Banco Santander, S.A. (NYSE:SAN)
Q2 2012 Earnings Call
July 26, 2012 4:00 am ET
Alfredo Sáenz Abad - Second Vice Chairman, Chief Executive Officer, Member of Executive Committee, Member of International Committee and Member of Technology, Productivity & Quality Committee
José Antonio Álvarez - Executive Vice President of Financial and Executive Vice President of Investor Relations Division
Stephen Jones - Chief Financial Officer
Alfredo Sáenz Abad
[Spanish] Good morning. We're going to begin the presentation of our -- the results for the first half of the year. And as we usually do, I will be talking about the main aspects for the first half of the results of the group, and then José Antonio Álvarez will look at the business areas in more detail. And lastly, I will close with my conclusions.
The first thing that I should point out is that the economic context continues to be very difficult with a great deal of uncertainty in the global deterioration of confidence. By areas, renewed tensions in Europe and the market's lack of confidence reflected a sharp increase in the risk of -- in the risk premiums of peripheral countries such as Spain and Italy.
The U.S. still performs better. Its economy is growing moderately, and Latin America remains strong despite the international context. In this context, our strategy is to strengthen the balance sheet, supported by our capacity to generate earnings.
The 3 key elements of the quarter are: First, the strength of the upper part of the income statement, pre-provision profit was EUR 12.5 billion after again surpassing EUR 6.2 billion in the quarter. Second, in the quarter we made provisions for real estate in Spain of EUR 2.78 billion. Business took [ph] coverage to 46% of the total problematic real estate balances and represented more than 70% of the requirements of the Royal Decree. Third, we combined these provisions with the capital ratio above the 9% required under EBA criteria and core capital BIS II ratio above 10%. Fourth, we continued strengthening the balance sheet. In liquidity, we kept the group's loans-to-deposit ratio at under 120%, and in Spain, it was 112% after improving the commercial capture in the year. And we continued to compare very well in credit quality in the main areas where we operate. Recurring profit for the first half was EUR 3.008 billion in the first half of 2012 and EUR 1.7 billion after provision.
Next, we're going to take a look at each one of these points in more detail. The generation of results. The first aspect to point out are the results, where the group maintained its strong capacity to generate recurring results. Pre-provision profit was EUR 6.223 billion in the quarter and EUR 12.5 billion in the first half, 6% over the first half of 2011 and 10% above that of the second half.
In other words, we are keeping up the excellent track record of this item in which we are one of the leading banks in the world. In this slide, we can see the positive performance, and we see that the performance is due to 2 drivers: first, the good dynamics of revenue, which were higher than in the first and second half of 2011; and second, cost containment. Costs are flat in the first half compared to the second half of 2011.
The second thing to point out in this first half of the year is the significant effort made in real estate provisioning in Spain. The group decided to allocate EUR 2.78 billion, EUR 1.923 billion net of taxes, 1/3 of this amount came from the capital gains obtained from the sale of the subsidiary in Colombia, EUR 619 million. And 2/3, in other words, EUR 1.923 billion, came from the quarter's ordinary profit, underscoring the group's priority in strengthening the balance sheet.
In short, in the second quarter, we posted ordinary profit of EUR 1.404 billion, which, coupled with capital gains, amounted to EUR 2.023 billion. Of this amount, EUR 1.923 billion were allocated to provisions. Thus, accounting attributable profit for the second quarter of 2012 was EUR 100 million. These profits do not include the capital gains generated in the recent agreement to reinsure the portfolios of insurance companies in Spain and Portugal as the operation was signed after the end of a quarter. They will be recorded in the second half of the year, and they will be assigned to real estate provisionings.
The third point is capital. The third in the quarter, we combined the effort in provisioning with the solid capital ratios. BIS II core capital ratio was 10.1%, and we exceeded the ratio of 9% required by the EBA for June, while our forecasts lead us to think that we will be above the various possible requirement for the end of the year. And this capital strength is not just at group level. It is also seen in the various units and most clearly in those units operating in countries where their banks needed state aid.
As we see in this slide and the next one, none of the group's units have a capital shortfall. Starting in the U.K., whose banking system has needed significant injections of capital, Santander U.K. not only needed no aid but participated in the systems restructuring, acquiring banks with problems, which enabled it to improve its market position, and with a core capital of more than 12%.
Similar comments can be made for Portugal, where the rest of competitors needed to raise funds, either from their shareholders via the issuing of contingent convertible securities, Cocos, or directly from the state to cover their capital shortfalls and meet the troika's requirements.
In the case of Santander Totta, right from the onset, the ratios were much higher than those required. And today, the core capital ratio of 11.4% is clearly above the 10% required by the end of the year. Lastly, Spain, where the financial system has entered the financial assistance program and is in the process of recapitalization. Santander parent bank has a core capital of 10.2%. Furthermore, the top-down analysis conducted by 2 independent consultancies, Santander would not need capital. This is particularly important for 3 reasons: first, because the adverse scenario for the next 3 years used for the analysis is much tougher than that in similar exercises in other countries, and moreover, it's on top of the strong adjustments in Spain's macroeconomic variables that have been already taken place; second, because even in this scenario, which is given a 1% probability, the group would have a capital ratio of around 9%; and third, because it ratifies and reinforces the IMF conclusions on Santander in its recent analysis of Spanish banks; lastly, and within the classification established for the financial assistance, Santander would be in Group 0 of the memorandum of understanding, the one for banks with no capital shortfall.
With regards to liquidity, the group remains a solid liquidity position, basically for 2 drivers. On the one hand, deleveraging in some markets, mainly Spain and Portugal, where we have reduced the commercial gap by EUR 12 billion in this first half of the year, partly from the fall in lending and partly from growth in deposits, mainly in the retail networks. On the other hand, we maintained a very conservative policy in issuance backed by our wide and diversified access to wholesale markets through 10 units with issuing capacity, which include the parent bank and the group's main subsidiaries. This enabled us to issue more than EUR 16 billion medium and long term via the U.K., Latin America and Spain, placing in the market EUR 9.4 billion in securitizations. And the situation is reflected in the loan-to-deposit ratio, which remains at below 120%, which, remember, was around 150% at the start of the crisis. And we have a medium- and long-term financing ratio of 115%.
If you talk about credit quality, the group continues to manage risks very actively. As the slide shows, we compare well with average of the financial systems in the main countries in which we operate, in other words, Spain, the U.K. and Latin America. The group's NPL ratio is 4.11%, 13 basis points higher than in March, and maintaining the small rise of previous quarters. This increase is basically due to the evolution of Spain and Portugal, which maintain the trend mentioned in recent presentations. Also Brazil, in line with the changes in the market in the last few quarters, increased its ratio.
