Banco Santander, S.A. (STD) Q1 2012 Earnings Call April 26, 2012 4:00 AM ET
Alfredo Sáenz Abad – Second Vice Chairman and CEO
José Antonio Álvarez – CFO
(Interpreted) Good morning, we’re going to begin the Results Presentation. As usual, I will be reviewing the basic parameters for the year and for the quarter so far. Then, Jose Antonio Alvarez will review the business areas and I’ll close with some conclusions.
The first thing to be said is the economic context is still very difficult and also very diverse, depending on the geographies. In Europe, at the beginning of the quarter, it seemed that there was some degree of stabilization. But now, in the latter part of the quarter, once again, we see signs of instability in the market. The U.S., on the other hand, closed 2011 with higher growth rates and remain solid at the start of the year, while Latin America still showed dynamic growth rates of around 3% or more in the main countries.
(Inaudible) the Grupo Santander has applied different strategies depending on the countries and the momentum in each economy and the priority in all of them was to strengthen our balance sheet, aided by our strong capacity to generate results. Quick overview of the quarter, three keys were, first, strong gross operating income, with over €11.35 billion, that’s 8% up on the first quarter of 2011, enabling us to post a pre-provision profit of €6.26 billion which is a new quarterly record and an attributable profit of €1.6 billion.
Second, the group’s diversification. At this time, 56% of our profit comes from emerging countries. I remind you that in line with our strategy, we have strong local franchises and we continue to improve our geographic diversification as demonstrated by the latest acquisition in Poland.
And then thirdly, we have continued to bolster our balance sheet significantly in the quarter. We have once again improved our capital ratios whilst under BIS and EBA criteria, we’ve improved our funding structure and our liquidity, improving our loan-to-deposit ratio to 115%. And in credit quality, we compare well with the industry in the main areas where we operate.
Let’s look at each of these points in more detail. We have continued to generate solid revenues in the top part of our P&L are near. And the net operating income in the quarter was at €11.35 billion and this is an important figure, because it sets a new quarterly record for the group and it does show a changed trend with respect to previous quarters, with growth over the fourth quarter backed by most units, mainly Brazil and Mexico, but also Spain, Santander Consumer Finance and the U.S.
And as we will see later, in most cases, the income was purely commercial and hence, more recurring. We also had a good quarter in trading gains. As well as this favorable trend in revenue, we see that cost remained virtually stable over the fourth quarter and this quarter. The net result of all of that is a pre-provision profit of €6.28 billion, which is also a quarterly record, which has enabled us to maintain our excellent track record in that line in our P&L of the last several years in which it has been continuously increasing.
New growth in the quarter puts us again amongst the world leading banks by profit generation, and it makes our P&L extraordinarily solid and we are extraordinarily able to absorb provisions in very demanding economic context. As a result, at a point in this cycle in which there is high need for extra provisioning, we’ve been able to maintain – sustain profits as you see on the right-hand side of the slide. So you can more easily understand the underlying elements, we have subtracted the distorting effect of generic provisions and of the special provision fund we constituted last year in the fourth quarter.
These very recurring results are due to the group’s diversification and to the right geographic mix between emerging and mature markets. As I’ve pointed out, we have a strong presence in growth markets, which generates 56% of the group’s profit. Of the rest, 31% of the profit is generated in mature markets, where provision levels are still fairly stable, and 13% of the profits comes from markets where cyclically high provisions and therefore, with profits still depressed in relation to their potential towards, which we must move in the next quarters and years.
The Group’s international expansion in the last few years has enabled us to build a business portfolio which is better than those of other savings national banks. Today, we have a stronger presence in emerging markets than our major competitors. We have very strong local brands with critical mass, whilst many of our competitors have banks without sufficient scale in many markets. And this has enabled us to have a better profit mix and a more stable and recurring profit. As a result of all of that, we are in an excellent position to normalize our profit.
And speaking about the improvement of our business portfolio, I should refer to the acquisition that we’ve made in Poland, which will merge BZ WBK with the Kredyt Bank. This is a very good transaction for the good and consistent with our strategy and the Santander business model for several reasons. First, because we increase our weight in a high-wealth core market. Second, because it enables us to become one of the top three players in the Polish financial system, far ahead of our nearest competitors.
Thirdly, it provides us with an excellent opportunity for growth and to improve our profitability with annual growth in this period of between 15% to 20%. And fourthly, it meets the Group’s financial criteria that it increases EPS and it offers an attractive return on the investment of almost 13% in the third year. And according to our forecast, fifthly, Santander will have at the end of the process a stake of between 76% and 81% of the new bank. Others shareholders will include the European Bank for Reconstruction and Development, which has recently announced its entry into the Zachodni Bank’s shareholding structure. So in summary, this is an opportunity, unique opportunity in terms of scale, positioning, profitability and growth potential in Poland.
The third point in my introductory slide was the strength of our balance sheet. Beginning with capital ratios, the quarter was a business as usual quarter. We closed it with the BIS II core capital ratio of 10.10%, was up eight basis points from the previous quarter, and that was attained by 18 basis points of organic capital generation, minus the negative impact of 10 basis points from exchange rate differences. As a result, we have stabilized our core ratio at over 10%, which we reached at the end of 2011. In EBA terms, we have gone up to 9.11%, which is well above the minimum requirement for June.
As for liquidity, the group has improved the excellent position with which it closed 2011. There were two drivers behind this. On one hand, deleveraging has continued in some markets, as mentioned, especially the Eurozone, mainly Spain, while our commercial gap shrunk by €11 billion in the quarter, which has put us within the target we announced in the last presentation, covering (audio gap) policy, supported by our wide and diversified access to wholesale markets.
We’ve issued €12.2 billion medium and long-term issues through the UK, Latin America and Spain. Additionally, we have placed in the market €3.8 billion in securitizations. And this situation can be seen in the following parameters. Our loan-to-deposit ratio dropped from 117% at the end of 2011 to 115% at the end of this quarter. And remember that the ratio was around 150% at the beginning of this downturn.
Additionally, the group has also continued to resort to the three-year auctions conducted by the ECB, depositing most of the funds captured with the ECB as well, which has notably increased on liquidity buffer and improved its structure by replacing short-term funding with longer-term funding. The only bank within the group with net significant structural funding is Santander Koda with around €5 billion.
The third item, referring to our balance sheet, is credit quality. The group is still very actively managing its risks. And as a result, as you see in this slide, we compare very favorably with the market and the main geographies where we operate, that is in Spain, UK, Brazil and the rest of Latin America. Overall for the group, our NPL ratio was at 3.98%, up nine basis points from the end of 2011. This increase is basically due to the trend in Spain and Portugal, which has continued, as noted in previous presentations. Brazil’s ratio, also in line with the market, increased in the quarter.
On the other hand, Santander Consumer Finance has after the strong improvement in previous quarters, is now at 4% NPL ratio, which is excellent in its business. Sovereign has continue to improve for the ninth quarters running.
