Banco Santander, S.A.
Q3 2017 Earnings Call Transcript

Published: 26 Oct 2017

[Sergio Gámez Martínez:]

Good morning, everyone. Thanks for joining Q3 Earnings Presentation. As every quarter the group CEO will address the group key topics and our messages and after that the CFO will address our, on a business by business unit, the details P&L, balance sheet wise, and the main commercial and financial trends as well. Obviously, we'll have plenty of time for your live questions. And the IR team will be at your disposal in case of any follow-up afterwards. So, with no further delay, José Antonio, the stage is yours. Thank you.

[José Antonio Álvarez Álvarez:]

Thank you, Sergio, and good morning to everyone, and welcome to this presentation of the third quarter results. As usual, we have in the presentation, three parts. The first one, I'm going to elaborate about the group figures. Afterwards, José, our CFO, – José Garcia Cantera, our CFO will go through the main areas of the group, the main subsidiaries. And finally, I will make a very short sum-up of the – how we're progressing in relation with our targets that we confirmed to you or established to you in the recent Global Strategy Update in New York. Starting with the figures for the nine month, the first nine month of the year, what we have is the profit generation which progressed in a solid way, I will say. The attributable profit for the group was slightly above €5 billion, to growing up 10% with an underlying profit of €5.6 billion that after the charges we took in the quarter, we took in this quarter, all the restructuring charges that we expect for the whole year. The underlying profit grew 14% in constant euros comparing with the same period in 2016. This allow us – the quarter was good in capital generation. Organic capital generation was pretty strong, 16 basis points in the quarter. I will elaborate later on this. The return on tangible equity profitability keeps growing. We are approaching the 12%. And as a result of this, the EPS is growing at 6%, taking into account the number of new shares we issued to buy Popular. And finally, tangible net asset value per share is progressing as well, relatively well. At the end, these numbers is the result of what I qualify as a good progress in our commercial transformation that probably is reflected in the number of clients. You know that at the core of our strategy is to increase the number of loyal customers, at the same time progressing in our digital transformation. Those numbers reflect exactly this. We are progressing well in the number of loyal customers, growing double digit, both in individuals and companies and the digital customers grew more than 1 million in this quarter. So, we are progressing well towards our targets. And this has a translation into the P&L where the NII, the net interest income is growing at 7%. The income growing at 10%. That probably is the best – the number that reflect the best the progress in the loyal customers. While in the figures in the balance sheet we're growing well in customers funds, not so much in the loan book. This is also affected by a more capital lighter model in the GCB business, where the loan book is falling, and this is something that we are looking for to have a lighter capital model, business model in GCB. Finally credit quality, significant progress. This number – the number went down 64 basis points this quarter. This reflect the disposal of the real estate related activities into Spain to Blackstone that we agree two month ago. The cost of credit keeps falling, and is already in line with our targets has been in the previous quarters. We don't see any concern at this point of time. Let me just explain the restructuring charge in the quarter, (00

[José Antonio Garcia Cantera:]

Thank you, José Antonio. Good morning, everyone. Like always, I will start by showing the breakdown between emerging markets, the developed markets, Europe and the Americas in our business, which roughly is 50/50. It remains pretty similar to previous quarters. We have added Popular, but emerging markets are growing a bit faster than developed economies. So, roughly, we continue to keep the diversification very much intact. Before I go into the details of the major units, just a general comment. You will see a widespread improvement in the number of customers, asset quality, efficiency and profitability. In Brazil, we have another excellent quarter. Our strategy to gain new customers and to deepen the relationships with these customers is yielding very positive results. We're gaining market share in loans and deposits. In the margins, as you know, we are positioned to lower rates in Brazil, so we are benefiting from the drop in interest rates. But we are also managing much better the cost of funding as we substitute wholesale funding deposits by customer deposits. Fee income also growing very well, particularly in our credit card acquiring business. A slight increase in costs basically associated to two factors

[José Antonio Álvarez Álvarez:]

I'm not going to take more than a minute to you and we'll go straight to the Q&A. It's just more than to remember the numbers that we gave you in the strategy update that we have had only two weeks ago. The overall picture of the bank, I will say, is good and the macro is definitively helping in the emerging markets and we're heading towards little by little slightly higher rates probably in mature markets already in the States, probably relatively soon in UK and maybe depending on what is bid/ask in Europe in the coming future. So, this is an environment that we can work in a constitute way and continue to deliver good results in this environment. You have here the figures. We confirm to you the targets. We increase the target for return on intangible equity in the coming years and this allow me to be relatively optimistic about the outlook of the group for the coming quarters. And now, without any delay, we go straight to the Q&A. Thank you.

