Banco Santander, S.A. Q3 FY2020 Earnings Call

Good morning, everyone, and welcome to the 9-month 2020 earnings presentation of Banco Santander. As every quarter, we have as speakers, our group CEO, Mr. Alvarez; and our Group Chief Financial Officer, Mr. García-Cantera. Our CEO will address the group performance for the nine months of 2020, and then our CFO will follow up with a business update review in more detail before a jump into the key takeaways of the quarter by our CEO, and obviously, happy to answer your questions during the Q&A session afterward. So José Antonio, please. The mic is yours.

Okay. Thank you, Sergio, and good morning to everyone. First of all, I hope that you and your families, friends, and relatives are doing well. Allow me to go straight to the third quarter results. I will qualify these results this quarter as a very positive quarter within the environment arising from the COVID crisis. We have significantly improved the quarterly trends in business activity and results. On activity, if the second quarter was pretty strong on the corporate side, the third quarter has recovered significantly, with the activity coming more from individuals. And this reflects in the underwriting of both mortgages and consumer lending, as well as the growth in deposits. The profit in the quarter was €1.75 billion, a 14% increase in underlying terms compared with the previous quarter, and 18% higher in constant euros. All the regions are performing better than in the previous quarter. In the first nine months, we maintained solid top-line performance. The pre-provision profit under this scenario, and I want to stress this, in constant euros, grew 3%, driven by resilient customer revenue and our cost reduction plan. In credit quality, I will elaborate later on in more detail, €76 billion out of the €115 million or €14 billion that we had in moratory payment holidays have already expired, and the behavior has been pretty good. Only 2% went into stage 3. While the future continues to be highly uncertain, for this year, at least, we expect a lower cost of return. The one we guided you in the first quarter was 1.4%, 1.5% cost of risk; now it’s probably going to be more around 1.3% for 2020. On the capital side, we continue to build capital with a strong capital generation of 40 basis points in the quarter after the dividend accrual of 13 basis points. This morning, in the AGM, we presented to shareholders who approved a scrip dividend of €0.10 per share on a cash dividend for next year, provided that the regulators allow us to do so. So if we go to the P&L, straight to the P&L, what we see is, first, as mentioned, the exchange rates had a significant impact in the quarter. You see that bolt-on revenues vary between 6 and 9 points in different lines of the account. This has been particularly strong in Brazil. Excluding the impact of exchange rates, looking at the business in constant euros, the income remained stable, as the decrease in activity and lower interest rates were offset by higher volumes, some management of market volatility, and lower costs of deposits. We accelerated our cost reduction, and we have good news, good perspectives for the coming quarters. As a result, our underlying profits show significant resilience, and net operating income rose 3% year-on-year in constant euros. Finally, higher loan loss provisions due to COVID-19 were more in line with the second quarter than with the first quarter, where we had the overlay that you already know. In the charts on the right, you can see how earnings peaked strongly in the quarter, with the following details. By lines, the revenue grew 7% quarter-on-quarter, with growth in net interest income being the highest NII in the last 7 quarters, mainly driven by Spain, the UK, the U.S., and Brazil. So, it's pretty well spread across the board. We saw a turn in net fee income as a result of higher activity, which happened across our 10 markets. We recorded lower gains in financial transactions in the second quarter; however, CIB had a very good quarter, which we couldn’t repeat in the third quarter. Costs were up 3%, partly reflecting adjustments made in the second quarter due to the expectation of lower personnel costs related to the expected performance. As a result, net operating income was up 11% quarter-on-quarter and higher than Q3 2019, which I will say is remarkable. Loan loss provisions fell 14% due to the high level of provisions related to COVID-19 in the second quarter. The main trends from the last quarter are supported by all the regions. You see all regions growing revenues, all regions maintaining good cost control, and a very positive pre-provision profit performance, increasing in all the regions with highly resilient NII and efficiency improvement. On capital, we finished the previous quarter at 11.84%. We continue to generate capital with strong organic generation in the quarter. We accrued 13 basis points to be able to pay dividends next year, if allowed to do so. Additionally, we had several positive impacts from corporate transactions of 10 basis points, mainly related to the share buyback of SCUSA and negative impacts from regulatory market and exchange rates. In Q4, we could have a potential positive impact from the software of around 20 basis points, slightly higher, and a negative change of around 10 basis points from other regulatory impacts. This is our outlook; we expect to end the year around 12%, which is at the top end of our target range. In relation to profitability ratios, it is notable that our efficiency ratio improved slightly compared to 2019, which is again remarkable. The underlying return on tangible equity recovers from the first half of the year, although it remains far from the levels we had in 2019. The tangible net asset value stayed basically flat, but suffers from continuous depreciation of currencies, particularly those in Latin America, mainly the Brazilian real. If we go to business activity on the group, we usually don’t go into that much detail with the activity, but let me guide you, given the current situation. The average new lending is coming back to more normalized levels. In the previous quarter, we had strong government support that underpinned the growth. Now you see that we are lending €1.1 billion a day in constant euros, which is pretty much the same figure we had back in February. So we are seeing some kind of normalization in the lending volume compared with the previous quarter. You can see new mortgage lending by regions showing a significant recovery from the previous quarter. Consumer lending is pretty much similar; it has happened across all regions. We saw substantial recovery in the third quarter compared with the second quarter. In terms of SMEs and corporate lending, we are returning after the spike in the second quarter when we were quite active in providing government-backed loans, particularly to SMEs and corporates; it's back to more normalized levels, with government-supported programs being non-material at the end of September. In CIB, large corporates have returned to a fairly stable position after the spike in March. It may not surprise you to hear that digital sales are booming as a result of the pandemic, with increasing digital adoption among customers day by day. As you can see in the figures on the screen, digital customers and sales are growing, with mobile being the preferred channel for customers. In my view, this trend will continue into the future. If we analyze the details of the P&L, NII was around €24 billion, with no material change year-on-year. Net income was heavily impacted in the second quarter by lower transaction volumes and regulatory changes in several units. From a global business point of view, both Wealth Management and Insurance and CIB increased fee income, representing 46% of total group fee income. This quarter, we perceivably saw a gradual recovery of net fee income associated with the normalization of activity. In terms of costs, we observe good developments here. Cash nominal costs are falling, with Europe around 6%; North America, 2.3%; and South America growing 1.9%. Overall, group nominal costs are falling 2.1%, and we expect positive developments in this area. In relation to Europe, we expect to achieve the €1 billion target we established last year in April; we anticipate reaching this goal by the end of the year since April 2019. In relation to credit quality, we see two fronts. On one front, we are providing much more based on our models and scenarios. The scenarios we are using are not mimicking, but they are not too far from those used by the IMF. As a result, our provisions, loan loss provisions are up 58% year-on-year. This extra provision basis remains on our balance sheet according to the models and scenarios we are using. On the credit quality side, we are not seeing significant deterioration. The cost of credit is increasing due to provisions based on scenarios and models. NPLs, in the traditional definition, continue to perform very well, and loan loss reserves in the balance sheet stood at around €24 billion, approximately 2.6% of the total loan book. Additionally, this is the first line of defense in this situation, our pre-provision profit is around €25 billion and has remained stable over the last couple of years. Let me elaborate a bit on the moratorias, the payment holidays. You have the figures that you are probably familiar with. The total group moratoria was €114 billion, categorized by products and regions, with the majority in mortgages. More than 2/3 of the moratoria have already expired. If you observe the behavior of those customers, 82% are in stage 1, 16% in stage 2, and only 2%, as mentioned before, in stage 3. By regions, you see a fairly consistent picture, with some variations. The remaining amount, around €40 billion, is being managed well, thanks in part to government programs protecting incomes. Out of this €39 billion, €24 billion are mortgages, €3 billion are consumer loans, and €12 billion are for SMEs and corporates. In certain countries, Portugal and Chile, the government has extended moratorias for a longer period, usually one year, meaning we can expect these moratoria to remain in the portfolio. In the UK and Spain, these amounts in relation to the total loan book are relatively small, around 2% to 5%. This situation doesn’t lead us to expect materially different behavior, especially considering that approximately 89% of loans in Spain and 83% in the UK are secured loans. I will now hand it to José García-Cantera, our CFO, to elaborate on trends in the regions and the countries, and I will return at the end to summarize and provide our vision for 2021. Thank you.