Santander Consumer Finance, on the other hand, reduced its ratio in the quarter to below 4%, an excellent figure for this business. Sovereign Bank improved for the 10th straight quarter, and the U.K. and the rest of Latin America remains stable. The small rise in Latin America excluding Brazil is mainly due to the mathematical impact of the exit of Colombia in the quarter, whose ratio was below 1%.
With regards to coverage, the group's coverage rose by 3 points in the quarter to 65%. This improvement was largely due to the rise of 7 points in Spain after the provisioning made in the quarter. And also to improvements as consumer -- of Santander Consumer Finance, SCF, and Sovereign Bank to 111% and 113%, respectively. Stability in the U.K. and Latin America's coverage remained high at around 90%.
If you look at the group's results, the slide shows the accounting changes and after eliminating the net impact of the perimeter and exchange rate effects, which are very reduced in the first half. There are 2 main points here: first, the strength of the upper part of the income statement, with a 7.3% rise in pre-provision profit on a like-for-like basis and without the exchange rate impact over the first half of 2011. And second, that this does not feed through to the bottom line because of 3 factors: Greater loan loss provision, partly due to more specific provisions in some units, and the release of generic provisions in the first half of 2011; the negative impact of the rise in minority interest after placing part of the capital of subsidiaries in Chile and Brazil; and, lastly, the impact of the real estate provisioning in the quarter.
If we talk about revenues now, excluding the exchange rate impact, we can see that the fees, net interest income and insurance activity income, all these increased in all cases. The basic revenues grew 16% in Latin America after rising for the ninth straight quarter. Basic revenue also includes a growth of [ph] 16% in Latin America, but the main driver was net interest income and was 9% higher than in the first half 2011.
Also in Continental Europe, we see a recovery in the last few quarters due to the evolution of retail banks. Other revenues, which accounts for 8% of the total, these remained mainly stable because of the reduced trading gains and the smaller contribution of income by the equity accounts I've mentioned [ph].
With regards to expenses, well, all units registered almost 0 or negative growth in expenses over the first quarter, maintaining the strong balance seen in previous quarters. The moderate rise over the first half of 2011 reflect the revision of collective wage agreements in some countries, investments in the commercial network and technology and the impact of the incorporation of BZ WBK, the Polish bank, to the group in April 2011.
And with regards to provisioning, the slide shows the loan-loss and other provisions made by the group in the quarter. The upward trend in loan loss provisions continued because of the phase of the cycle in Spain and Portugal and the rise in Brazil. Brazil reflects the deterioration in credit quality in the system from lower-than-expected GDP growth. We believe we'll see an improvement in provisions in the second half, given the positive evolution of irregular ones at less than 90 days, which have improved 40 basis points in the second quarter, and the measures taken by the government to jump-start the economy.
In addition, and after the real estate provisioning made in recent quarters, the group has met more than 70% of the requirements of the Royal Decrees, including the capital buffer. More specifically, the effort made in the first quarter of 2012 enabled us to raise coverage for real estate exposure in Spain significantly.
In doubtful loans, 44% from 33% in March; in substandard to 42% from 16% in March; and in foreclosures, to 50% from 48% in March. This gives coverage for all problematic real estate assets of 46%, much higher than in March. Coverage of all the real estate exposure, in other words, including outstanding risk, is 39%, considering the capital buffer, and is expected to reach around 50% once the requirements of the Royal Decrees are met. I'll remind you that these figures do not include the fund to be established from the capital gains of the insurance operation.
I now hand it over to José Antonio Álvarez, who will look at the different business units.
José Antonio Álvarez
Good morning. As the SEO said, I will now be talking about the different business area. First of all, I'd like to note our geographic diversification from the bank and the good balance that has been reached between mature and emerging markets. As we can see in the graph, 54% of profits come from emerging markets, with Brazil providing 26% and Poland, as our last unit, representing 4%. With regards to mature market, the contribution is well balanced. Spain contributes 14%, the U.K., 13% and the U.S., 10%.
If we look at it by units and starting with Continental Europe, I would say that the income statement reflects the difficult environment in which business is being developed, sluggish growth, deleveraging in the main economies in which we operate and low interest rates. This probably is the most determining factor. The profit of this geographical area in the first half was EUR 1.211 billion, lower than in the same period of 2011. The comparison is affected by the positive impact of the entry of the Polish unit, BZ WBK, and the negative one from the release of generic provisions of EUR 300 million in the first half of 2011, which was not repeated in the first half of 2012.
Now there are better trends, though, as we look at the second quarter over the first quarter. Basic revenues rose 16% due to the net interest income. Of note was the recovery also in the commercial networks in Spain and Portugal. Expenses fell 1%, and -- in all items, and provisions remained stable, with the exception of generic and the extraordinary provisions that we make at the corporate center, which fall 1%. Attributable profit increased for the second quarter running.
If we look at all the units, this trend is seen in most units. We can also see a fall over the first half of 2011, but a better trend in all items over the second half, mainly due to the recovery of revenues and flattening of provisions. Let's look at each one of these units in more detail, starting with the Santander branch network. And if we talk about activity, we can say that there's been good growth in deposits. Deposits are going up at 15% in terms of balances. This reduces the relationship between loans and deposits by 20 points in 1 year.
In terms of results, basic revenues show a positive trend both year-on-year and quarter-on-quarter. Provisions also showed a flatter profile than in previous quarters. Because of the combination of both factors, we have profit that has been growing since the fourth quarter of 2011.
So in short, I would say that in an environment of deleveraging, we are recovering some revenues, flat costs and stabilized provisions show a certain stabilization. If we look at Banesto, perhaps the most important differentiating aspect here is the different pricing policy on liabilities, which means that the activity is different. Reduction in the commercial gap of over EUR 4.5 billion in 12 months and so the loan-to-deposit ratio improved. Then there's also recovery of the basic revenues and profits in the last quarters. Expenses are falling at 1%, and the year-on-year comparison is affected by the release of provisions in the first half of 2011.
Tomorrow, the CEO of Banesto will explain in further detail all these figures. I just wanted to point out, too, the main elements. If we look at Spain as a whole, and here I'm talking about the Santander Branch Network and Banesto plus the wholesale business in Spain, Santander Consumer Spain, and Banif. In other words, all the activity that the bank carries out in Spain, total gross lending stood at EUR 217 billion, it's grown. Later on we'll see the reasons. 50% of gross lending is to companies with no real estate purpose, and 25% are mortgages. Deposits totaled EUR 187 billion including EUR 10 billion of retail commercial paper.
Of this, EUR 82 billion are demand deposits. The difference between loans to deposits has fallen by EUR 10 billion in the first half, putting us in the run rate to cover all the year's maturities. This was because of a fall of lending, but also in a rise in deposits. We are seeing strong growth in retail deposits, offset by some outflows in institutional deposits as the result of automatic triggers following rating downgrades.
