll have to take any decisions on this matter. But we have... you must understand that all these write-off are also done on the basis of the P&L, so that they have no effect on the capital because goodwill has already been subtracted from the capital, so it has no... there is no impact here.

Unidentified Analyst

Also, there is a question for UBS, about our appeal to the market and financing during the third quarter, this had [ph] a good access to the market and they would like to know about the appeal process.

Unidentified Company Representative

I'm going to pass this floor to my colleagues who will answer better.

Unidentified Company Representative

Well, it's true that after the subprime crisis in early August, liquidity in the markets was seriously damaged, especially in products that are related to credit that is securitization and it's also true that spreads in seeing and secure and mortgage certificates have reduced considerably, and we've already stated the liquidity position in investors day. We are a bank that finances itself in a conservative way, the wholesale financing has an average life of 4.5 years and placement in short-term markets, commercial paper etcetera, deposits certificates, etcetera, although necessary and limited and we were net lenders in the interbank market and I think, even after the operation of ABN, our position continues to be very good. We are still net lenders in the interbank market and we have done some operations, and market open, the prices are rising with the operation in subordinated debt have a significant employment [ph] 4 billion at high prices, so we are not talking about a lack of liquidity, so much as larger credit spreads. And during this period, basically we could say that we have financed ourselves with the excess liquidity we had and also some issues in the short-term. And finally, we have been able to place some securitization in the market, basically in drive during this period from September to October. We've placed $1.1 million sorry and basically I am referring to the subprime sector where we have been able to place $1.1 million in securitization in the market at higher prices than we had in July. And so we have this winnings [ph] in liquidity, so the liquidity environment is one of the wider spreads rather than lack of liquidity.

Unidentified Analyst

Okay, there are also some questions from different banks on ABN and the possible financing through rights issue. Because of the equity position, we had number of months ago and also the enlargement after the issue of convertibles?

Unidentified Company Representative

Well, there is no change in projections that we gave on I think the 20 of May or so, when we spoke in London. We issued 7000... 7 billion, sorry, we have a total of 3.3 billion and the next issue is going to be soon, probably, obviously before the end of the your, but it was not yet decided exactly, what date is it going to take place. But we're still waiting according to same basic promise, the same basic ideas that we have been updated both basically what we have been doing is being to concern our projections.

Unidentified Analyst

Also, there is a question from Antonio Ramirez [ph] about the rest of the Continental European and Latin America, where there has been a slow down, quarter-on-quarter and negative performance in comparison with last year, could you explain this please?

Unidentified Company Representative

Well, in Latin America, I am very clear about this because in Latin America, there has been a poor performance in Puerto Rico in the third quarter and as the financial manager already stated in Latin America, last year during this period in 2006, we had some capital gains of as a result of the sales in Bolivia and Peru and obviously these two effects taken together in comparison with the third quarter of 2006, this has resulted in the poor results.

In Europe, nothing special has happened really, perhaps the effect comes more from the movement in hotel banking, where in the third quarter of 2006, there was some very strong corporate operations, which resulted in a strong growth in revenue, as you may remember and it's also true that we had low provisioning, specially in the genetic products and we have been able to recover during the first and second quarters. But if we are talking about operating margin, operating profits, well, that's probably the effect of the slowdown in the third quarter, in comparison with 2006.

Overall, but I think, this might have a lot to do with the operations that took place in Spain also in the third quarter. In Europe rather, including Spain in the third quarter of 2006, which to some extent, because they didn't take place with the same degree of intensity, in 2007 this might be the reason for the slowdown in profits. But the attributed profit in the third quarter of 2007 was 106%. Now the figure is 98%. So we are talking about figures that are really very high for growth in attributed profit in Europe, over these two periods.

Unidentified Analyst

There are three questions from Harpreet Parhar [ph]. Firstly, can you update the cost of implementing the MiFID standards in 2007? What do you think is going to be the impact of these in 2008? And the second question is, if the increase in equity premium... in both the regions can be transferred to rest of Latin America in 2008. And the third question is when do you expect consolidation on a global level of [indiscernible] and there are number of economists asking about when we are going to be consolidating all of this and what are we going to be during the division of the assets?