Thank you, José Antonio. Good morning, everyone. Despite the global nature of the pandemic, our geographical and business diversification continues to work effectively. The very strong results that we had in the first quarter are predicated upon our diversification between the three regions and the businesses that José Antonio has mentioned. We had positive year-on-year volume performance across all geographic regions and global businesses. The decrease in the quarter is explained by the sale of Puerto Rico and the sale of a non-performing loan mortgage portfolio in Spain, which I will refer to shortly, along with lower volumes in CIB. We experienced an increase in pre-provision profit in North America, South America, and our global businesses, with the only decreases recorded in Europe. There's excellent underlying profit from our global units, with CIB growing 30% year-on-year, and Wealth Management and Private Banking displaying stable year-on-year profits, but activity has clearly picked up in recent months. If we turn to Spain, we now have 13 million customers and continue to support families and businesses with numerous initiatives aimed at economic recovery. For instance, we’ve granted 180,000 payment holidays in mortgages and consumer loans and hold a 27% market share in the government support program for SMEs and corporates. All this while remaining prudent to avoid any deterioration in the portfolio’s risk profile. We’ve reached over 5 million digital customers, with more than 300 million accesses in the quarter, consistently leading in customer experience rankings. In terms of commercial activity, loans fell 2% in the quarter mainly due to the sale of that non-performing loan mortgage portfolio I stated earlier, which amounted to €1.5 billion. However, we experienced a year-on-year increase, boosted by SMEs and corporate loans. Regarding the income statement, profit was 53% higher in the quarter due to the positive performance of customer revenue, resulting from sharp increases in net interest income, which went up 11%, and a 5% quarter-on-quarter rise in fee income. On a year-on-year basis, we saw a decline in total income due to low interest income, a smaller ALCO portfolio, reduced transaction volumes, and lower income from our real estate subsidiaries. We achieved a positive cost performance, reducing costs by 10% year-on-year, and the non-performing out ratio has dropped by 125 basis points in recent months, primarily due to that sale of non-performing loan mortgage portfolio. Looking ahead, we remain optimistic about top-line performance, particularly regarding net interest income and net fee income, with a positive outlook on credit quality among individuals. However, we are less optimistic regarding SMEs due to prevailing uncertainties. In Santander Consumer Finance, we note strong recovery signals in most countries where we operate, with new business actually outperforming the market. In the third quarter, underlying profits increased by 10%, driven by an almost 30% surge in net fee income, linked to a return of volumes to pre-crisis levels. Over the nine months, underlying profits were impacted by provisions; however, net interest income increased by 1%, and costs fell by 3%, aided by efficiency programs and actions taken to address COVID-19 impacts in the second quarter. The cost of credit remains low for this type of business. Looking forward, we expect new business in the coming quarters to align closely with the levels recorded in the third quarter, with costs and loan loss provisions maintained under control. In the UK, we witnessed a strong quarterly increase in underlying attributable profit, primarily driven by a continued rise in volumes. We now see very strong new demand for mortgages, with applications soaring in recent weeks—this should positively reflect in net interest income in upcoming quarters, bolstered by bounce-back loans as well. We reduced the costs associated with the 1|2|3 account in both May and August, which has contributed to lower funding costs. Fee income increased, mainly due to CIB activity, while costs remained controlled, and loan loss provisions decreased significantly in the quarter, down 19%, with the cost of credit below 30 basis points. In terms of nine-month results, we continue to feel the impacts of COVID, alongside regulatory changes affecting overdrafts; however, we are somewhat compensated by reduced costs. In Brazil, we once again achieved outstanding results, recording strong results and volumes as we focus on capturing growth opportunities. We experienced a positive performance in mortgages, achieving record new mortgage lending in September. The cards segment also performed well, selling 450,000 cards just in September. In wholesale banking, metrics in GetNet and our auto finance subsidiary show positive evolution. Underlying attributable profit rose 21% quarter-on-quarter, fueled by consumer revenues; costs increased by 3%, half of which is tied to a collective labor agreement. Provisions declined in the quarter, and we do not foresee a deterioration in the cost of credit in the forthcoming quarters, expecting it to remain stable or improve slightly given current economic forecasts. The economic outlook in Brazil continues to improve as the IMF's projections regarding GDP growth for 2020 improved from a drop of 9% in June to minus 5.8% recently. Analyst consensus is even more favorable, expecting a GDP drop of between 3% and 4%, with a current account deficit of 1%. All these positive indicators lead us to expect the Brazilian real to perform better in the coming quarters. In summary, Brazil has demonstrated resilience in its balance sheet and strength, and we remain optimistic regarding future profits and profitability. In the United States, SCUSA has increased its stake in the consumer finance entity to 80.25%. Additionally, we completed the sale of the retail and commercial bank in Puerto Rico, which amounts to €2.2 billion in loans and €3.5 billion in deposits. This sale explains the performance of volumes. Nonetheless, we still achieved solid year-on-year growth, excluding these loans and funds driven by corporate demand and incentive programs. Profits were 79% higher, mostly due to lower provisions, reduced cost of debt, improved leasing performance, and controlled costs. Underlying attributable profit decreased by 24% year-on-year, mainly due to COVID provisions, while net operating income remained flat. The reduction in costs, down 5%, helped offset total income decrease. In Mexico, most branches continued to operate normally with reduced staff levels, and we observed a substantial increase in digital activity. Year-on-year loan growth was propelled by the corporate side, while credit card usage remained affected due to lockdown measures. Compared to the previous quarter, profit rose slightly as lower loan loss provisions and higher customer revenue were counterbalanced by declines in gains on financial transactions and rising costs driven by various projects and increased IT expenses. On the other hand, we achieved good year-on-year performance resulting from improved revenue performance and efficiency. Profit was subdued by higher loan loss provisions, and the cost of credit stood at approximately 3%, with expectations for stability or even a decrease in future quarters. These results exhibit a very positive trend in customer revenue, signaling improvements in our franchise and high profitability, with a return on tangible equity of 15%. Finally, in the corporate center, we observe an 11% increase in profitability compared to 2019. On one hand, we benefited from gains on financial transactions amounting to €440 million, predominantly from foreign currency hedging, alongside progressive improvements in operating expenses, advancing 12% compared to last year. Conversely, we faced a negative impact on NII due to a larger liquidity buffer, and other results and provisions increased due to one-off provisions for certain stakes whose values were affected by the crisis. Now, let me hand it back to our CEO for his closing remarks.