As for coverage, coverage has remained at 62% for the group. Continental Europe and the UK were constant. The U.S. increased again strongly to over 100% already and Latin America has maintained high coverage ratios of around 90%.
Moving on to the group results, in this slide, you can see our P&L with the year-on-year comparison by lower equity accounted income and lower release of generic provisions. We can draw the following conclusions from this P&L. First, the strength of the upper part of our statement, can summarize it as net operating income or pre-provision profit up 9.2% versus Q1 2011.
This growth was based on solid and consistent revenues. Net interest income and fee income have also performed well, up €851 million. Trading gains were also better and the lower end income by the equity method was due to reduce stakes in the Latin American insurance holding and in Santander Consumers Finance U.S., and a higher contribution to the deposit guarantee fund.
This good results did not fully feed through to profit, because of three factors: higher provisions due to a significant extent to the non-release of generic provisions, as we will see later, higher tax rate for the whole group, up from 25% in Q1 2011 to 28% in 2012. And finally, the negative impact of the increase in minority interests after placing part of the capital of the banks in Chile and Brazil.
Moving on to gross income, good performance in basic revenues, trading gains and a slight positive impact on exchange rates. If we look only at basic business revenues, that is net interest income, fee income and income from our Insurance business. The increase in the quarter was €530 million, that’s up 5%. We should underscore the dynamic growth in Latin America. Basic revenues increased for the eighth quarter running, reflecting the rising volumes at double-digit rates and a successful spread management strategy.
Jose Antonio will explain in more detail both Brazil and the rest of the region have grown in net interest income. Second, recovery in Continental Europe, partly due to commercial banks and also to a good quarter particularly in January in GBM, that’s our Wholesale Banking Market business, after a very weak second half in 2011 in trading gains because of the situation of the market.
As for costs, there, costs in Q1 in 2011 reflect cost containment and the investments made in new branches and technology, as well as the incorporation of BZ WBK to the Group, which has increased our installed capacity by 517 branches and almost 11,300 employees. As regards just this last quarter, we see a clear slower growth in the cost of some units, which has enabled us to reduce expenses in the quarter slightly by 0.4% versus Q4 2011.
And finally, loan loss provisions are still high because of the phase in the cycle of some units. Specific provisions increased, partly due to volume growth, given the double-digit growth experienced in lending in some Latin American units and partly also because of the rise in NPLs in some of our markets. This trend was amplified by the impact of generic provisions since in 2011, we released generic provisions particularly in Q1, €356 million, compared to an allocation of €99 million in the same period of 2012.
Very well. I will now hand over to José Antonio Álvarez, so he can talk to you about the quarterly results of our business units.
José Antonio Álvarez
(Interpreted) Good morning. Continuing with the business units, I remind you that on the website, we post more detailed information than I’ll be showing in this presentation, which you may consult if you need extra information. Starting with Continental Europe, the summary shows that we have a difficult environment for business, particularly in Spain and Portugal, with continued deleveraging and low interest rates, as well as high provisions.
The year-on-year comparison for the first quarter of this year distorted by two effects: the change in perimeter because of the incorporation of the Polish bank, BZ WBK, in the second semester; and the release of €400 million in generic provisions in the first quarter 2011. So as to make proper comparisons, I will compare Q1 2012 with Q4 2011. Basic revenues have been growing solidly, 5%, with the rising net interest income supported by our more commercial banks and higher fee income especially in GBM, which has had a very good quarter, as we will see in the presentation.
We had a good quarter for trading gains also because of GBM and also, a tender offer we made in Portugal which brought in about €18 million in capital gains. The results in Portugal have been allocated to loan loss provisions in full, so their effect on our profit in Portugal and the Group is zero.
Costs or expenses have gone down 2% across the board, but not with Portugal and Santander consumer finance, of which especially for consumer finance had some restructuring costs in Q4 2011. Provisions have remained largely stable for this whole area. So attributable profit was €584 million in the quarter.
Moving on to the units, there are six units in this geography. In this breakdown, you can see clear improvement in the trend. Five out of six units registered growth in Q1, especially consumer business which posted a quarterly record. Looking in more detail at the units, beginning with the Santander branch network, clearly reflecting strong deleveraging as mentioned, with growth in deposits of 2% and a fall in lending of 9% with an improvement – a significant improvement in our loan-to-deposit ratio, which went down from 130% to 116%.
In the quarter, deleveraging was €5 billion. Basically, deposit growth and foreign lending accounted for this. Year-on-year comparison in profits was very affected by the release of generic provisions last year which did not take place this year. Improvement in net interest income and basic revenues, the return on lending was higher, repricing of new operations and the cost of funding was lower, thanks to a fall in Euribor from 1.5% to 1%.
Cost of wholesale funding has gone down, since Euribor has gone down to below 1%. Provisions remained high because of the phase in the cycle, and our net profit was higher than in Q4. So, in spite of a very difficult environment, we have seen gross income grow, and we expect it to continue to grow in the next quarters, and costs to stay flat or go down slightly, while provisions will remain high.
The same will apply to Banesto. They’ve already posted their results, and they follow the same trends. Deleveraging, business trends, similar in lending, improvement in commercial spread, slight recovery of income, costs under control, and provisions still high, and the non-release of generic provisions that I already mentioned for the Santander Network.
Moving on to the business in Spain, overall, this is our business in Spain, so combining all of our businesses, the Santander Branch Network, Banesto, GBM Spain and Santander Consumer Spain and Banif. Our total gross lending amounted to €215 billion, €208 billion after provisions, of which almost 50% more as to businesses and without the real estate purpose, significant mortgage contribution, the real estate profit going down.
Total deposits were €188 billion, including €8.3 billion in retail commercial paper, which were actually term deposits that we have marketed as retail commercial paper, and that’s why we split them. And the rest are demand deposits, €80.4 billion, which brings our loan-to-deposit ratio in Spain – all of our businesses in Spain to 111%, with an excellent track record and the drop demonstrates the deleveraging of the business in Spain.
Moving on to more detail about our lending portfolio in Spain, in the quarter, we see a clear trend, they fall – very significant fall in lending to businesses in real estate. In the quarter, that’s down almost 8%, and a fall also in lending to individuals, that’s mortgages and consumer finance. Overall lending to business remained stable and has been since December 2010 to the end of Q1, we have a level that has remained fairly constant in Spain.
For NPLs, I think, the same trends continue. Mortgages are still performing well, with stable NPLs at 2.6%. For the remainder of our portfolio, this is all the rest except for real estate, slight rise, 3.7%, which is a ratio that is rising, but very, very slowly. And in real estate, NPLs have continued to rise, but that sort of denominator effect, because of the shrinking size of our portfolio in that area.
But all in all, in spite of the slight impairment, our credit quality remains much better than in the industry’s, as our CEO has already explained when comparing the different countries and ourselves with our peers in those various markets.