[Sergio Gámez Martínez:]

So, please, operator, we can kick off this Q&A session.

[Operator:]

Thank you very much. Ladies and gentlemen, the Q&A session starts now. The first question comes from Jose Abad from Goldman Sachs. Please go ahead, sir.

[Jose Abad:]

Yeah. Hello. Good morning. I guess the first question, and I'm sure for this I think relates to Q4 and probably beyond. And if you could comment about how the Catalonia related pensions are actually impacting your business or the way you see your business evolving before year-end, so in Q4 and also into 2018 in the form of potential actual deposit inflows or inflows in your asset manager. The second question relates to the UK. Given that we are getting ourselves into a new rate hike cycle in the UK, could you please remind us about your rate sensitivity in the UK? Thank you very much. Bye-bye.

[José Antonio Álvarez Álvarez:]

Okay. In relation with the question, in relation with the political situation in Spain, particularly in Catalonia. Well, probably this is too early to call. Yeah. So, what is for sure is the longer it takes to settle the situation, the higher the impacting in the overall economic activity. And being that the case, probably then will affect also our activity. It's probably too early to talk about changes in the forecast. The government produced some figures. So 30 basis points lower growth next year. There are independent analysts who think higher figure on this. Probably it's too early to say. Definitively, is not good and the longer it takes, probably the worse for the outlook for the business, not only in Catalonia, where our exposure, as you know, is relatively low. It's more to Spain, what the potential impact in overall Spain that may affect us more. In relation with the rates, José, do you want to elaborate in the UK?

[José Antonio Garcia Cantera:]

Yeah. A 100 basis point increase, but this is a 100 basis point increase in – parallel upwards in the entire interest rate curve would bring in approximately £500 million of higher revenues.

[Sergio Gámez Martínez:]

Thanks, Jose Abad. Next question please.

[Operator:]

Thank you. The next question comes from Carlos Cobo from Société Générale. Please go ahead, sir.

[Carlos Cobo Catena:]

Hello. Thank you very much for the presentation. One quick question on MREL and something you explained in the strategy today. You said that MREL will be a higher requirement in terms of the proportion of risk-weighted assets, but the eligible funding or instruments will also be higher. Did you imply that the senior debt will be eligible for MREL? Is this your view, or guidance from regulators when you compare MREL with TLAC requirements? Thank you. And secondly, quickly, on Poland, we've seen a couple of big players in the market exploring consolidation. Clearly, as you said, the impact on the banking costs were higher. What's your view in Poland from a strategic perspective? Are you interested to consolidate all the competitors, or even to explore a disposal in this integrating market? Thank you.

[José Antonio Garcia Cantera:]

In terms of MREL versus TLAC, the calculation of the requirements is different, and also the base on which to calculate the requirements is different. However, we don't have the final requirements in MREL. So we are just reacting to what has been mentioned in the markets and the different working papers that are being discussed in Europe. In these papers, we see a higher risk-weighted asset requirement than in TLAC, but also higher MREL liabilities. Part of that, higher liabilities, is senior debt, like you said, but it's also the wording of the debt instruments that are eligible, that also makes the difference. So it's a combination of type of instrument, but more importantly it's the wording of subordination of those instruments that is different in the two MREL and TLAC requirements.

[José Antonio Álvarez Álvarez:]

Question in relation with Poland. First, Poland is for us one of our 10 core markets. Being that the case, the general policy applies to Poland in relation with consolidation. So, if we find opportunities at the right price that provide the right return for our shareholders with the rules that we established at (00

[Sergio Gámez Martínez:]

Thanks, Carlos. Next question, please.

[Operator:]

Thank you. The next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead, sir.