Thank you, José. A couple of minutes’ conclusions on 2020 results. I would say a strong capital build, following continued organic capital generation. We have demonstrated strong operating performance considering the scenario, with an increase in underlying profit in the quarter. We maintain robust credit quality, and we have set a new cost of credit estimation for the full year 2020. As our Chairman mentioned in the AGM, based on these trends and results achieved, we expect for the full year to be around the €5 billion mark in net profit during this very, very complex year. Regarding the outlook for 2021, I should note that it’s a bold exercise given the uncertainty surrounding the health situation and its duration, driven by COVID-19. We anticipate positive revenue trends, particularly in Europe due to expected liability repricing and some support from higher lending volumes, mainly in the Americas for 2021. For net fee income, we expect CIB and Wealth Management to continue performing relatively well. In terms of costs, I previously mentioned last quarter that we were optimistic about our capacity to reduce costs, and we are now committing to an additional €1 billion in net savings reduction over the next two years in Europe due to our One Europe project. This is fueled by the quality and diversification of our balance sheet, better-than-expected customer behavior, as already explained, supported by current estimations primarily from the IMF. We are confident that we will maintain or improve the cost of credit in the P&L once we utilize the overlays we built throughout the year. Concerning capital, we are at the upper end of our target range, which provides us with more flexibility in how we allocate capital and the way we reward our shareholders. We continue to generate capital organically without sacrificing business growth or improving long-term return. We expect an underlying return on equity in line with our traditional cost of equity. As the Chairman indicated this morning in the AGM, we are unlocking our potential for organic growth going forward. Our scale offers considerable opportunities for organic value creation, which we realize through structural change. The One Santander initiative we are launching in Europe, combined with open banking and consumer finance, is set to create one of the largest payment platforms globally built on GetNet along with our SME trade project. This transformation will allow us to generate more revenues and achieve additional cost efficiencies. In summary, I would assert that our business model, coupled with diversification and the changes we are implementing, offers a strong foundation to continue generating value for our shareholders. Thank you. Now we remain at your disposal for any questions you may have.