As for real estate exposure, I mentioned that we have reduced our balance sharply. Our exposure has gone down 43% since the beginning of the crisis since December of 2008. Allocated and foreclosed properties have remain stable for the second quarter running, and so we think that they already peaked and they’re beginning to fall and we’ve successfully sold a large number of properties. In the quarter, we’ve sold €900 million in foreclosed assets, although we’ve only accounted €500 million, because the contracts were not formally completed. So in the next quarters, we will see significant drops in the bank-foreclosed properties.
As for coverage for our whole real estate exposure, coverage is much higher than the average of the sector and foreclosed properties were up 48%, 43% for doubtful loans and in those described as substandard, we have €600 million in provisions and these are all loans that are up to date in their payments. So we think these are the appropriate coverage rates based on our experience in the market. But with the new law, we expect prices properties to gradually come down in the next quarters, as well, provisions. And therefore, by the end of the year, we expect to be compliant with the level required by the new law.
Moving on to Portugal, first point, here, there’s two sets of numbers. First, we’ll talk about delta in local terms to compare ourselves with our benchmark in Portugal. You can see that our position in Portugal is much better than that of our peers in the country, both in our capital ratios, our core capital ratio is much higher than the average of the market and our NPL ratio is less than half that of our peers in that market and coverage is much higher. So, local criteria, we are in a very strong position in that market.
Having said that, deleveraging continues very clearly. Lending falls by 6%. Deposits rise by 6%. As a result, we’ve been able to cut – reduce our commercial gap and cover the maturity of the next years, which you see in the last part of your slides, €1.5 billion in maturities over the next years. As for results, we’ve seen some recovery in the quarter. We’ve seen improvement in lending spreads and a reduction in expensive deposits. Portugal is a country where we decided not to compete for expensive – extraordinarily expensive deposits. And as a result, we’ve been able to more efficiently improve our net interest income and improve our funding costs.
We’ve had higher fee income, thanks to GBM. We’ve had significant trading gains due to that tender offer for securitizations issued by the bank, which brought in about €80 million, which has been – all been allocated to provisions – to loan loss provisions. Costs have continued to be under control. That’s both personnel and general overhead. And we posted €33 million in attributable profit in the quarter, which is a level of profit generation which we think will continue in the quarter.
Moving on to Santander Consumer Finance, still positive trends. Here, what we see in Santander Consumer Finance versus other years does not include what is now part of the U.S. geography, so Santander Consumer Finance U.S. and Santander Consumer Finance UK, which is now part of the UK geography. And what we see here, therefore, is a business that is still growing well. It’s ahead of the cycle and very geographically diversified. Half the portfolio, as you see is Germany, €30 billion. There’s €7 billion Italy and Nordic countries and Spain, Poland, €3 million, and the rest is basically Austria, the Netherlands and Portugal.
Good recurring results, flat costs, credit quality improving. This business is further ahead in the cycle, NPLs peaked, as did provisions, a few quarters ago and volume growth in Germany was particularly significant and also, in the Nordics. As a result, strong growth in profit in Germany and Poland, and Spain is also showing a positive evolution of profits because of the strong fall in provisions, which we saw already last year, and which continues this year. So, in short, very solid area with good trends.
In the annex, you have more detailed figures with the same premise that we posted last year, which has changed significantly in this area. That is if we included the U.S. and the UK, profit would’ve been at €317 million in the quarter.
As for Poland, I’ll just explain about BZ WBK. Since the CEO has already discussed the merger with Kredyt Bank, I’d say that BZ WBK continues to deliver in volumes and profit, as well as in credit quality. NPL ratio going down significantly to 4.7%, just 1.7 percentage points lower than a year ago, when it entered the group. Lending has increased 15%, deposits 6%.
So significant business growth, which does feed through to our profit, which was 16% higher attributable profit. If we compare it with Q4 2011, we see a strong trend, too, with slight increase in income, lower costs and lower provisions and profit growing at double-digit rates. So I’d say in summary that in Poland, we are certainly on track to attain the results that we issued as guidance when we acquired it.
For the United Kingdom, the income statement has been very weak, affected by low interest rates and low activity, and high funding cost by wholesale funding and deposits. This has exerted pressure on the financial market on the generation of income. Income fell 12% year-to-year, basically, as I said, because of pressures on the spread. Volumes are flat in SMEs and growing well in SMEs, although very weak in mortgages.
There is a fall in deposit because of our policy of not going into marginal deposit then in trying to optimize the account, and for any other reason. Therefore, revenue has fallen because of these negative elements. There are also some positive elements that you can see in these spreads, the improvement of the margins on mortgages and the corporate loans.
There are more provisions because of the higher growth of corporate lending and also, because we are keeping the same level of coverage which went down in 2011. So in a very difficult environment affected by low interest rates and high funding costs, our account nevertheless has gone down one notch, and we think that we are now at another level, which we understand will be recurrent looking forward.
Brazil, as you all know, good macroeconomic environment, although growth has slowed down a little bit. Growth figures are at 3.5% right now. Recently, the government announced stimulation measures, lending to the industry to try to relaunch growth which, as I’ve said, is at levels of 3.5%. €848 million is the posted profit. Lending growth, 19% year-on-year, spurred by mortgages, consumer credit and SMEs.
So lending grew 19%, in line with the trend in the industry, which hasn’t grown too much in the first quarter. And results were also growing at two digits. The results reflect the growth in volume. The spreads are contained, despite the noise that is being generated with the public banks trying to reduce some prices in the products that have the higher spreads in the country, but that hasn’t had too much of an impact so far.
So the cost increased 8%, combination of 5% inflation with the opening of 128 branches, which is 6% more network. Net operating income rose 17% and then, there is an increase in the NPL rate in the country. So provisions grow strongly. This is a sector trend, we hope, that the NPL rate will remain at the same level. We don’t expect it to rise significantly in the next few quarters. We think it’s going to reach a peak in the second half of the year.
The bottom part of the P&L, there is a negative impact due to higher minority interest because we sold 5% of the bank. So in brief, the bank continues after finalizing the integration in June at a very good cruising speed in activity, which affects the revenue, and there are favorable expectations for earnings. We think that we are in line, on the right track to achieve the levels of about 15% that the management of Brazil mentioned at Investors Day in September.
The rest of Latin America, in other words, Lat Am, ex-Brazil, good growth as well, deposit and lending growing at two digits. The margins are improving. Good expectations for the rest of the year. Growth of GDP does help in this.
If we look at the P&L for the whole area, revenue is going well. The net interest income is about 22%. It has evolved very well, if fees go up 7%. So in summary, what we see is an acceleration of profit of the basic revenue, which means that the quarter has been much better than any quarter in 2011. So two-digit growth, Uruguay especially and Puerto Rico up 32%. Colombia increased 18%. The sale of our business in this country is expected to be completed in the second quarter.