If we look at the lending portfolio in Spain in further detail, the first thing that I should point out is that the sharp fall in loans with a real estate purpose and deleveraging of individual customers have maintained -- was maintained in the quarter, and the deleveraging of individual loans.
On the contrary, companies seem to be more stable, and the public administrations are increasing for payment to suppliers, EUR 4 billion.
Nonperforming loans. While the real estate sector's NPL ratio rose to almost 40% because of a double impact of the increase in the numerator and the sharp fall in the denominator from the decline in balances. This fully explains the rise in NPLs in Spain as the rest of segments remained stable after the rise of around 0.5 percentage points in 2011. So standard credit quality remains much better than the sectors in Spain, as the CEO mentioned.
[Spanish] And now, if we look at the gross NPL entries before recoveries of the non-real estate sectors, you can see some stability. Here we have the figures with the first half of 2008, our baseline, so pre-crisis. Net entries in consumer finance and cards are clearly below the levels of the first half of 2008, basically half, and in mortgages, after the peak of 2009, where levels gross net entries, which are -- which is similar. In businesses, we see a slight rise because of the recessionary context with a gradient which is really very slight, and it reflects the underlying economic crisis.
We move on to our real estate exposure. As we've explained, strong drop in the quarter. The total of loan plus foreclosures dropped by EUR 1.8 billion in the quarter, accelerating the pace of decline of the previous 3 years. Also in this decline, there is something that had not happened before, which is the volume of foreclosed assets. We had announced it in our presentations in previous quarters that after 2 quarters in which volume had remained flat, we are beginning to see for the first time a decline, and we think that this is a trend that will accentuate in the coming quarters and that there will be additional falls in the volume of our foreclosed assets. So in summary, our management is very focused on reducing our real estate exposure and, as our CEO has explained, to increase our coverage, which is currently at a level of about 50%.
Moving on to Portugal. The country -- the macroeconomic context is still difficult. The financial adjustment programs agreed with the EU continue, and this impacts the volumes and the results of the bank. In volumes, the trends are fairly similar to what we saw in Spain. Deleveraging continues, loans fell by 7%, deposits grew by 7%, so we have significant deleveraging. Income performed well, in part due to less competition for deposits in the market, so the cost of deposits fell. And operating costs went down 4%. 46 branches were closed in a year, and that has reduced our costs. And we have reinforced our provisions from the results of the tender offer we made in the first quarter.
Overall profit was EUR 71 million, so in short, the Santander continues to deleverage, revenues are recovering, profits have remained relatively stable. And although NPL has risen a little, we are moderately optimistic. Santander Consumer Finance in Continental Europe, because the results of the U.K. are incorporated into the U.K. and those in the U.S. are incorporated into the U.S. business, have had a highly recurring profit -- in a very difficult environment, automobile sales, which represent about 65% of our consumer finance activity, new car sales have fallen 7% in our footprint. Several countries are in recession. The 2 elements which bolstered our profits are our business model. We have continued to increase volumes due to diversification by countries, by products and also because of the brand agreement with manufacturers, which have enabled us to increase our market share in new cars in several countries. So our front book is still growing greatly above the industry averages, and so we're gaining market share. And risks are very much under control, with a high coverage at 111% and NPL rising -- and dropping, so that -- as a consequence, our profit has risen by 4% year-on-year. So in summary, this is a business which is generating solid profit in a not very favorable environment.
And finally, I'll speak about Poland. Substantially different environment, good economic growth, good growth in loans and deposits, double-digit growth in both cases. NPL ratio falling to 4.9%, that's 1.5 points lower than the year before. As for volumes, both loans and deposits, as I've said, are growing significantly and consistently, both to individuals and to businesses. As for our results, if we look at this semester and compare it with the second half of 2011, we don't compare with the first half of 2011 because it wasn't within the group's perimeter at that time. In the comparison between this semester and the previous ones, revenues increased 4%, fueled by net interest income, mostly because of greater spreads on deposits and growing volume. Expenses remain flat, pre-provision profit and attributable profit registered 2-digit growth. In 2012, with a better environment than in other markets, we think we'll be able to continue to grow our volumes at this rate. And also our highest priority in Poland will be, once we have the regulatory permit, to merge BZ WBK with Kredyt Bank once we have the regulatory approval, which we are currently obtaining.
In the U.K., in a very difficult macroeconomic and regulatory environment, there are 2 trends, falling volumes and very low interest rates, and these are significantly impacting our ability to generate revenues. The more important negative factors there were the cost of funding, which has risen in a very competitive market, and wholesale funding has also become more expensive. As for lending, the spreads on new loans in general in the last quarters have been improving. And so the effect on revenues is more to do with falling volumes and rising costs of wholesale funding.
Net base foreign revenue, I think we're at levels which are close to minimum, and we hope to see this trend revert towards Q3, Q4 this year. As for costs, that's gone down in real terms, and provisions have remained flat. Credit quality's still good, still stable within the levels of high quality that we have consistently maintained in our book in the U.K. In total, attributable profit was 41% higher. You have to remember that last year in the second semester, we had to establish the PPI provisions, which is why there's been this increase, 41%. In summary, the foreign revenues has impacted our profit in a difficult market environment, which we expect to improve towards the end of this year.
Brazil. I'd say that this is a completely different environment, with strong volumes. Lending growing at 18%, bolstered by mortgages, consumer finance and SMEs. Deposits growing at 6% in an economic environment, which is not or has not, in the last 3 quarters, been quite so favorable with economic growth relatively slow. Profit in Brazil was at $1.49 billion, the top part of our P&L, very solid. Basic revenues growing at 17% due to volume growth and spreads remaining relatively stable. Costs growing at a slower pace, although there has been significant increase, because last year we opened 100 new branches -- in the last 12 months, we've opened 100 new branches. And there's also been the rising wages as a result of the latest agreement signed in the second half of 2011. Net interest income was 20% higher. This growth in the upper part of our income statement, which feeds through to the profit, only to a lesser extent because of rising NPLs in the country across the board for the whole industry in an economic environment which, for Brazil, was relatively weak. In our case, our loan book has been a significant component of cards and consumer finance, so that rising NPLs in the industry affect us sooner. But now we believe that the -- full 90 days defaults are falling, so we're relatively optimistic with regards to an improvement in provisions in the second half of the year. And this will also be accompanied by economic recovery. It seems that the country in the year will be growing at about 2%, when in the first 2 quarters it was basically at 0. And in summary, I think the bank is now moving forward successfully in its business performance. The rising NPLs we believe to be temporary and strongly connected to the economy, which we expect will improve in the coming quarters, as will our profit.