[Alvaro Serrano:]

Hi. Got two questions, one on Brazil and one on Banco Popular. On Brazil, obviously the NII is up very nicely in the quarter. I just wanted to understand if you can give us a bit more color – obviously, benefited from the reduction of rates, we had another 75 basis points cut. Is – going into next year, I realize you've guided for double-digit profit growth at the Analyst Day for next year. But margins, strictly margin-wise, if you look at the NII, are we going to see at some point, when rates stop going down, the NII actually fall sequentially? Are you going to be able to grow – if you can give us a sense of what kind of growth we could expect in 2018, and what are the offsets on loan growth versus potential margin tieration? And then on Popular, if I look at the Q3 standalone, as we model next year with the disposal of the Blackstone portfolio, how do you think that will affect – if you can give us at least some broad thoughts, how do you think that will affect the NII, the lower funding costs, because you've got the real estate now deconsolidated? And if there's going to be any significant deconsolidation of costs that will go to the vehicle, to the Blackstone vehicles? Thank you.

[José Antonio Álvarez Álvarez:]

Okay. First question, Brazil NII, color going forward, what's going on there? So, well, what we had in the quarter, probably the main change compared with the previous quarter is we saw higher growth, particularly on the consumer side. It's true that is quite specific probably from Santander, because we are gaining significant market share in several key markets, in key settlements in Brazil particularly we are gaining market share in acquiring business, we are gaining significant market share in payroll-based lending, what they call consignado. We are also gaining share in auto lending, and that's where the growth comes from. When you look at the other side, the corporate and GCB business, we are not growing on – I mean, in the asset side. On the loan book, we are not growing. In fact, I think we're flat or slightly down in the quarter. So, what we are seeing is a good developments on the more individual-related business, as still the corporates and global corporate banking is not growing. You mentioned the reduction in costs. It's true that we have some ALCO portfolio there, that with the reduction on rates, we are getting higher NII coming from this. But the main impact comes from the volume growth on the lending side, particularly in relation with consumer finance and auto lending and payroll-based lending as I said before. Going forward, well, this year, Brazil may grow around 0.5%, 0.7%. Next year, forecasts are getting better and better. Probably, we may expect some, probably growth between 2% and 3% in the country. This should allow us to grow faster the loan book, probably with lower rates. I will say, the NII coming from the ALM portfolio will be, compared with this year, probably pretty flattish, yeah, so because the portfolio stays there. And probably, the game in the future is about, in Brazil, if my view about the country is right, it's probably a game between significant growth in volumes. The leverage is still relatively low with some margin pressure. As you know, the spreads are relatively high in some segments, some margin pressure coming from this side. The fee income, that, as you saw, grew relatively well and probably, we won't be able to give the 20%, yeah. So, the 20% we're showing this year is difficult in any case, but I am relatively optimistic about to show significant growth in the fee income going forward due to the volume – the business is growing all across the board. And the franchise, I've been telling you, I don't know how many quarters, the franchise is now in a better position to compete head-to-head with our main competitors, Itaú and Bradesco, yeah. Banco Popular model for next year, well, what is going to – the effect of the disposal. Well, since the day we bought Banco Popular, several changes, restructural change had happened in the balance sheet. The first one is we increased the deposits by €10 billion. We'll inject €7 billion capital. And we're going to dispose around €10 billion of assets. So that means altogether that we're going inject to the bank €30 billion cash. So, €10 billion higher deposits, €7 billion capital and €10 billion from the disposal of the real estate related assets. In these days, to have such a big amount of cash, such a big assess liquidity probably is not good news from the NII point of view. But on top of that, this is a fact that will structurally affect the balance sheet. What is important from the real estate deal, you have this effect. On the other side you have an effect of reducing – increasing the capital ratio, reducing the risk-weighted assets. And you have an effect on cost that we still are still work in progress because we are finalizing with our partner in the real estate, how many means, meaning people and operational people to manage all the real estate assets is going to leave Popular perimeter, let's say, to go to a new company. Sorry, I cannot give you a specific figure for this but some figure is going to happen there. And more important than this figure that is not going to be very relevant in terms of cost is going to be the other costs. Meaning, the maintenance cost, the taxes related with all the repossessed assets that were there and this should be a significant figure.

[Sergio Gámez Martínez:]

Thanks, Alvaro. Next question please.

[Operator:]

Thank you. The next question comes from Sofie Peterzens from JPMorgan. Please go ahead.