If we look at Mexico in more detail, performance in Mexico has been very good. The business is growing at two digits, more than 20%. Lending and deposits are growing at two digits, as I said, gaining market share. And in deposit side, in term deposits, we are also gaining market share.
Basic revenue continue growing quarter-to-quarter. We’ve seen this growth. There is a decrease in trading gains this year as compared to last year, because in the first quarter of last year, we saw the shares of Mastercard and Visa. The costs grow at 12%. There has been – we’ve hired more people. So provisions grow in line with lending. Last year, we had AGE mortgage portfolio with a very high coverage, about 200%, and the NPL ratio is 1.61%. Profit was €388 million, a new quarterly record. So the franchise is doing very well, gaining market share and that has an impact on the P&L.
In Chile, growth is weaker here. We’re focusing on spreads, which is reflected in moderate growth in lending. The spread is not too attractive. It has increased more among individual customers and less in corporate. Retail deposit growth, 16%. Our revenue is recovering. There is a reduction in the trading gains, because of the rise in long-term interest rates. Costs are slowing down at still high levels, 8%, provisions increased 52%. This is a specific impact on the financial system, reflecting some impairment in credit quality and more restrictive lending after the case of La Polar.
Therefore, attributable profit was 20% lower, and at a constant perimeter, it would fall 5%. We think that Chile is in conditions to continue to produce consistent earnings in the next few quarters.
With regards to the United States, we’re including this reporting area, which includes the activity of two units, Sovereign Bank and the Santander Consumer U.S.A. business, which is consolidated by the equity accounted asset. The 2011 results were restated with the same criteria so that we can compare figures. In 2011, Santander Consumer U.S.A. was included in continental Europe.
If we focus on Sovereign’s activities, loans and deposits grew at 5% and 7%, respectively, reflecting a certain economic recovery. $191 million were the profit, up 9%. Net interest income declined because of the fall of long-term interest rates, of which are practically zero, and the reduction of the portfolio. May I remind you that when we acquired Sovereign, we had a €10 billion portfolio that we put in our runoff and that has been reduced or is being reduced.
Good performance of fee income and we have an increase in costs. As you know, we are investing in changing the IT platform of the bank. And also because of the commercial effort that we’re making with new businesses, new market segments, because we had a thrift status with certain restrictions and now, we have a status that allows us to do all sorts of activities.
Very good performance of the NPL rate, under 2.5%. I remind you that a few quarters ago, it was more than 5% and the coverage increases as well. So we have to make less provisions for that.
With regards to the Consumer business in the United States, it contributes $123 million. If we compare to 2011, where it was $120 million $220 million, well, there are two things that we need to state here, that we sold part of the business and also that in the first quarter of 2011, there was a releasing of provisions. If we compare to other quarters, the business continues to have a high recurrency. The perimeter effect is of $50 million, because of the reduction of the stake. And as I mentioned earlier, the first quarter of 2011, there was that impact. So the profit of this new area reporting was $314 million.
If we look at corporate activities now, in corporate activities, the interest margin is practically the same. There are several elements here that we have to mention, a lower margin, a lower cost of the wholesale issues. That’s why it remains relatively stable. In regards to trading gains and the corporate center, well, what affected it the most are exchange rates, the euro versus the other currencies, they fall under this category and the impact that exchange rates have in the collection of dividends. And this is why the performance this year is relatively better than last year.
And the lower provisions and write-downs for foreclosed properties offset the reduced recovery of taxes. So the corporate center contributes, as compared to last year, €91 million less as reduced from last year’s figures.
And now I give the floor to the CEO, who will give us a conclusion.
(Interpreted) To conclude, Santander will continue to maintain differentiated management by areas in order to adapt it to the specific conditions of each market. In Spain and Portugal, the group will have to manage an environment that will be very weak in the coming quarters. We envisage deleveraging continuing, due to reduced demand for loans and focus on funds. We will also be demanding in provisions as befits the economic environment. And in the rest of developed markets, our management will focus on strengthening key areas for future business growth.
In the UK, the focus is on companies without forgetting the linkage potential we still have with individual customers, as well as in retail deposit. In the United States, we will continue to improve the commercial franchise, which will enable us to expand the range of products offered and the profiles of the customers that we target. The conversion of Sovereign Bank into a National Bank Association and the new IT platform will drive this transformation.
In consumer lending, we aim to consolidate the levels of penetration and the results achieved, and maintain profitability differentials with our peers. Moreover, the strategy followed in agreement with producers gives us growth possibilities. Of note are Germany’s solid results.
In emerging markets, we continue to take advantage of the good macroeconomic environment to maintain high growth rates. We see a good evolution of profits in Latin America, driven by revenue growth. And in Poland, we will progress in the integration, while meeting the envisaged growth path of profits.
In short, diversification, balance sheet strength, and the generation of recurring profits enables Santander to face 2012 confident of continuing to produce good results in a still complex environment. Thank you.
José Antonio Álvarez
(Interpreted) Good morning. We’re going to start answering the questions that we got over the webpage. We will try to cover all your questions. We will group these into different subjects so that we have time to cover all the questions – answer all the questions.
The first group of questions is on strategy and regulation. And Sergio Gamez from Merrill Lynch, Antonio Ramirez from Keefe, Britta Schmidt from Autonomous, Paco Riquel from Nmas1, Patrick Lee from Royal Bank of Canada, and Alexander Pelteshki from ING ask two things. First of all, the statements made by the IMF with regards to the need for public capital, proposals of ring fencing and the creation of a bad bank in Spain. And related to that, the role of the deposit guarantee fund in Spain, whether you think more support will be required, more leveraging, what would be the schedule for that, if public capital will be needed, and generally speaking how do you think the funding will be solved for the deposit guarantee fund in Spain?
(Interpreted) Well, nothing – there’s nothing new under the sun here, nothing new has been said. The IMF has said things, very clear things with regards to the key Spanish Banks and emphasizing their soundness, their solvency, their capacity to generate results and their strength. And we seem to forget that when we refer to statements made by the IMF. But the first thing the IMF said was precisely that. It underlined the strength and soundness of the banks.
And what the fund says is what we are also saying. This -- what our – it’s what our Chairman said in the General Shareholders’ Meeting. We have to continue with the provisioning of the sector. And we have to agree with the fund in that regard.
With regards to what has been called the bad bank, although it’s not really a bad bank, but that’s how we’re calling it. The basic problem here is that banks must manage the real estate assets they have. And this process of managing these assets, some people believe they can do it themselves, which is our case. We have the capacity to manage our own real estate assets.
And in fact, in the first quarter of this year, and I think this appeared in one of the slides, we – the last quarter of last year and the first quarter of this year, we are selling as much as is coming in, and we hope that at the end of 2011 to have achieved a fall of these assets. So we are managing these assets ourselves. We’re doing this well. We are going to speed up the sales of those properties. The Royal Decree of February will make it easier to accelerate the selling of these assets and this is very important that we manage this process well. How we do it is not that important.