In Mexico, business has continued to register high-double-digit growth. We've gained market share in loans to SMEs, cards, mortgages and, really, across the board, time deposit, demand deposits. We're gaining market share significantly in all these segments. Our brand continues to grow in the market. Basic revenues rose by 20%, fueled by net interest income and fees, very good performance there. Lower trading gains, because in the first half of 2011, we had capital gains from the sale of Visa and MasterCard shares. Increasing costs is strongly linked to growing volumes, more sales, staff and rentals after sale and leaseback of 220 branches a few months ago. Provisions rose in line with lending, 17%, with low-risk premium falling. NPL ratio was 1.64%, down 81 basis points in the year, and coverage was at 183%. So profit amounted to EUR 556 million, 18% higher in local currencies. So in short, good business and profit performance which we believe will continue in the coming quarters.
In Chile, we've had good volumes, particularly in deposits, up 15%, and loans less growth because we've been focusing on profitability, and there are some significant market segments in Chile where spreads are very low. And so where we've not been -- like I said, we've been significantly more selective, and we prefer to focus on high income and not so much in other segments like mortgages, where spreads are relatively low. Basic revenues grew 6%, affected by the sharp fall in inflation because it's there's a significant part of our balance that pays inflation plus spread. So the sharp drop in inflation has had a negative impact, as has the regulatory framework on fee income. Also in Chile, there's been a higher cost of lending, although we've anticipated that with the provisions that the rest of our peers are having to make. So in short, low inflation, tougher regulations and high provisions have affected attributable profit before minority interests. I'm speaking about the bank overall. After minority interest, of course, this is amplified. Looking ahead, we envisage some positive aspects for our income statement, lending growing, costs decelerating and stable provisions and, therefore, lower cost of credit overall. On the other hand, there are still some significant regulatory impacts that might affect us, such as a cap on rates and some risk of lower inflation.
Details of the other Latin American countries: Argentina, profit rose 7%, reduced by the higher tax rate, 33%. Profit before taxes was up 19%, but with a higher tax rate. Net profit rose only 7%. Double-digit growth in profit in Puerto Rico and Peru, and Uruguay's profit more than doubled, although, of course, it was a very low level in the first half of 2011. And BPI's business has also improved.
Finally, in the last geography, the U.S., beginning with Sovereign Bank, the top that it brought in $362 million, some growth, single-digit, in loans and deposits, low-single-digit growth due to conditions in the American market, same as -- or lower in our peer's case. Profits were flat, registering a falling net interest income because of lower interest rates. And we also had some run-offs, and provisions fell sharply due to excellent evolution of NPLs and coverage. Fee income fell due to regulatory effects. And coverage is already at a very high level. As for Santander Consumer U.S., contribution of $229 million in the quarter, good growth. The auto market has been performing quite well in the U.S. Lending grew 16%, with better spreads on new loans. In profit, 2 factors, basically 2, the release of provisions that was made in the first quarter of 2011 and improvement or effect. If we look at the red part of the slides, that's attributable profit for the group. And after selling part, it remains at $100-and-some million in the quarter, showing the excellent performance of this business unit. So overall, total profit generated by the U.S. was EUR $591 million in the semester.
And finally, corporate activities. Not much change versus the previous year. Net interest income has remained almost flat, identical to the first half of last year. Lower volume of wholesale issues offsetting the higher cost of credit. As for trading gains, the impact is due to our exchange rate hedges. As you know, we have an active hedging policy and some impacts due to the impact of exchange rates on dividends and portfolio valuations, but it's basically an exchange rate effect. And the bottom line was affected by lower recovery of taxes in 2012. Additionally, our profit was affected by the recording in this area of capital gains and extraordinary provisions, as I explained at beginning of the presentation, of the EUR 1.34 billion that our CEO mentioned.
Who will now take the floor to close this presentation?
Alfredo Sáenz Abad
[Spanish] Okay, to conclude, we are going to hear some general comments and also an outlook for the rest of the year for the second semester. In the next 2 quarters, Santander will continue to enforce its balance sheet by adopting its management and strategies in each of the markets to growth and conditions in each of them.
In Spain and Portugal, we face a strong recession and high volatility, and therefore, our priorities will continue to be strengthening our balance sheet and provisioning our real estate exposure. And the strengths will remain key in order to take advantage of the opportunities that the markets might afford to gain profitable market share. In the rest of Continental Europe, we expect to maintain the highly recurrent results we have seen in recent quarters. In Santander Consumer Finance, bolstered by business model, which is difficult to replicate due -- by our competitors because of its product and country diversification and our agreements and alliances with manufacturers.
In Poland, we will take advantage of macroeconomic contexts and low banking penetration to achieve the profit levels we have issued as guidance while we proceed with the merger with Kredyt Bank. In the U.K., we are almost finished absorbing the negative effects that -- on our net interest income. When these sectors are stabilized, we will be able to see the results of the improvements achieved in our different businesses. Both individuals and businesses are areas which we will continue to reinforce.
In Latin America, we will continue to see revenues grow strongly through volume growth and better spread management. In Brazil and Chile, we have seen high provisions, which are, however, stabilizing or falling. And as a result, we will be able to see the strength of the upper part of our income statement feed through to the bottom line.
In Mexico, we will maintain the current trends and work to strengthen our brands in opening new branches that will enable us to continue to gain profitable market share. And finally, in the U.S., we will continue to invest in our retail networks, in one of the areas with most economic potential in the country. We're completing the IT integration as well as integrating the new sales model in all our branches, and this will give a new push to business and product development in areas such as GBM, global banking and markets, and credit cards, amongst others where we have an excellent outlook.
So in short, Santander will keep working to strengthen its ability to generate recurring profit. Thank you.
[Spanish] Good morning. As usual, we will now answer questions coming in through various channels. First, we'll begin with questions that have been coming in through our website. I'll divide it into themes so we can answer as many questions as possible.
And the first set of questions about strategy and regulation. There are several questions about the Mexican IPO, our vision and our plans. And I'll just explain, because questions come up 2 or 3 times, that we maintain what we've said in previous quarters, is that the IPO is in our plans and that we will provide more details as the months go by. No change with regards to what we announced in previous quarters.
There's another question that has come in several times, the capital gains on the insurance deal that we reported to the CNMV as a relevant event a few days ago, if that's part of the results we've posted. And the answer is no. Those capital gains have just been terminated, and therefore, they will be charged through the current quarter.
Then there's a question from Juan Pablo López from Espirito Santo and Carlos Peixoto from BPI. What do we expect from the Oliver Wyman's stress tests, the evaluators in the process which begins from now, and whether our policy or our current view is to take advantage of the situation to acquire market share -- and they say in Spain, but I suppose they mean in general.