[Sofie Peterzens:]

Yeah. Hi. Yeah. Here is Sofie Peterzens from JPMorgan. Just going back to Brazil, I was wondering, your asset quality is improving there and coverage on NPLs is pretty strong just under 100%. How should we think about cost of risk going forward? It has now come down to 450 basis points. Where do you see it going in the next 12 to 24 months? And then my second question is also around asset quality. There was a paper out by the ECB a few weeks ago from the beginning of next year, all the unsecured NPL should be fully provisioned within two years and secured NPLs within seven years. How do you think about this and what impact should we expect if any on Santander? And then if you could just give a quick comment on mix figure, what the outlook is, how do you think about growth and cost of risk going forward. Thank you.

[José Antonio Álvarez Álvarez:]

So, first question, cost of credit in Brazil. Well, as I said, the macro outlook is improving. We expect a significant or a substantial reduction in the cost of risk, particularly in the corporate and global corporate banking business in Brazil. On the other side, the mix is shifting from corporate and ECB towards more consumer-oriented kind of businesses. So overall, although the environment we expect from the (00

[Sergio Gámez Martínez:]

Thank you, Sofie. Next question please.

[Operator:]

Thank you. The next question comes from Francisco Riquel from Alantra Equities. The floor is yours, sir.

[Francisco Riquel:]

Yes. Hello. Thank you. Wanted to ask about NII in Spain, if you can comment if you have made any changes in the loan portfolio during the quarter, and an update on the ALCO portfolio. When do you expect the loan deleverage to end? And if you can give any guidance on margins in Spain, what shall we expect before interest rates start to rise? Also, on the UK, NII excluding the one-off in the second quarter has gone up in the third quarter and it was expecting a decline, the SVR attrition, et cetera. So, if you can comment also margin dynamics in the UK before interest rates rise there. And sorry, just last technical question. In Corporate Centre almost no tax shield, if there is anything extraordinary here, thank you, on the tax rate in the Corporate Centre.

[José Antonio Álvarez Álvarez:]

Okay. NII in Spain, I will elaborate on the commercial side. I will pass to José to elaborate on the ALCO portfolio. Well, overall, in Spain what we have is a pretty stable situation, yeah. So, after many quarters of margin compression on the front book, we got to a point in which – well, we are not seeing margin compression in the front book. What we continue to see naturally is the Euribor, one year Euribor getting lower and lower, and this affect the repricing of the portfolio. But in the new activity, we are not seeing a significant – we are not seeing a more margin compression. Do you want to elaborate on the portfolio?

[José Antonio Garcia Cantera:]

No, no. There were no changes in the ALCO portfolio in the quarter.

[José Antonio Álvarez Álvarez:]

Some in Popular.

[José Antonio Garcia Cantera:]

Yeah. Not in Santander. Not significant changes. We remain with a €26 billion, €27 billion portfolio with an average yield of around 1.7%. We sold some bonds, some Italian bonds that Popular had in its portfolio in the quarter. But other than that, there were not any significant changes that would affect net interest income in the future.

[José Antonio Álvarez Álvarez:]

The second question, Paco, was about NII UK. Well, you mentioned the key points as we are. Attrition continues to be at the pace we were expecting. The front book was quite constructive in the quarter. It's not that much now. As a result of the changes in the yield curve in the UK due to the new expectations of increasing rates. What has happened and we haven't repriced the front book, so you compare the new rates with the new yield curve, you have lower spread then, but this for the new applications that will come to the book eventually in January, February next year. There is a three-month delay. We expect probably some increased competition, particularly in the mortgage sector. On the others, we are not seeing any change. We are progressing relatively well or very well in the commercial side of the business, in SMEs and we are progressing very well in GCB. So, those business are gathering momentum. Well, are still small but every quarter represents more in our P&L. The interest rates we elaborate already in the impacting in this. There are no tax in the Corporate Centre. Basically we are being conservative and not taking tax rate on the Corporate Centre.

[Sergio Gámez Martínez:]

Thanks, Paco. Next question please.

[Operator:]

Thank you. The next question comes from Ignacio Cerezo from UBS. The floor is yours, sir.