So, I repeat, we are managing this ourselves and we’re doing it well. We’re very pleased with how we’re doing it. And you’ll see that in 2012, you will see a fall in the net stock of these assets in our group.
And with regards to the deposit guarantee fund, nothing has been decided yet. But we know what is happening and we know what the rumors are and we’re not very enthusiastic, but we will accept the fact that the deposit guarantee fund will have to pay for the remaining restructuring. How is it going to do this, whether through a loan that is anticipated to the fund or through a quota that has been – or installment that has been mentioned, well, we don’t really know. We will have to see what the government has to say about this.
The deposit guarantee fund increased from 0.6 to 2 per 1,000, the quotas and we don’t think they’re going to change. They’re going to continue at that 2 per 1,000 level that they are now. So the capacity to pay the bills, let’s put it that way, to pay for the restricting of the fund is of about €2.6 billion, €2.8 billion a year and if I have to anticipate more, then we will have to see how that is done. So that is the situation we’re in, so nothing has yet been decided yet.
José Antonio Álvarez
(Interpreted) And talking about regulations, the group of analysts that I mentioned before together with an analyst from Citi asked about the Royal Decree to 2012. With regard to real estate assets in Spain, if you’ve made any provisions in this quarter, if you’re going to do that, when do you expect to do that? What will be the schedule for that and what would be the impact of the expected Royal Decree, taking into account that we already announced the amount?
Britta Schmidt asks about the charges of Banesto, the 375 and 475. I remind you that the intragroup accounts are cancelled in the consolidation and the only thing there is, is a reclassification of some of the charges and payments of Banesto. So, but the main question is on the Royal Decree.
(Interpreted) We closed the year 2011 with very high coverages for real estate assets, much higher than the rest of the sector. The same thing can be said about doubtful loans and substandard loans, and also for foreclosed and repossessed. We closed the year with higher coverages than the rest of the sector, and we did this because of the extraordinary charge of €1.8 million that we used to improve these coverages, and we can’t forget that. Now, what Banesto did the first quarter was a catched-up with the group, because all units should be at the same level within the group, so what it did was to catch up with the rest of the group.
In the first quarter, we haven’t charged any provisions for the Royal Decree, because we’re having to apply the international accounting standards, the IFRS and the transactions that are made in the market are still at prices that would not justify applying the levels of provisioning required by the Royal Decree. We will do this gradually in 2012, as the market reflects these new prices, which it will, because of the higher demands of the Royal Decree. And therefore, quarter to quarter, we will see how our provisions and therefore, our coverages coincide with market valuations of the different assets.
How much do we need in 2012 to comply 100% with the decree? Well, after discounting the Colombia capital gain, which we haven’t applied yet but that we will to this effect, we would have about €1 billion to apply in the form of additional provisions from here until the end of the year.
José Antonio Álvarez
(Interpreted) With regards to acquisitions or M&A operations in Spain, Autonomous and Barclays ask where we are involved in the processes of Catalunya Caixa Banco de Valencia. And other analysts ask if we are considering buying something in Spain, do you think this is the right time to buy in Spain, given the deleveraging?
(Interpreted) We were asked the same question last quarter. Conditions have not changed since then. We have been considering and we will continue to consider and study all the banks that come up for sale, and we will continue to do that. And I can’t say much more than that. We’ll see.
José Antonio Álvarez
(Interpreted) These two analysts – Antonio Ramirez from Keefe asks for the possible IPO in Mexico. Are you thinking about doing that? When would that be? And would it be 25% of the capital?
(Interpreted) The answer to that question, because we’ve been asked that question in previous meetings, well, the strategic decision of floating 25% in Mexico has been made, we’ve made that decision, 25% of it. When, we don’t know. It’s going to be done in 2012, if market circumstances don’t change. So we will do that this year, that IPO of 25%, and we have already started to prepare that IPO and that’s public knowledge.
José Antonio Álvarez
(Interpreted) Within the area of financial management, there are several questions on the ALCO portfolio from Alexander Pelteshki from ING, Antonio Ramirez from Keefe and Paco Riquel from Nmas1 and Ramenghi from UBS. On the exposure, can you breakdown the ALCO portfolio of the group duration and contribution to the margin? Specifically, how much do you have in public debt, Spanish public debt, what about the maturities? And Justo Mateo asked, do you think it’s reasonable that it’s gone up from €5 billion to €10 billion in the first quarter.
José Antonio Álvarez
(Interpreted) The portfolio available for sale, we don’t hold portfolios to maturity. We don’t classify any portfolio as held to maturity, so the ALCO portfolio is what is available for sale and that amounts to €86 billion for the whole of the group, of which €63 billion are public debt and €23 billion are other assets.
Sovereign debt is basically in Spain, where we have about €35 billion. We’ve increased it by about €6 billion, €7 billion in the quarter. We had (audio gap) for the rest of the group, another €16 billion. These are basically portfolios in Poland, Chile. And as for the rest, the €86 billion, €63 billion is sovereign debt, €23 billion is not. But basically, those assets are mostly –you can see this in the U.S. The rest is various assets in the different banks.
Mean maturities were as – or mean term in general, it’s between a year and a bit in emerging countries and three and a bit or three and a half in the mature economies. The contribution to our trading gain, maybe, 3%, 3.5% in the whole of the group. And I forget if there was some other question. Do try and speak closer to the microphone.
(Interpreted) And connected to that, there are several analysts, Antonio Ramirez from Keefe, Matteo Ramenghi from UBS, Sergio Gomez from Merrill Lynch, Britta Schmidt from Autonomous, Rohith Chandra from Barclays were asking about the LTRO, how much have we used, how much is the net and the gross and what are the plans to use what we asked for in the two LTROs. The increase in AFS is – €13 billion I think is explained already in the previous question, and the funding plans for 2012 and 2013 in wholesale markets? What are we going to do and how do we see it?
José Antonio Álvarez
(Interpreted) Right. Beginning with the LTRO, the ECB and the two auctions, our position is still net, basically, five and in Portugal. The gross figures, which you always ask about, in Spain, the whole of Spain, all the Spanish units, we have taken up in the two LTROs, €35 billion, and we’ve deposited a bit over that amount, although that varies. Right now, it’s around €37 billion deposited with the ECB. And as for Portugal, we’re using €5.3 billion, that’s the latest figure we have for Portugal. And those are the numbers for the LTRO.
The AFS increase, we’ve already discussed. And the funding plans, 2012-2013, well, it will depend on the subsidiaries we have planned to issue, depending on the subsidiaries. The biggest issues will be in the UK, where we have the plan to issue €13 billion in the year. We have already issued €8 billion.