Alfredo Sáenz Abad
Okay, as you know, we are now all undergoing the bottom-up stress test, which has different stages and which will conclude at the end of September. What do we expect? Well, we expect nothing different or very different from the results of the top-down stress test. In our own particular case, in the Santander's case, we really expect no difference in the top-down versus we are classified as group 0, that is, as banks which required no capital injections in the bottom-up process, which has began. And we now understand the process. It will simply confirm that the Santander requires no extra capital and will, therefore, remain in group 0 and not be affected by the MOU. And of course, that does afford us certain opportunities for the future. We could take advantage of various types of opportunities. We can grow organically. We are already noticing that as we reported, and that is part of the reason for the excellent results we are obtaining in Spain in the top part of our income statement in net interest income. There has been flight to quality. And we have gained market share profitably in the last few months, and we expect that to continue. So this is an effect which is bolstering our organic growth. As for inorganic growth opportunities, as we've always said, we assess all opportunities. We take part in all auctions and sales processes. We analyze the conditions and the opportunities, and if we see an opportunity that makes sense, we explore it. But we will continue to assess any opportunities that develop and decide accordingly.
The second set of questions about dividends and remuneration after Telefonica's announcement yesterday. Question from Santiago Lopez, Exane, and Stanislas Behone [ph] from BNP Paribas and Daragh Quinn in Nomura. With regards to our intentions versus payout and dividends, are we going to modify our dividend policies both for cash and scrip dividends? That's the dividend for remuneration. Do we think that we should limit the remuneration to board members or executives? Would that be a positive step? Or we do think similar to Telefonica?
Alfredo Sáenz Abad
Our dividend policy has been set and reported to the market. It was reported expressly in the last results presentation, and the only thing I will add now is that I can confirm that we will maintain our current payout policy. There's no change. As for remuneration to executives and board members, this is an issue that we are reviewing and will be discussing soon, and we will probably follow the approach followed by other companies. But it's not something that I can be specific about yet, because it has to be decided by the board in due course.
As for asset sales or divestments. Several questions from Britta Schmidt in Autonomous and Daragh Quinn from Nomura. First, about real estate assets. Are we interested in selling package real estate or selling larger chunks of property instead of the individual property sales we're carrying out? Has demand risen? I suppose that means for real estate assets in Spain. And are we willing to offer bigger discounts on our sale price? And how large would we be interested in selling to a bad bank? And what we think about bad bank? That's about real estate.
And Marta Romero from Keefe is asking about Banesto. Will it continue to trade, buying, selling? What percent did it make?
Alfredo Sáenz Abad
Okay. If you look at the numbers, you will see that in Q2, property sales were larger than entries for the first time, seen the turning point this quarter. Last quarter, as you know, it was almost flat with a very slight rise. And we announced already that the following quarter probably, but of course now it's a fact, sales would exceed new entries by EUR 200-and-some million. So that's first significant breakthrough. Foreclosed assets no longer growing. Second, sales in Q2 have been very good. We've sold EUR 1,300-and-some million in the quarter. And that's also milestone, because we sold more than in almost in the whole of 2011, so we've been very successful with our sales strategy. We have no problem with considering sales of individual properties or sets or chunks of property. Depends on offers and prices. Would we be willing to sell packages or chunks of assets? And the answer is yes, as long as the price is right. What sell price are we obtaining? Discounts between 35% and 45%, so similar to the level of provisions we have. And as we've explained other quarters, these prices will probably tend to fall slightly as a consequence of pressures in the market. As for the bad bank, I see no financial [ph] you will have read in the MOU. That is a possibility that is offered to those banks that need public finance. That is not open to the banks that are not in that position, so it's not anything that will provide any benefit for us. It's an internal decision for us and for the 3 other banks that are in group 0. And for the banks that are in group 3 and are, say, in the -- in a comfortable position, the choice to go for the bad bank is an internal organizational structural position of what would best suit the management of these assets, to split them into an independent business or to keep them within the group. That is purely a strategic and structural position for us. And in our case specifically, we have decided not to establish a separate business formally. We have some subsidiaries that were really about real estate retail, Altamira, OPENESMM and Banesto and Santander, which we've merged just for efficiency's sake. But we don't see for now any benefit in the establishment of a bad bank for us for now, and so unless there's any significant change, we will continue as we are, managing our real estate assets internally ourselves through a specialized unit which is in charge of this area. And it does not really interfere in the run of business and which has been very effective, as you see, from the numbers I've just given you. As for Banesto, what are we going to do? Well, as we've said over and over, Banesto will not be sold and will not be merged. So there's really no change in our usual strategy with respect to Banesto.
With regards to the selling of assets, there is a question from Benjie Creelan. How much are we funding the clients when we sell them our real estate assets? It's about 50%, I think it's a 56%, if I remember correctly, what is being funded through mortgages for the individuals who buy a property from Santander.
There's a question from Espirito Santo and from Sergio Gamez from Merrill Lynch. How much is spending provisioning of the Royal Decrees? I remind you that the total impact was EUR 8.8 billion minus EUR 2 billion for the capital buffer, and we already said that we have more than 70%, so that's more or less what we need to provision, the difference. The charge to capital gains or some charges against the P&L.
And there is another question also on the update of the timing of RBS, but no changes there. 2013 is the year in which we hope to carry out this deal.
A question from Sergio Gamez and another -- and JPMorgan. On the MOU, do you see any alternatives to lower the cost of sovereign debt? Do you see an additional LTRO? Do you think that Spanish debt can be stabilized?
Alfredo Sáenz Abad
Well, it's a very speculative question. So it's very difficult, really, to give you a quality opinion. We are witnessing movements which I think have a certain significance to solve the problem. And we hope that these movements will bring about results, and we hope that the spread of the debt will be reduced. And we hope that the risk premium will fall. But as I say, this is in the hands of politicians. And so that's all I can say.
To finish with this area of questions, there's another question on real estate assets, but I think it's already been answered on whether we expect to continue to sell assets in Spain in 2012, at what price and what will be the impact of the discount? We gave the discount, we said how much coverage we have for real estate assets, so I think you can come up with a conclusion with regards to the impact on the income statement. And yes, we want to continue to sell real estate assets in the second half of the year at similar prices as in the first half of the year. With regards to the financial area, there are 3 or 4 basic concepts here. I'm going to try to divide the questions into these different concepts. The first one is LTRO, the money that we have in LRTO (sic) [LTRO], our appeal to the European Central Bank size utilization. Number two, therefore, ALCO and the weight of ALCO in the financial spreads; number three, sovereign debt, breaking down the sovereign debt. These are the 3 main subjects, and we have several analysts asking questions on these things. A series of analysts have asked about the financial margin net interest income impact, et cetera.