[Ignacio Cerezo:]

Ah, yeah. Hi. Good morning. Couple of questions on around Popular if you want. First one is if you can share with us in terms of the composition of the P&L versus the main announcement you made back in June, without broadly changing your (00

[José Antonio Álvarez Álvarez:]

Okay, the question about – so probably it's too early to have a – naturally, so a potential business plan for the joint venture we're going to have with Blackstone that we plan to incorporate in January, February next year. But probably is not in a stage of elaboration that we are in a position to share with you. And as you know, we're not going to match this company. But naturally, you can play with the numbers that a private equity normally does in these kind of deals. You are very familiar with these kind of numbers and apply to us the 49% and you have a proxy about the expectations. I don't have, at this stage, a number to share with you because it's responsibility of Blackstone to come with a business plan for this company. But naturally, we expect some profits coming from this. This is not going change, now, our outlook for the next three years for Banco Popular or Banco Popular-related business if you include the joint venture with the Blackstone.

[Sergio Gámez Martínez:]

Thanks Ignacio. Next question, please.

[Operator:]

Thank you very much. The next question comes from Benjie Creelan-Sandford from Jefferies. Go ahead, please, sir.

[Benjie Creelan-Sandford:]

Yeah. Morning, everyone. First of all, maybe just to go back to Popular again. I mean, if we look at the underlying result in the quarter, it is already running quite far ahead of the 2018 target profit level that you gave in June. So, just wondering whether you had any further comments around your expectations there or what's surprising positively in the results to date? And then, a couple of quick questions around asset quality. If we look at the UK, the NPL ratio ticked up quarter-on-quarter very slightly, but I was just wondering whether you were seeing any meaningful change of trend there. And also, if we look at the consumer division in Continental Europe, there was an increase in loan-loss charge this quarter. I mean, again, that's still at very low levels, but I was just wondering whether you expect that to continue to tick up going forward or whether or not it's just a one-off in the quarter. Thank you.

[José Antonio Álvarez Álvarez:]

Popular, we are not changing. As I said before, we are not changing our expectations for Popular and we confirm to you the numbers we gave to you after the acquisition. NPLs in UK was nothing new, wasn't a specific case coming from GCB. That is the main difference in the quarter. Nothing has changed in the main portfolios. And in relation with consumer finances through where you say the charges in the quarter were higher, but it is worth view that in second quarter we dispose. And probably we mentioned to you some nonperforming portfolios, and this makes the difference. We are not seeing, as of today, any change. The scenario, as I mentioned in, overall for the group, and specifically for consumer and finance, continue to be quite benign.

[Sergio Gámez Martínez:]

Thank you. Next question, please.

[Operator:]

Thank you. The next question comes from Ignacio Ulargui from Deutsche Bank. The floor is yours, sir.

[Ignacio Ulargui:]

Hi. Good morning, everyone. Just have two questions. One on the restructuring charges that we could expect for Popular whether this, you can confirm that you have done already most of them or we should expect any additional charges into fourth quarter. And the second one is just regarding consumer finance unit. What do we expect in terms of cost going forward after the restructuring charges you have done in Germany? Thanks.

[José Antonio Álvarez Álvarez:]

Well, in Popular, we don't expect any restructuring charge, any further restructure charge this year. I mentioned to you that we're going to have round number €300 million net of taxes per year. 2017, 2018 and 2019 is our expectation. If we change, we will tell you. And other charges in the fourth quarter, the only thing that every year eventually may come in the fourth quarter is the assessment that we do of all the goodwill that we have in the subsidiaries that we perform this analysis in November. And if some comes, it go to the four quarters. It's the only thing that – but I do not expect any additional restructuring charge in the fourth quarter, that is your question. Germany, well, there's a reduction in costs here. Let's say, the payback we are estimating here, is slightly below two years. This will give you an indication of the reduction in cost that we expect there.

[Sergio Gámez Martínez:]

Thanks, Ignacio. Next question.

[Operator:]

Thank you. The next question comes from Carlos Peixoto from Caixabank BPI. Please go ahead.

[Carlos Peixoto:]

Hello. Good morning. I was wondering if you could give us some further indications to begin with if you reiterate the impacts on IFRS 9 for the bank. Particularly in here with the impact on IFRS 9, I'm referring both to the impact that it will have on capital, for both capital and also on the provisioning side. And also on the U.S., if you could give us your views on your expectations for the evolution of NII into 2018 and also for cost of risk? Thank you.