In Spain and Portugal, the deleveraging covers need for issues, so the €35 billion we’ve deposited with the ECB is a sort of cushion in worst-case scenario. We will continue to issue if the market is open or in good condition, to retain a presence in the market in the two products we generally issue.
In the UK, the €12 billion or €13 billion we’ve said, basically with securitizations, covered bonds and some senior debt issues. And much more modest amount in Chile, we might issue €1 billion or €2 billion, and in Brazil, €3 billion or €4 billion.
Additionally, there is securitization activity should finance the U.S. business. It’s very active and it’s funded with securitization. And the business in the Nordic countries and in the UK is also being funded with securitizations. And these are basically the issuance plans we have in the Group for 2012 and beyond, 2013.
So in summary, in mature markets Spain and Portugal, deleveraging is basically equivalent to maturities and we will issue to help retain a presence in the market and other markets. That’s the specific plans we have.
(Interpreted) Okay, there’s a question about trading gains in Portugal. I think that was clear in the presentation. Of course, Antonio has said that it was because of that tender in Portugal, and basically it’s all been allocated to provisions. It’s a high amount in trading gains and a high amount to allocation. And in our part of the income statement, Antonio Ramirez is asking about portfolio sales, if we’ve made any and for what amount and what asset classes?
And there’s a question by Rohith Chandra from Barclays, also on trading gains and whether we can give them the breakdown and whether it’s sustainable, this kind of figure. And he refers to Banesto again and the €154 million that Banesto reported. And again, remember that they’ve reported everything – it’s in different parts of the consolidated accounts and specifically, the €354 million we have at the top is because of the divestment of Banesto portfolios. There’s also a question about ECB funding, which I think you’ve already answered.
José Antonio Álvarez
(Interpreted) Right. As for the trading gains, I said that GBM has had a very good quarter. There’s nothing beyond the Portuguese tender that’s non-recurring. There’s also some elements to compare with Q1 2011 that would show that this quarter was better. But basically, GBM has had a good quarter plus this capital gains in Portugal. We have not sold portfolios in any significant amount, nothing that has had a significant impact, well, no impact really on the portfolio at all. So that’s all I can say about that.
(Interpreted) There’s some people asking for more detail on financial aspects about whether Q1 includes the capital gains to the debt buyback. We’ve already discussed that and what we announced yesterday, of course, is not reflected in the results of this quarter. Question about the tax rate ahead, and basically extrapolating Q1, that might be a good proxy for 2012.
Andrea Filtri from Mediobanca is asking about EBA capital ratios, if we had reflected the provisions of the new Royal Decree. I think we’ve already explained what the impact of that law is going to be and how we’re going to do it. And someone from Natixis is asking about the impacts of the deferred tax assets and the Basel III, and in general, the phase-in. I think we’ve announced already several times that the impact of all those new frameworks will use up between 15 to 20 basis points annual starting in 2015. And finally, to finish this part, we have some more questions on strategy and regulation about dividends. Jaime Becerril from JP is asking about the payout plan. Why don’t we cut dividends instead of selling or reducing our stake in businesses or subsidiaries?
José Antonio Álvarez
(Interpreted) Well, we’ve already confirmed to the AGM what the payout policy is going to be and I’ll repeat it here. We are committed to maintaining the dividend of €0.60 per share and placements in the – of IPOs in markets are not connected to capital regeneration. And therefore, with the alternative of bringing down the dividend, the IPO in Mexico was a strategic choice, as was the IPO in Brazil and as well, the UK IPO and it happens. There are strategic reasons behind it which we’ve already explained, which I won’t elaborate on again for the fifth or sixth time.
There is basic strategic issues connected with management, with the group’s valuation, et cetera, et cetera. So it’s nothing to do with dividend decisions and the dividend will remain at €0.60. This year, we approved three scrip dividends, as you know, in the AGM. We will have four interim dividends of €0.15, of which three will be script dividends and that’s the policy we’ve announced and confirmed.
(Interpreted) There’s a question from Matteo Ramenghi from UBS about the amount of hybrids we have in Tier 1, and what the Tier 1 level is? There we have about €63 billion Tier 1, of which four and a bit are preferred. And whether intangibles are included in core capital, you know they are included according to EBA and Bank of Spain ratios, but not under Basel today, but they will be in Basel III, obviously.
Moving onto risks, Spain, there are several questions. One by Matteo Ramenghi from UBS, Alexander Pelteshki from ING, Ryan Cost from Citigroup, about NPL trends in Spain by segments, mortgages, SMEs, and trends in those segments. Coverages and ratios – I think you’ve already said something about that in the presentation. And specifically, with developers, they want a breakdown of the loans per segment and how do we – and the NPLs per segment and how do we expect our exposure to developers to evolve in the future? So it’s all about NPLs in Spain.
José Antonio Álvarez
(Interpreted) Okay. Let’s see if I can be a bit more specific. I may not be able to give you the exact breakdown of everything you’re asking for. Trends, we believe NPLs will continue to rise in 2012 and probably somewhat, although not as strongly, clearly, but will continue to rise somewhat in the first half of 2013. So the NPL peak will not, I think, happen in 2012, but rather in 2013.
Where will NPLs be in Spain at the end of the year, or throughout this year? It’s hard to predict. It may rise from the figure we’ve just posted, to maybe another 0.5% by year end, less certainly next year, but it could maybe go up another 0.25% or 0.3% in the whole year, and this should be probably middle of next year.
By segment, there is a table that we showed in the presentation in which we tried to answer that question, looking at total NPLs in Spain, and the breakdown between real estate, household mortgages and other loans, showing a breakdown by different segments, how much in our balance belongs to each segment. And so in this graph, which I’m going to try and find again, here you go, what you see there is basically that loans with real estate purpose, which are basically real estate developers, €32 billion, sorry, €22 billion; the €22 billion, which are loans for real estate purpose have had a very high NPL, as you see, of 32.8%.
On the contrary, the rest of the portfolio has performed quite well until now. Individual mortgages, NPLs have remained flat. Certain fears and certain rather historical predictions about how in the future, Spanish banks, because of the recession, would see their NPLs rise because of individual household mortgages, well, none of those predictions have proven to be true, neither here nor in any country where the economic context is similar. Household mortgages are extremely resilient and their NPL is stable. It may rise a little, but we – but quite insignificant amounts and we are not concerned. In fact, in the quarter, if we look at the real data, not a prediction, in Q1, actually NPLs for household mortgages has gone down 0.1%, so that’s a fact.
As for the other segments, basically, as you see in this slide, other loans to individuals and to businesses not in real estate, if you consider NPLs have remained fairly stable, from 3.5% to 3.7% in the whole of 2011, it went up 0.4% and, of course, it’s gone up 0.2%, so a bit more and probably that trend will continue. But we can’t assume that there’s going to be in that segment any major concerns, beyond what we might reasonably expect. With €105 billion we have loaned to companies, plus €19 billion to other loans to individuals, NPLs are at a very normal level.