Unidentified Company Representative

The last question, on the, question of consolidation is going to be... that's going to take place as soon as we have done the legal separation of [indiscernible] from ABN and as a result of the agreement amongst the four supervising boards, we are basically doing the equity method and all, any area for global consolidation Israel.

We are talking about the MiFID. Well, the fact is, I don't know what that cost of MiFID is, it's certainly very costly in the work, but I don't know how much in cost in money. And the impact... well, I too would like to know what the impact is going to be. I hope it is going to be the same for all of us. I'm clear about that. And Dominic [ph] subjects were Puerto Rico, I don't think we can really transfer that but in the rest of [ph] May for 2008, Puerto Rico is in a recession. It's showing negative growth. At least we don't think, this situation could be applied to the rest of Latin America in 2008 and certainly it's very from the consensus.

Unidentified Analyst

And there is a question from Deutsche Bank about ratio of non-performing loans in Spain, why is it rising and how can we see fit this in with the level of provisions, which is not too high over the quarter?

Unidentified Company Representative

Well, the increase rose in September and commercial of June. In June we had an impaired ratio of 0.51 then it was 0.56, so it rose by 5 base points. I don't think this is a very high rise. I think it's a very small rise quite offset. Also we have provisions that we've stated in investor day with regard to risk premium, which are sitting very well in the overall situation now, level of provisioning I think is more than comfortable, we could say.

Unidentified Analyst

Now question from Upendra Choudhury from the analyst on to the rate of Brazil intergroup after consolidation, which is going to reach about 20%. Are we concerned about this rate? Do we think it's appropriate considering that this is for an individual country within Latin America? And the second part of the question is, could we say something about growth in credit in Brazil in the shorter medium term and to what extent can we maintain that level of growth.

Unidentified Company Representative

Well, I think we've had great news. It's not a matter of concern. It's really great news, because we have an opportunity in a country like Brazil which is a country that is growing tremendously. It has a tremendously dynamic situation and it's going to enter investment grade soon. And ahead of it, I think it has very positive prospects in both growth, macroeconomic growth and banking growth and therefore, it's going to offer tremendous opportunities for generating business and I think there is no element of concern in the short-term. It's just a question of having the necessary diversification, which we already have and we have certain components in the continent of Europe in islands in the Europe that is U.K. and also in countries with high levels of growth. Our position is tremendously good and what we have seen in Brazil and in the operations in Brazil, I think we are noting positive elements rather than elements of concern. It's quite the opposite. I think there is really a lot of opportunities there, so what's our prospects for growth. Well, if the macro situation in Brazil continues to be positive as we can think it will continue to be, then I think the demand for growth or the demand for credit rather for the speaker will continue to rise markedly above 20%, which is the current level of growth. I think it's going to grow between 20% and 30% and the increase in credit, well I think the figure that's a figure doesn't matter, but I think certainly all of this is going to give tremendous impetus to the banking business and to our results. And so therefore I think it's very good news but it is something that is reasonably sustainable. And I do hope that over the next few years, it will be a source of great satisfaction for the group. We are working on it.

Unidentified Analyst

Okay. There is a question about our stakes in sovereign and Sepsa from Kana Norimoto from the Citigroup. Are we planning to sell our stake in sovereign and can you update what the divestment plan is for Sepsa, and any potential capital gains?

Unidentified Company Representative

The first question it is no. We are not planning to sell our stakes in sovereign and the second is that obviously, as we have said repeatedly our stake in Sepsa is currently an investment, which is available for sale and when we have more precise information, we will give it to you. But right now there is no additional news to be discussed.

Unidentified Analyst

Okay there are two questions from Louis McGarry and Quentin Soza from European Dynamo Capital [ph] with regards to synergies in Brazil and the part of both revenue and costs.

Unidentified Company Representative

There is a presentation about these synergies on the website, but if you can't find it, you can get in touch with us and we will give you the details.

Unidentified Analyst

There is a question from Louis Pinya [ph] from DB about the selling of our real estate while we close it with the announced capital gains of 1 point some billion and when?