José Antonio Álvarez
Let me try to elaborate. Of the 3 that you asked about, ECB size utilization. Well, in the first half of the year, what we see is a difference with regards to previous quarters, which was the effect of the sovereign downgrades. And with correlation 1 to 1, the downgrades in the bank's rating, in the short-term rating more than the long-term rating. So what we've seen since April were some downgrades and then the sovereign downgrades, which have had 2 or 3 impacts. This had an impact on institutional deposits, which is not too relevant for us, so there are automatic triggers. Our wholesale deposits are 3% or 4% of the whole bank's deposits, but there's an impact there that there are automatic triggers in some of these deposits. Then, there's a second impact, which is more important for the use or nonuse of the ECB, which has to do with the repo. The repo business, just to simplify things, is divided into 3 parts: We have a repo with bilateral with counterparty clients. Then, we have repos through our clearance houses, and then we have repos through the ECB. What has happened in this first half of the year is that the derivative of the sovereign downgrade, the clearance has gone up 12%, 14%, 13% to 30%, which means that we are using ECB more to do the repo business. And this is a non-stable use. It's not comparable with our LTRO, which were to specific operations. This depends more on how the market is for bilaterals, what clearance houses are like and what the ECB is like at that moment. So depending on that, we use the ECB to discount public debt. From 60% to 80% is in bilaterals, and 20% to 40% we can discount with the ECB, depending on the week. The second thing that is also related to that is the ALCO. The ALCOs -- a proxy of the ALCOs you will find in portfolios available for sale. All the ALCOs are classified in portfolios available for sale. There are no portfolios to maturity. Therefore, the figure of ALCOs in the balance sheet is slightly less than EUR 100 million. It's relatively stable. I think it's EUR 96 million, EUR 98 million, out of which EUR 68 billion, if I remember correctly, is sovereign debt. About the -- it's -- EUR 35 billion is Spanish sovereign debt out of those EUR 68 billion, which is the same figure that we had last year -- at the end of last year and at the beginning of last year, too, so it's a relatively stable figure. The durations of these portfolios is very similar to what we assigned to current accounts, 4.5 year.
And there's also a question regarding the weight of the ALCOs in the financial margins. The financial margin was EUR 15 billion, the net interest income of the bank. The ALCOs would be about 4%, 5% of that. That's with regards to the interest -- net interest income. In other countries, the sovereign debt, the second one in importance is Brazil, where we have about EUR 11 billion, and the others are relatively lower amounts. We have EUR 35 billion, Spain; the European Union, EUR 12 billion, out of which EUR 2 billion are Portugal; EUR 4.7 billion, the U.K.; EUR 11 billion, Brazil; EUR 3 billion, Mexico; EUR 2 billion, Chile; EUR 2 billion, the U.S.; and EUR 2.3 billion, Poland. These are the holdings of sovereign debt that we have. Have I left anything out?
Yes. Just to go over the questions and not -- to answer all parts of the question, there is a question from Juan Pablo López from Espirito Santo on the mark to market. How do we think it's going to evolve the balance of the debt? And with regards to that, the impact of the valuation adjustments, what impact is that going to have on BIS II and III capital ratio? And basically, those are all the questions regarding debt.
Well, the mark to market, the net one is about 2 billion negative of the whole portfolio, and the balance, I said, is relatively stable. The balance in the future of that will -- it will depend on the performance of current accounts and the hedging needs. Therefore, I think it will remain relatively stable. The impacts of Basel II, no impact, and in Basel III, it seems that there might be an impact, but it's still too soon to tell.
Net interest income. Locovare [ph] and Britta Schmidt from Autonomous asked about the net interest income. First of all, in general, by areas -- and then by areas, the Spanish one is going up. Well, there are more questions about this from other analysts. The increase of the net interest income in Spain compared to the fall in other markets. What is the effect of the exchange rate? And specifically on the net interest income at the Santander network and also at the corporate sector.
José Antonio Álvarez
For the net interest income, we would have to elaborate by countries. In the Santander networks, starting there, good performance there in terms of the volumes and a slight increase in our lending spread. It has been going up consistently. With regards to other geographies, in the U.K., it's due to the liabilities. And in Brazil, which is another important element, the net interest income is increasing because of volume, because the spreads remain stable, but the volume is going up. In other countries, I don't know. In Poland, it's based on the volume. In Chile, there's a certain deterioration of the spreads because of inflation. I think these are the main units.
Talking about capital now. Francisco Riquel is asking about the organic generation of capital until the end of the year. No changes there. 10 or 10 basis points per quarter is more or less what we have been generating.
Francisco Riquel also asked about the capital buffer of the EBA, what is going to happen with the sovereign buffer? Well, it's being discussed. That's being debated right now, and we'll have to wait for Q4 to learn more about that.
There's a question from Carlos Peixoto. Why has the core capital fallen by EUR 850 million in Q2? That's basically because of the exchange rate. I remind you that differences by exchange rate affect the capital. On the other hand, risk-weighted assets also move along the same lines.
And Frederic Trech [ph] asks about the levels of EBA in June, but we already said they are well above 9%.
There's a question from Ignacio Cerezo from Credit Suisse. What would be the impact in the capital and in the positioning of a downgrade of Spanish -- of the Spanish rating of the sovereign bonds? Do we have any ideas on additional impacts of the -- on Santander?
José Antonio Álvarez
Well, this time, we're just speculating here about a downgrade to non-investment grade. Well, we would have to see what the performance of prices would be. Given the levels of the bonds right now, it isn't for sure -- certain that a loss of investment grade -- well, we would have to see what the impact on the price would be in order to answer this question.
Juan Pablo López from Espirito Santo asks about the -- how are we going to use the DTAs? What will be the impact under Basel III? I remind you that there are 2 types of DTAs, those of temporary differences, which are charged against the 10% or 15%, and that will be part of the impact of Basel III in January of 2013, about 90 or 100 basis points. And then negative taxable income, that would be charged against -- well, the schedule, the timetable is going to be 20 basis points a year, half of that will be by DTAs. So you can calculate the figures. The reason why DTAs is generated, 40% comes from Brazil, 40% from Spain. Brazil, it's to deduct it from provisions. And in Spain, it's the impact of the Royal Decrees, and we hope and we wait for profits to be generated to use them. The figures are 18 billion in assets and 3 in liabilities, so net would be 14 billion to 15 billion.
And then with regards to positioning, they ask about the duration of the debt, José Antonio, if you'd like to elaborate. Britta Schmidt asks about the unencumbered assets. And that's basically it for debt questions.
José Antonio Álvarez
Well, the debt is related to the duration of current accounts, 3 to 4 years. The encumbered assets, I guess, it's -- he's referring to mortgage-backed securities. It's 119%, the relationship between assets and the securities backed by assets that are issued.
Ignacio Cerezo from Credit Suisse asks about the capital gain of the liability management exercise in England, if it's EUR 500 million and how is that capital gain going to be used? And Mario Loros [ph] is asking about the provisions for the Royal Decrees. Why are these done at the corporate center?