[José Antonio Álvarez Álvarez:]

Well, his question related with the run rate IFRS 9. IFRS 9, the original impact I told you, probably told you in the previous quarter, that for the group before Popular was in the region of 15 basis points. With Popular, probably we go to the region of 20 basis points is the one-off impact at the beginning of 2018. Afterwards, you asked us the impact afterwards. Well, this naturally, as you know, IFRS 9 relies on models. Depends on the macro outlook, that may change and add some volatility quarter on quarter. What kind of volatility? If this is more of downward, depends on the models and mainly on the macro outlook for the different business countries in which we operate. Sorry I cannot be more specific than that. This is basically the rule, and we will apply the rule. The other question was about U.S. NII and cost of risk. Those are closely related. In NII, I am gladly optimistic in the bank. And as we (00

[Sergio Gámez Martínez:]

Thank you, Carlos. Next question, please.

[Operator:]

Thank you. The next question comes from Mario Capairo (00

[Unknown Speaker:]

Hello, good morning. And my first question is related to the real estate unit in Spain. José Antonio was mentioning that you expect a material reduction in the stock of foreclosed assets by the end of next year. I was wondering if you can give some color on when you expect this unit to reach breakeven, also considering that you are expecting some profits on the deal with Blackstone. And then my second question is on the coverage, NPL coverage in Spain, which is 58%. Are you considering, given the high coverage, a potential deal to dispose a large chunk of NPLs? Or otherwise, do you think that this coverage is too conservative, considering the average for the industry of around 50%? Thank you.

[José Antonio Álvarez Álvarez:]

Okay, real estate unit. What I mentioned is the €5.9 billion net volume that we have in real estate related activities, I expect at the end of 2018 to be not material. This means that we expect to dispose this and to continue to manage this in a way that we reduce this to be nonmaterial and to reduce the cost on this side. This is our expectation. Naturally, as you know, we have a lot of exposure. Some of them are listed companies like Merlin. Some of these are already are independent, professionally managed by third parties in which we have a stake, let's test them after what they said that we continue to match, and we will see. I am fairly optimistic on, first, reducing the capital that we deploy there. Second, make some capital gains on the stakes going forward. Coverage in Spain, it's okay. I will say we are disposing basically our marks, taking into account the cost. We are making some gains there. But basically, those gains are enough to pay the costs. I remain – well, actually the coverage is the one, we think, that we should have, naturally.

[Sergio Gámez Martínez:]

Thanks, Mario. Next question.

[Operator:]

Thank you. The next question comes from Britta Schmidt from Autonomous Research. The floor is yours.

[Britta Schmidt:]

Yeah, hi there. I've got two questions, please. Going back to the Spanish balance sheet, conceptually, loan volumes are still declining, the funding side (00

[José Antonio Álvarez Álvarez:]

Well, loan volume, you mentioned, the loan volume not growing and deposits growing. As a result, the cash balance increasing. That's the case, and there's some embedded cost that is in the Corporate Centre. Yeah, in the Corporate Centre, we are running significant amounts, large amounts of cash in our balance sheet, that costs us money at this point of time. In the future, well, in the future, it depends what you call future. Future, I expect the rates to start to normalize somehow in the future. In the meantime, we need to match properly both assets and liabilities. That means that in some cases, we need to reprice downwards some liabilities, particularly wholesale liabilities that we probably have are still going to reduce the cost of those liabilities. NPA, non-performing assets disposal, are up to what point the effect of the political situation going on in Spain may affect the disposal of those assets? Probably to close a deal in this stage is difficult, but I said before, if I didn't say it before, I think that the situation is going to settle rather sooner than later. And we're going to go to back to normal business, and we're going to continue to dispose. The market is in pretty good shape. The demand is there. And all the news this morning, we got the employment survey and the numbers were simply good in the third quarter. Yeah? So, the underlying economic situation before this crisis was extremely good, probably this affecting 20, 30 basis points, 40 basis points, but the growth continue to be good and the real estate continue to be in good situation to dispose us. And we've seen even this month in the middle of the crisis some companies going to market I think with pretty good demand.

[Sergio Gámez Martínez:]

Thank you, Britta. Next question?

[Operator:]

Thank you. The next question comes from Stefan Nedialkov from Citigroup. Please go ahead, sir.