Unidentified Company Representative

Well as I said in my presentation, this is a subject that is still ongoing. We have had some offers for all the real estate that we have put on sale. They would be studied to some of very good offers actually and so I expect the operation to go through. When, very soon. That's a decision that must be made by the bank when the time comes.

Unidentified Analyst

All right. Mario Lowes [ph] from UBS Securities. Several questions, first says he is positively surprised by the evolution in customer spreads in the third quarter versus the second especially when compared with competition in Spain in two quarters with increase of those spread by 50 basis points, and he wanted to know if that's a price effect or a business mix effect? He is also asking about the new loans to SMEs and new mortgage-backed loans for SMEs and the other types of loans, new loans?

Unidentified Company Representative

We can explain about those later, if you like.

Unidentified Analyst

And then they are asking about the evolution of the income in the corporate headquarters and also the impact of the depreciation of the dollar on our accounts, both consolidated accounts and the corporate headquarters?

Unidentified Company Representative

Very well, I am going to give the analyst from UBS Securities just a flavor of what's happening in this third quarter 2007 in Spain. I said... it's true, it has been very good in comparison with our other competitors, but that's because of the good management of our spreads mostly and if we look forward, we are not actually pessimistic, but quite the contrary, we are quite optimistic, because although it's true that the business will be slowing down in terms of lending volumes because there is a less of a demand for credit and in 2006 or even in first quarter 2007, we have seen a slowing down in the demand, we are not growing at 20% anymore. It's more at 15% or 16%, so we are seeing a slight slowing down of the business, but we are also at the same time seeing a very clear improvement in our spreads for several reasons, different courses for that. That is as far as lending. On customer funds obviously comparing interest rates now, is also 2006 it has a positive impact on customer funds and as a result, we are over all seeing a very beneficial evolution of our spreads, but there is delivery management on the part of our branch network in terms of selecting the right product mix and right price or spread targets. Of course, there is a slowing down of the mortgage business, but at same time we are seeing growing activity with SMEs in general. It's the business that they are not of course, is also a contributor to these results we have mentioned.

Unidentified Analyst

All right. There is a question about the revenue at corporate headquarters and the impact of the depreciation of the dollar.

Unidentified Company Representative

Well, in the corporate headquarters, as I explained as you know, we have a short-term dollar position, long-term euro position and overall in the three quarters that has generated about 200 million impacting the ROF of the corporate center and in the last quarter, it's been about 170 million more or less and that explains the movements in the corporate center, which is I think the only part of the group, which has significantly changed.

Unidentified Analyst

Abdoulaye Friest [ph] has several questions. He is asking about provisioning in Latin America, which is growing and can we explain our expectations for that market. He is asking about dollar hedging in, I think Q4. We have 4%... 100% euro dollar hedging sovereign. He is asking that's already been answered and the capital enlargement too, so really just provisioning in Latin America.

Unidentified Company Representative

Right. I don't really think there is going to be or has been specific circumstance beyond the growth of the business to explain the growth of provisions. Our business in Latin America is growing very strongly, both lending and customer funds if there might be some minor element, perhaps greater acceleration of investment funds in some countries and deposits of that may on fees, even perhaps it could also be in effect of the change of our asset mix, which will also generate more fee income. The credit card impact, of course in Mexico and perhaps in some other countries may also have an effect, but really what we are seen in Latin America as I have already explained, is that the business is growing extremely strongly and that growth is accelerating, both those contribute fees and those that contribute net interest income are launched in Santander global connect in Latin America and that's generating fee income. The insurance business in Latin America is growing very strongly. It's accelerating as it did, when we launched the input to go on Spain. And that's also having an impact on our fee income. So it's probably a combination all our fees effects. More insurance, more Santander global connect, more investment funds, all of these elements are contributing to this growth in our fee income and revenues.

Unidentified Analyst

Nigel Sanapa [ph] has several questions, most of them have already been answered, there is maybe two left. He is asking about deceleration of growth in Spain versus our deceleration versus that of our competitors. He wonders whether we are still comfortable with our target of plus 11% to 12% in our revenues for 2008. And that's for generic and specific provisions, how they will involve in Spain in the fourth quarter?