Alfredo Sáenz Abad
Yes, in effect, there has been a capital gain of EUR 500 million in the U.K. for the time being. We -- its use is pending. We will decide in the future what we do with that money. But for the time being, it has been used to reinforce the balance sheet. But at the end of the year, we will decide how we will use it.
Going into risks now. There are questions -- first of all, generic questions on the performance of risk and the -- your outlook on the NPL rate. We have several questions regarding that. How do we see the performance of the NPL rates at a group level but also in the main geographies? And what has given rise to the worsening of debt everywhere? So would you like to talk about the general quality of risks?
Alfredo Sáenz Abad
Well, in terms of the NPL rates, we have different situations depending on the market and also different forecasts. In the second half of the year, the NPL rate went up in Spain. It went up also in Brazil and in Chile. So these are the 3 places where the NPL rate went up in Q2. The reasons for these increases, I think, have been explained well. In Spain, I don't think I need to explain them, because it's quite obvious. In Brazil, we've had the first half of the year where the macro situation was worse, and therefore, that made the NPL rate go up, but not only at Santander but throughout the system. Private banks in Brazil have published -- have posted their quarterly results a few days ago, and you will have seen that in all of them, the NPL rate went up. And it went up for reasons -- for the same reasons that they go up for us, too. So we're being affected like everybody else. And they also goes up in Chile for what José Antonio Álvarez explained, because of the specific situation in Chile with the problem of La Polar. We have a provision for that, and that is the explanation of where we are. Now looking forward, what do we expect with the NPL rate? Well, in Spain, it will continue to go up. I might make a mistake, but we think that from 5.9 in June, at the end of the year, it might be 6.7, more or less, so we will continue to see the NPL rate go up in the -- in Q3 and 4. And in Brazil, we think the NPL rate will stabilize, and we also hope to see provisions fall, because the cycle has changed. Economic growth is going to be better in Brazil in the second half than in the first half of the year. So in the future, in Brazil, we expect an improvement of the situation. And our colleagues in Brazil share this view. They also expect that less provisions will have to be made and that the NPL rate will fall. And in Chile, more or less the same thing. In Chile, looking forward, well, we already made some provisions, so we think that in the future, the time is going to change there, too. So basically, that is our opinion on the NPL rate because in the other units and in the other countries, there is nothing to mention, because in all of them, the NPL rate is going down or remains flat, as in the U.K., and we don't expect anything that might change that trend in the future.
More questions on risks. We have 3 questions. The first one you already more or less answered on new entries. It's from Juan -- Francisco Riquel from N+1, and other analysts ask about the level of entries. Is there any reason behind this increase in the NPL rate? Although you more or less already answered that question.
Then a second question that refers specifically to Spain on the NPL rate and on real estate segments, more specifically in SMEs and individuals, it improved somewhat in the second quarter, but what do you expect in the future?
And finally, also referring to Spain, Matteo Ramenghi and Antonio López [ph] from UBS and Espirito Santo. Can we talk about the restructured or refinanced loans, basically mortgages in Spain? What levels are we talking about? And how could that affect you?
Alfredo Sáenz Abad
Well, I think that the presentation you will find on the web deals with the NPL rate in different groups. You will find that divided into the different segments. So what do we see in those graphs that I repeat you have in the presentation itself. In -- what we see in those graphs is that for mortgages to individuals, the NPL rate remains stable. It is not growing, and that confirms what we've been saying, which is that mortgage loans to individuals are very resilient and even more so when they are concentrated in segments of the population, as it is in the case of Santander, which obviously is different to that of other institutions, which might have a different makeup of their loan portfolio. Also consumer loans, while the NPL rate is going down in consumer loan, that is very well managed. And the same thing can be said about the credit card. In the these 3 product for individuals, which is consumer loans, mortgages and credit cards, for these 3 groups, the NPL rate has fallen, and we don't expect any change on that trend, because we can anticipate, we can predict. And we have fine-tuned our predictions. And obviously, if we were to see growth or surprises in the future, that would be an indication. We would have an indication of that in previous months. Now for corporate loans there, the NPL rate is going up. It's not a strong upward trend. It's very mild, but certainly the NPL rate has gone up. In the second quarter, it did go up as compared to Q1. And now if we put it all together, and, of course, depending on the mix, that gives you the final figure, which in this quarter is slightly lower than last quarter's figure because of the effect of individual customers. But if we divide it into parts, well, as what I said, in corporate loans, these are increasing slightly the NPL rate. Although it's not too significant because of the weight of corporate loans. So corporate loans, the NPL rate is very low and remains stable. And so this makes this ratio very favorable in our case.
The last part, which was restructuring, I'll remind you that a year ago, we rolled out a product of mortgages in Spain, and the volume of those who have decided to go for that product is about EUR 2 million, and the bad debt is EUR 7 billion to EUR 8 billion ever since the beginning of the crisis.
And with regards to Mexico, Marta Sánchez from Keefe asks about provisions in Mexico. Is this increase for this quarter, is this a reason for that? Well, it was the first quarter that went down, but the $130 million that we provisioned this quarter, is that in line with the EUR 125 million or EUR 120 million that we had been doing in previous quarters? The risk premium is 1.5, 1.7, so nothing extraordinary to point out there.
With regards to Brazil, we have questions from Marta Sánchez, Juan Pablo López and Ignacio Cerezo. Also, David Vaamonde has a question. They ask about 2 things basically. One is the guidance. Are we going to reach the target? What is our idea for our guidance? How do we see growth in the second half in Brazil? Although you said something about that when you talked about provisions. And the second question is quality in Brazil. When are we going to see the peak? How is that going to perform? But you also already mentioned that, but perhaps you'd like to elaborate, because there are several questions on that.
Alfredo Sáenz Abad
Yes, I could say a bit more on that. In Brazil, clearly, the top part of the statement is really good, really good, again. Better than our competitors, which means that the bank in terms of its vitality and its retail capabilities and business growth and so on is performing really well, its fee income clearly much better than the -- in fee income slightly worse than the competition, net interest income much better than the competition in overall, so very good. Although, as I said, the macroeconomic context in Brazil in the first semester was not very good. So in that -- with that excellent top part of the statement, we think that the second half of the year will show much better results, because that's how part of income statement we'll continue to grow strongly. It's only the bottom that will pay based on provisions. And as I said earlier, what we expect in the second semester is for provisions to improve. We are -- we've been saying this because we have seen clear indications of this improvement in NPLs under 90 days in the second quarter. That is any irregular loans and before 90 days have improved by almost 40 basis points versus Q1. And this kind of early warning system, which lets you know what will go into default the following quarter. And that is why we're saying that we expect less NPL entries in Q3 and therefore, lower provisioning needs. So that's basically the concept. And this together with the improvement in the macroeconomic context brings us to this positive outlook for the second semester, Q3 and Q4.