As for how do we expect the developer allowance to evolve, if you’re asking me with the application of the Royal Decree, where we will be at the end of 2012 in this segment, by applying the requirements of the Royal Decree, coverage will be high at the end of the year for doubtful – for NPLs, 33% and for substandard, 16%. So that’s basically what we predict for the end of the year. And we’ll have not €22 billion, but probably quite a lot less, €17 billion or so at the end of the year. So we expect fewer entries and certainly, much more sales.
(Interpreted) There’s a question from Axel Finsterbusch from JP, and Andrea Filtri from Mediobanca, about our exposure to YPF, what do we expect to happen there and to Asear and ACS? You know that the group policy is never to report customer-specific data exposures to any particular names. Our policy is to have more diversified portfolios and substantial uptakes in these operations, so there’s nothing new to add there, I think. They are also asking why coverage has gone down. I think you’ve already talked about that for real estate property in Spain. Remember that entries come in with less coverage and outgoing, go out with high coverage, so it’s normal for small variations in the quarter.
Same question from David Vaamonde from Fidentiis. He’s asking about the sale of portfolios, if we’ve sold off any portfolios? Can we elaborate a little bit about the sale of loan portfolios and whether the fall in our exposure is because we’ve sold portfolios and what do we plan to do in the future in this area?
José Antonio Álvarez
(Interpreted) Okay, portfolio sales are recurring, relatively recurring activity for the group and we will continue to do it in every unit. It’s more common in consumer finance, in cards and so on, where it’s very, very common indeed and it’s slightly less common in other areas. And I suppose that’s what they’re asking, whether we’re planning to sell our real estate portfolio in Spain.
We don’t have any specific plans, but of course, we wouldn’t discount that possibility, as the normal activity is not going to significantly change neither NPLs nor outstanding balance. So it’s part of the usual process of portfolio sales that happen in the different subsidiaries, depending on – around default management policies.
José Antonio Álvarez
(Interpreted) Axel is also asking, from JP, about substandard in Spain. We produce an annual report that you receive at the end of – with the close of last year. It’s been published just a few weeks ago and about total general provisions also in Spain just under €400 million, €369 million, I think it is, or €370 million.
Moving on to other areas, questions about the UK from Britta Schmidt from Autonomous, Nikos from Citi, Matteo Ramenghi from UBS and Patrick Lee from the Royal Bank of Canada, asking us to explain about the rise in provisions in the UK and whether it’s going to continue, whether this run rate of 33 basis points up to 40 basis points cost of risk would be a good proxy, and whether we expect more charges from corporate portfolio or any other. So by segments, if there’s a one-off, it’s all about the UK and provisions.
(Interpreted) All right, in the UK, there has been a slight increase in provisions, and that’s for two reasons. On the one hand, a change in our business mix. In fact, in the last month, we’ve had more activity in lending to SMEs. Mortgages, we’ve grown, well, growth has been flat in lending, but for SMEs, we have grown our lending by over 20%. Well, of course, the initial volume was small, but nevertheless, 20% growth, that changed the mix, and a kind of loan that requires more provisions than mortgages.
That’s one reason, and obviously, that will continue, since Santander UK wants to increase its penetration in the SME segment. That’s part of our strategy of the unit. That effect will continue, and that will affect NPLs and provisions because of this change in the business mix.
And then, we have also had in the non-core corporate part, the part that’s run off and non-core, and doing social housing, we have had a slightly higher increase in provisions. And that, together with what I’ve just explained, which was the biggest contribution, has meant a slightly greater need for provisions. But I do want to underscore that our provisions levels in the UK are very conservative, very well-provisioned indeed.
José Antonio Álvarez
(Interpreted) The same group of analysts plus Paco Riquel and David Vaamonde from Fidentiis are asking pretty similar questions about Brazil and whether the rise, if we consider that the cost of risk, which has cost of increase, will continue in the future. And while there’s been the same case in our expectations, some of it connected to rising volumes, that 90% rise in the loan portfolio and whether we’re adjusting our net spreads, very similar question to the ones about the UK, but about Brazil.
(Interpreted) Okay. In Brazil, in whole industry, we are seeing a rise in NPLs and when I say the industry, I mean particularly the private banks, our peers. Perhaps sometimes it’s confusing, because the sector as a whole, including state banks and private banks, sometimes have a different trend or trends which do not really correlate with what we see and our peers experience.
But in any case, our ratios today, our NPL ratios, now compare very favorably to those of our main competitors in Brazil for NPL trends in Brazil. If we compare it with Q1 last year and also with Q4 last year, also very similar to what’s been experienced by our peers. There has been a strong rise in provisions in comparison with Q1 2011, but that’s also been the case for all our peers and also a rise, a significant rise versus Q4 2011. But again, this is connected to two factors, first, growth in lending. We are growing double-digit growth, high double-digit growth of our lending, in fact, more than our peers.
Having said all that, in our particular case, there’s also an effect that I should mention, and that is that this rise in NPL is very much in the individual retail segment. Our business mix in Brazil is quite concentrated on the individual consumer side, and the usual loan products for individuals in Brazil have a higher NPL, so that’s basically what we can say. I don’t think NPLs are going to fall in Q2, they have – I do expect them to plateau. I don’t think we can expect that there will be a fall in the second semester, because it is an industry-wide trend, again, for private banks, not for state banks. They have other kinds of lending with other trends, and that’s what we can say.
(Interpreted) And finally, to conclude the risk part, there’s a question from Frédéric Teschner from Natixis about Chile. Can we elaborate on provisions and NPLs in Chile in the quarter, and our forecast for the year?
(Interpreted) In Chile, there is something that we feel has been rather circumstantial or transient because of certain things that have happened in Chile, as you know. A new credit bureau is being set up after the negative experience in consumer finance last year. And this situation, waiting for this new credit bureau, has meant that the system as a whole has become more restrictive in lending.
As a result, in the system, more NPL has emerged, and although this rise will probably stay, it is not really a concern. It is still very small and the economic forecasts for the country are very good, because the economy shows good fundamentals. And what we see in our bank has been experienced also by all the major competitors in Chile. Provisions up very significantly, but it’s all due to the same underlying issue that I’ve just mentioned.
José Antonio Álvarez
(Interpreted) Right. And that completes risks. Moving onto the business units, starting with Spain, Alexander Pelteshki from ING and Rohith Chandra from Barclays are asking about deposits in general in Spain and whether there’s any kind of change in our deposit policy, whether we expect or see more competition from our peers or not, given the LTRO? Has the LTRO had an impact, and do we see deposits or expect deposits to leave Spain or Santander in the future?