[Stefan R. Nedialkov:]

Hi, guys. Good morning. Stefan from Citi. A couple of questions were asked already on margins. I just wanted to dig a little bit deeper. Mexico, Brazil, U.S. margins, it looks like the client component is either stable or improving, but in terms of the sort of non-client component with wholesale funding, also wholesale income from ARPU portfolios, very different trends. So just looking for example at Mexico, it looks like the net interest margin increased a lot more compared to what the client margin would have suggested. Can you just give us some color? Is that driven by a much better wholesale funding cost, or is it something else? In the U.S., similarly, you did mention that the yields in Santander Consumer should be trending down because of the lower risk in the portfolio, but it does look like the NIM actually fell a lot more compared to what the loan yields would have suggested. So that just makes me think wholesale funding costs for Santander Consumer are going up quite significantly. Again, if you can give us some color on that and what that means for the future? And lastly, in Brazil, client margin stable, ALCO gains seem to basically have driven pretty much the entire improvement in the margins. When would ALCO gains taper off? Are we talking once the SELIC (01

[José Antonio Álvarez Álvarez:]

Starting with Mexico that you mentioned before, in Mexico, the main driver of the NII has been the liability side, yeah. So, we've been growing for years and still this year in double digit in demand deposits and when the rates went up, we were able to extract a significant increase in the NIM, in those deposits. Also in the four quarter last year, we were relatively aggressive in taking time deposits and we profit from those time deposits in this year. I don't see a particular role for the wholesale funding here in Mexico in the trends, in the NII. It's more the management of the liability side of the balance sheet what produced this outcome. In Brazil, second point was as I said to you going forward, until now has been – probably in the last explanation I didn't say anything about liabilities but our liabilities we match. The team in Brazil has been able to match liabilities in a much more effective way and the part of the balance sheet where the net interest income is growing the most and interest margin is in the liability side, also in Brazil. What happens in the liability side, we are growing the margins at 40% or 40 something percent while in the asset side, it's much less. Naturally, the weight of the asset side is much larger than on the liability side. Going forward, I remain optimistic in keeping relatively higher margins than in the past than – in Brazil than we had in the past but not to go up again, yeah. So, this is kind of one-off that becomes recurring but not – in the future, the growth will depends more on the volume of liabilities. That is growing very nicely. You look at the saving accounts are growing at 11% and time deposits are growing at 26% or something like that. They are growing in a strong way. So, I remain relatively optimistic about NIM, net interest margin in Brazil in the liability side to keep what we got. On the asset side, the NIM probably is fair to assume that we're going to have some margin compressioning, extremely high margin segments and we rely more on the volumes. So, overall, I think that we can keep growing but more in volumes than in the spread as we did in the past. In the U.S., you elaborate about SCUSA, U.S. In this case, the wholesale funding cost that you mentioned play a role, naturally. So, as a result of the increasing rates in the U.S., the wholesale funding, as you know, this business, the wholesale funding is important. It's not the case in Brazil and Mexico. In this case, it's important. And the higher rates play a role in the reduction of the net interest income probably I missed when I explained before. I was focused more on the yield and not in the margin. The margin – the wholesale funding costs went up clearly in SCUSA and this affect the NIM in this business. Going forward, well, at some point, I do not see a situation in which we are not able to pass these increasing rates to the front book. So I remain relatively optimistic that we're going to be able to pass the increasing rates to the front book but well, it stood at the beginning, the wholesale funding costs in past due faster than you are able to reprice the front book.

[José Antonio Garcia Cantera:]

If I may, (01

[José Antonio Álvarez Álvarez:]

Yes. In fact, the losses we are facing when we process cars are lower than the ones we were estimating before hurricane due to this but secondhand car prices went up slightly compared with our expectations and what was embedded in our assumptions, yeah.

[Sergio Gámez Martínez:]

Thank you, Stefan. Next one please.

[Operator:]

Thank you. The next question comes from Rohith Chandra-Rajan from Barclays. Please go ahead, sir.

[Rohith Chandra-Rajan:]

Hi. Good morning. I've got three fairly quick ones hopefully. The first one was just on Brazil. I mean, you've talked about the margin and the credit quality quite a lot. I just wanted to check on fees where you indicated the 20% growth unlikely to be sustained but fees were pretty much flat quarter-on-quarter. I was just wondering if there's any particular seasonality there that we should think about. So, that was the first one. Second one, on UK cost of risk. Again, you sort of explained the NPL ratio increases relating to a single corporate exposure. I guess you probably have a fairly good line of sight over the next couple of quarters and the UK economy looks in reasonable shape. So I was wondering if there's any reason to think that the cost of risk would rise from the low-single-digit basis points that you're currently still seeing in the UK, at least in the next few quarters. And then, the final question was just on Blackstone. You deconsolidated the assets. But as far as I understand, the deal has been agreed, but not yet completed. I just wonder if there's any risks there that we should be aware of in terms of the completion of that deal and the assets of staying off balance sheet? Thank you.