Right, and to finish with risks, there's a couple of questions from Britta Schmidt from Autonomous, who's asking do we expect any more PPI charges in the U.K., both in 2012 and for the future? We've said that we've provisioned everything for the PPI charge already, so we don't expect to have to provision any further than we have already.
And I'm told that there have been several questions about the fully loaded Basel III effect on our capital. And again, it's 20 basis points, approximately. These are estimates, because the regulation is not enforced yet, but about 20 basis points, 15, 20 basis points a year, of which I said 3/4 could come from the DTA impact based on what we use up on coming years.
As for the different business areas, specifically, other than the questions we've already answered, starting with Spain, there's a question from Alex Pelteshki from ING about the different trends in deposits in Santander and Banesto. How do we explain these different trends? And what do we think about volume growth in lending in the future?
Alfredo Sáenz Abad
Well, if we -- on deposits, if it's true that in the first semester Santander grew in deposits much more than Banesto but also much more than anyone else in the system. As we said in the presentation, Q1 -- sorry, the first semester was very good for deposits for Santander for different reasons, which I won't repeat, but which have already reviewed. In Banesto's case, there's basically a problem with policies. During Q1 and even in April until May, Banesto had a funding policy that was very focused on profitability and, therefore, reducing the cost of funding. And as consequence of that, it didn't grow very much. In fact, it lost volume in that context. But since May, Banesto changed its policy, I mean [ph], May and June, speaking about Q2. But actually also in July, already Banesto has been growing its deposits strongly. But again, it's the consequence of a deliberate strategy to reduce its costs and also a very comfortable liquidity position in Banesto's case, which required no special props, and so, therefore, it was a deliberate choice. But now its strategy has changed in May, as I've said, and starting in May, we've begun to see a growth of almost EUR 800 million a month in the last 3 months.
Okay. As for lending, Matteo Ramenghi from UBS is asking about the growth in lending. There has been some growth in lending in the Santander network, a slight fall in the number of loans, but I suppose he actually means whether there's any public sector component in that growth, since at the group level, there's a EUR 5 billion growth. The group level in Spain, there's EUR 5 billion increase. Can we explain the mix behind that growth in lending, especially public sector component?
And second, since we were talking about lending and deposits, Daragh Quinn is asking about the evolution of net interest income in Spain in the Santander network, the reasons for that positive trend and our outlook for the future. I think this last question has already been partly answered, but perhaps you could give an outlook on the evolution of net interest income in Spain.
Alfredo Sáenz Abad
Can you ask the question again? Sorry, I was talking and I missed it.
Two parts, first about the growth or rather the drop -- the total volume of loans has dropped, but our -- there's been a rise in our exposure to the public sector.
Alfredo Sáenz Abad
Right. In part, the growth in lending in part is due to the funding of suppliers for local government.
Yes. And the second was about net interest income, our outlook for the coming years, for the coming months or year, why it's been improving so much in the Santander network and in Spain in general. And the second part of the question is our outlook for the coming quarters.
Alfredo Sáenz Abad
Well, I think for Santander, I explained that a little while ago. I'm not sure what the question was. But in the Santander network, you have the effect of the growth in deposits plus the improving spreads on loans, and as a result, net interest income grows significantly. In the rest of the year, the trend will continue in the same direction.
Right. And to finish Spain, the question about the rising loans to the public sector. Yes, it is a EUR 5 billion increase, and the EUR 4 billion, that's because of our program for local councils to pay their suppliers.
As for the U.K., Alex Pelteshki, Ignacio Cerezo -- from ING -- Ignacio Cerezo from Credit Suisse and Francisco Riquel from N+1 are asking about net interest income in Santander U.K. Can we give some idea why it's fallen? Is there any sort of funding pressure? Can we give some outlook on the quarterly minimum and how we expect it to evolve in the next quarters?
Alfredo Sáenz Abad
Right, in the U.K., net interest income in the second quarter fell. And it fell basically for 2 reasons, and I'll explain how we see it in a minute. It fell because there's been issues, issues that we are replacing short-term funding with long-term funding, and that's more expensive. And it's almost EUR 35 million in the quarter for the U.K. And a similar amount is the cost of deposits. In the U.K., there's been 2 factors, a very special ISF campaign, which always takes place in April, because it's a product -- tax product, and there's always a lot of competition for that. And this year, specifically, Santander U.K. was able to attract a lot of deposits through this campaign and some more aggressive price policy, more aggressive for 2012, because in 2011, I won't say names, but there was another very big retail bank that was aggressive and made us lose market share. We have now regained market share by being a bit more aggressive in attracting deposits in the first semester of 2012. We had the ISF campaign, which was very successful, and that has brought up the cost of deposits, that GBP 30 billion or GBP 40 billion. And looking ahead, I've explained recent developments. We feel that net interest income will probably continue to fall slightly in Q3 and will stabilize in Q4. So that's our outlook today, a higher cost of wholesale funding because we've moved EUR 25 billion from short term to medium term, plus what I said the reason for that. As for the bottom line, standard recurring profit will be somewhere between Q2 and Q3. will be improving somewhat in 2013, around then, around an amount halfway between what we made in Q2 and in Q1. And that will be in the next 2 quarters, more or less. And then after that, it will grow again. And if you remember what we said during our Investor Day in London in September, we spoke about that smile-shaped curve in the U.K. results, and that is the curve that we are seeing, a slight slump initially and then a turning point in recovery after that. And that's what we're seeing and all I can tell you for now.
Moving onto Brazil. There are 3 questions, all about net interest income. On the first is Juan Pablo López from Espirito Santo, how do you think net interest income will evolve in the next quarters? Also, Daragh Quinn from Nomura is asking whether we can give some kind of outlook for net interest income and revenues.
Second question for Brazil. Alex Pelteshki from ING is asking about volumes. Can we give any guidance on growth for the rest of the year and for the industry in general? And the third is whether there's any sort of strategy, José Ignacio Cerezo from Credit Suisse, do we have any sort of hedging strategy for our Brazilian net interest income? And what time, and how do we see hedging our net interest income in Brazil?
Alfredo Sáenz Abad
Well, I think I've answered in quite a lot of detail about the Brazilian net interest income, past performance and outlook, both fee income and net interest income. And I think I said most of what provisions we'll do in the coming months. So basically, I think I've already answered that question, and perhaps José Antonio Alvarez could say something about our hedges.
José Antonio Álvarez
I suppose he's referring to an interest rate hedge. I said before that we had EUR 15 billion in sovereign bonds, and that's the basically the hedge. And that covers the bank again to any fall in interest rates. And that's generally up to the maturity of those bonds, which tends to be about 3 years.
Okay. Well, that concludes all the questions. I hope that we've answered all the questions that came in over the Internet. There are no questions over the phone. So again, thank you very much for your attention. See you next quarter.