(Interpreted) We’re not seeing any deposits fleeing. If we look long-term, we’ve had strong growth in deposits. Of course, it’s hard to say whether there is a deposit – well, there’s always a deposit war, more or less intense. Right now, there is a strong competition over deposit. Probably if we compare it with other times in the past, we could say that it has slackened somehow, probably not so much because of the LTRO or maybe, but more because the sector has become more rational and we’re seeing concentration, and there’s search for profit, which is essential in order to face the necessary provisioning level, the weaker banks, and that’s, I think, promoting a more rational competition. So the war for funds, I won’t say is over, but it certainly has slackened. And we’re not seeing – what’s the next part of the question, any deposit flee in Spain towards other jurisdictions.
José Antonio Álvarez
(Interpreted) Patrick Lee from Royal Bank of Canada is asking about deleveraging. He says that our loan book is falling 8% or 9%, which is more than the country is falling overall, 3%, 4%. Are we reducing that book more aggressively than the country? And if so, why? And if not, are we just not lending to people demanding loans or are we being more restrictive in granting loans?
(Interpreted) We don’t have at all, a policy quite the opposite of restraining or restricting lending or deleveraging lending by reducing lending. It’s just that circumstances have meant there’s been a fall in that portfolio, amongst other things, because all the real estate developer loans are falling. The demand for mortgages is falling. The demand for consumer finance is falling. And therefore, the demand for lending overall is weak, because of the economy and especially because of the importance in Spain of the property sector in the past, and construction and mortgages.
If we subtract the trends in that segment, lending, at least for the Santander, would be growing. We’re growing lending to businesses. If we now look at property and real estate in all other areas, lending is growing, up 3% for businesses and other individual loans. So the overall effect is a little misleading in terms of our strategy. Banks, and certainly ourselves, are not at all restricting lending deliberately, or deleveraging on that side of things.
José Antonio Álvarez
(Interpreted) Moving on to the UK, several questions. Jaime Ritallo from Ubor is asking, given that the GDP growth figure for Q1 in the UK was negative yesterday, what are our forecast for this unit in 2012? And connected to that, two questions, or, well, one; Paco Riquel from Nmas1, Patrick Lee from RBC and Antonio Ramirez about our net interest income and our trading gains in the UK, and we elaborate on why the fall in the quarter, and about the future forecast for net interest income/net operating income? Are the figures for the quarter to be extrapolated to the rest of the year? Have we exhausted the hedge that we had announced before, or have we changed the guidance that we issued for Santander UK in the Investor Day? So it’s all about income, and net interest income, and net operating income.
(Interpreted) Well, in general, Santander UK is being hit, and we said it at the Investor Day, by, on the one hand, a bad macroeconomic environment, confirmed by the figures’ GDP growth for Q1, which as you know, showed a fall in GDP. Also, because we’re having a clearly higher cost for funds and persistently low interest rates as compared to our forecast a year ago.
And this, together with the hedge, which we have, in fact, post debt, has meant that there’s been a strong impact on our income and you see that very clearly on the income. But on the other hand, at the macroeconomic level in the UK, spreads have held, are actually slightly improving for lending, for deposits. There is very strong competition in the UK that’s based on competition for deposits, and so there, we haven’t seen an improvement in the cost of funding. But together, lending and deposits, we have seen a slight improvement in spreads.
So the impact on our net operating income or our net interest income is mostly due to falling volumes and to the cost of funding, as well as the hedge not being there anymore. So the current rate, will continue during next quarters. And the profit we’ve posted for Q1 is, I think, also going to be quite typical of the profit levels we expect for the UK in the coming quarters. That is, if you multiply that by four, you will have a good proxy for the year-end profit for the UK.
José Antonio Álvarez
(Interpreted) There’s a question from Ray Raymond from Credit Suisse. Are you going to charge more for PPI? I think we already mentioned this when we made that specific charge for the PPI. And with that, we think it’s covered for the time being.
And from Citigroup, about the investment that we announced for three years of €490 million in the UK, can we elaborate on that, if it’s going to be an investment or a cost and how is that going, the program and the investment itself?
No news there. Well, there’s – therefore nothing to say about that. There’s no more news than what we announced in Investors Day about the technology plan linked to the RBS deal, which as you know is – has been implemented. And then on Brazil, on lending, Benjie Creelan from Macquarie, whether we still have the same opinion on the lending increase in Brazil of about 15%? And how do we see the volumes in Brazil?
(Interpreted) The answer is yes. Despite the fact that it looked like the things were slowing down in Brazil, it is true in fact that we expect a certain slowdown in the year 2012 on the – compared to the initial forecast. But although it is true that the growth that’s going to be up about 3.5%, at other times, we said 4% or more than 4%, today, we think it’s 3.5%, which is the growth under the potential that we have.
But economic growth is still a priority for the government. So it is accepted in the market that that might be the growth level. So with all those levels of growth, lending, we think, might increase and therefore, we’re going to see our business grow 15% to 20%, our lending, reaching about 17%. If we don’t expect too many changes. The government, as we know, is making a great effort to reduce the spreads and the rates and the industry is trying to follow those indications. We don’t think that is going to have a significant impact on the accounts, though, and we think that Brazil, where I can confirm that this – the guidance that we gave at the end of the year or beginning of this year, that the earnings will grow by 15%. We can confirm that now.
José Antonio Álvarez
(Interpreted) We have a more specific question from Benjie Creelan on the growth quarter-to-quarter of our book in Brazil, which remains flat. But you have in the presentation of a – on the slide on the country, you have a breakdown of that. It grew because of – well, the corporate lending is more volatile. But consumer, SMEs and individuals have grown from 2.5% to 4%. And there are several questions from Iñigo Vega from Cheuvreux and Ignacio Cerezo from Credit Suisse whether we still have our prospects of the Investors Day, our forecast from Investors Day, yes, no changes, and the price policy, I think that was already answered as well.
There’s a question from Alexander Pelteshki from ING about Mexico. How much do you expect to grow in volumes of loans in Mexico? Do you expect to grow more or less than our peers? And how do you see the system growing in Mexico?
(Interpreted) We have a very positive view on Mexico. It’s had a very good year so far, we think it will continue to be very good. The country is growing well, and our forecasts are very positive for Mexico. I don’t think that the performance of Santander Mexico is going to be much different to that of the rest of the sector. We will be there at the sector average, perhaps emphasizing more lending to individual, cards, et cetera, more than we’ve had so far, but basically, we’re going to grow as much as the industry.
Good growth with good results, and with a very good outlook for the next few quarters, because Mexico is performing very well. It is the one that is performing the best out of all the large Latin American countries, and we hope this trend will continue in coming quarters.
José Antonio Álvarez
(Interpreted) And to finish, a question on Argentina. I think it’s the last question. Andrea Filtri asks about the situation in the country. Are you going to take any precautions there, or how do you see our bank in Argentina, given the latest announcements?
(Interpreted) Nothing special to be mentioned on that.
Okay, so I think we’ve answered all the questions that we received. If there are any pending questions, please get in touch with our Investors department. We’re at your disposal to answer any further questions. Thank you so much, and see you next quarter.
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