[José Antonio Álvarez Álvarez:]

The final question I don't see any reason not finish the deal with Blackstone. The first one, you elaborate about the fee income in Brazil, where we're growing at 20%. Naturally, we're going to keep growing our goods relating fees, but not at 20%. And those fees related with the volumes, for example, in mutual funds we are optimistic, in insurance we are optimistic, not that much – I see lower growth in those fees related with, let's say, inflation. Inflation went down from 9% to 2% in Brazil and probably going forward, what makes sense is those fees related with more services. Probably going to grow less than they have been doing in the last two or three years. In UK cost of risk, for the next couple of quarters, well, we are not seeing – every year, we -because of risk so low currently in the UK normally, we always budget higher cost of risk because it currently is very low. But do we have reasons to think in a significant different scenario than the one we have today? Not in our book. Our book, as you know, is mainly mortgages, high quality mortgages, similarly lower NPLs with some consumer exposure but they're limited in the conservative side, in particular in auto loans. And the exposure to companies where probably is more difficult to forecast, to have a case like in one we had this quarter. Probably this is much more difficult to forecast. Maybe if something happens maybe comes from this side. In other sides, I don't see any new development.

[Sergio Gámez Martínez:]

Thank you, Rohith. Next one, please.

[Operator:]

Thank you. The next question comes from Marta Sanchez Romero from Bank of America Merrill Lynch. Please go ahead.

[Marta Sanchez Romero:]

Hello. Good morning. I've got two questions. The first one is on the SCUSA. You have almost €3 billion of goodwill. Is there a risk of impairment in Q4? And an impairment would be capital neutral, of course, but with the fact that the headline payout ratio of 30% to 40%, does the supervisor look at you on this basis or you think it's irrelevant given that the impairment has no impact on capital? The second question is on Santander Consumer Europe. We've seen some negative headlines over the past couple of weeks from auto lenders and producers in Germany. I'm trying to understand the potential risk at Santander Consumer. How big is your leasing portfolio? How big is the portfolio where you assume the residual value of the cars? Thank you.

[José Antonio Álvarez Álvarez:]

Well. SCUSA, €3 billion goodwill, we review. As I said before, I think that we review the goodwill of our every subsidiary in the fourth quarter in November. If something arise, we charge at the end of the year as we've been doing for years. So, you mentioned specifically to SCUSA. I am not in a position to tell you if SCUSA or if any other subsidiaries may have a goodwill charge. That may be the case, may not. The payout, well, it's true that we are now in an exercise in which we are generating capital and we deploy this capital in three parts, one third each one. One-third goes to dividends, one-third go to grow the business, one-third to build capital for the existing business. Naturally, I expect to be above 11% at the end of 2018. And beyond that, we gain flexibility on capital, yeah. Flexibility means that we can grow faster the business or who can pay more dividends but it's too early to call at this stage. And leasing in Europe, we don't have residual values in Europe, yeah, in the car finance business. We do have in the States, in SCUSA, where the portfolio of leasing is, I think, speaking by memory, $8 billion or something like that. While in Europe, we don't have residuals values in the car business.

[Sergio Gámez Martínez:]

Thanks, Marta. And last question now.

[Operator:]

Thank you very much. The last question comes from Andrea Unzueta from Credit Suisse. Please go ahead.

[Andrea Unzueta:]

Hi. Good morning. Most of my questions have been answered, but I just wanted you to go over your volume expectations in Spain again. You mentioned that SMEs have grown by €1 billion for Santander stand-alone but the loan book is still declining, so I was wondering when you expect stabilization. And also, if you couldn't reiterate the underlying tax rate in Brazil, please.

[José Antonio Álvarez Álvarez:]

Well, volumes in Spain – well, let me to split the loan book in two parts. One part that is a non-institutional, non-GCB business, that is already growing and I'm more optimistic on this. Probably, we are heading into some growth (01

[Sergio Gámez Martínez:]

Okay. We need to leave it here. Thanks, everyone, for joining this call, and obviously, the IR team is at your disposal for any follow up. Thank you.

[José Antonio Álvarez Álvarez:]

Thank you.