Unidentified Company Representative

Well, the final part of your question whether we're comfortable with that 10%, 11%, 12%, 14% or even 15% target growth, I would say yes we are. Absolutely, I don't think that we are going to be content with 10% next year. We aspire to grow in our revenue in Spain by well above 10%. So we are comfortable with our target and what we said in the investor day, I can't remember of top of my head. But I think we were talking about something in fact slightly higher than these numbers. So yes, we stand by that. And the other question, sorry it slipped my mind.

Unidentified Analyst

Generic and specific provisions, how they will evolve in Spain?

Unidentified Company Representative

Well, my forecast for provisions... generic at current less, because they are connected to volume and since volume is growing less, generic provisions will grow less and that's just logical. And for specific, there is a slightly greater growth but that's highly connected to what we have been saying and seeing slightly higher risk premiums and cost of credit, but not significantly in any case.

Unidentified Analyst

And there is a question about decisive UBS versus the size of the book in driving your provisions against that book?

Unidentified Company Representative

The size of the book is $4.5 billion, basically that's the drive book and it's a business, which basically has... well, it's a business where you have a lot of non-performing loans are provisions are $205 million and the NPO's generally represent $160 million, however, the charge has been $395 million because the NPO ratio in Drive is actually very high, so the impact on the P&L $395 million, but actual non-performing loans at the year end is a $160 million, so we have saying quarter-on-quarter that the performance of Drive is actually surpassing our expectations and in fact the NPO ratios have been in line with the losses expected in this business, which are significantly higher than that of any other business in our portfolio.

Unidentified Analyst

All right. Two questions from Eva Mendes [ph] from Morgan Stanley and John Batchuarov [ph] from Merrill Lynch, both along the same lines. You partly answered some of these but it's basically about how we will account for our holding in the RCS consortium and what the capital target is for year end and the impact of integration on the capital... on the core capital?

Unidentified Company Representative

We've already partly answered this but for our CSS 10%, we'll use equivalency messing until there is full legal incorporation, so whatever it is right now before the separation from ABN AMRO and then for integration. As for their capital structure, there are two stages, there is an intermediate stage in coordination of course with the accounting of the stake, but in the period when we were using the equivalency method, we will have and after also on impact to goodwill and our core capital, but then one-on-one subtraction of a theoretical accounting value since it's higher than 10% of our equity use subtracted from the Tier 2, on the one-on-one. That's why we issued that subordinate debt two weeks ago. And so in that intermediate period that's the way it's going to work, and then it will be global integration and it would be like any other element. You will integrate the assets globally, so it will consume capital because of the risk assets we are integrating which are 65, 60 depending a bit on the growth. And then there will be the goodwill, which would be subtracted from the Tier 1 capital. So we have published the figures, the post-integration figures for ABN AMRO. We are talking about our core capital of 5.3, which will probably be slightly higher because I remember that we haven't included in that 5.3 a wholesale of the pension fund business in Latin America, which has an impact of 26 points on the core capital. So we will be at that level that we had announced then.

Unidentified Analyst

Right, there is a final question from Mark Cortrianna [ph] from Standard & Poor's. And he is saying that fee income both in Spain and Portugal are tending to stabilize year-on-year and are actually dropping, comparing the fourth... the third quarter with the second. What's the reason? What do we expect for fourth quarter?

Unidentified Company Representative

Well, we have had as a consequence of a deliberate policy reduction in our fee income because of our policies in Spain and Portugal we see... we want to be a bank plan and also the special accounts that have been launched in Portugal with those same objectives. Point two, also we have had a slight change in our customer fund policy, less mutual funds, more product of other types, which don't really generate deposits for instance, which don't generate commissions or fee incomes. So there is an impact of that and then also a really seasonal impact, but there is nothing really too significant. There has been no major event or change versus our trends over the last quarters, not just this last quarter but the four or five last quarters.

Unidentified Company Representative

Okay. That's all from the internet. Thank you. Any additional question that have not been answered, you can contact us at any time. Thank you.

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