Thank you, José Antonio. Thanks, José. In this, we have around 30 minutes for Q&A. So please, operator, go ahead with the first question.

From Francisco Riquel from Alantra. Please go ahead.

Yes. I would like to start with asset quality, if I may, in particular, the new cost of risk guidance of 1.3%. Could you provide us details on what we should expect for the main business areas and where the reduction is anticipated? I understand this mainly concerns Brazil and SCUSA. What will be the new cost of risk expected in these two areas? Additionally, any relevant changes in other units for better or worse, such as Consumer Finance in Europe or the UK, and Mexico? Lastly, concerning Spain, the transformation ratio into NPLs from the moratoria is the highest among all units at 7%, and the macro is tougher. What should we expect in terms of cost of risk for Spain this year and the next?

Okay. Let me elaborate on the asset quality and the new cost of risk guidance. As you rightly pointed out, if we look back over the quarter, the main business areas that performed better than expected were SCUSA in the U.S., where both originations and recoveries were quite favorable, largely due to the prices of used cars in the U.S., resulting in a significant reduction in the net cost of risk. The same can be said for Brazil. You may have seen this morning that the Central Bank of Brazil published data indicating that the number of families in default is now the lowest in the last nine years. Hence, our outlook for the cost of risk in Brazil is fairly positive, and I would suggest it will remain stable or possibly decrease next year. As you know, we have built an overlay that remains unused. With the current trends, we are feeling optimistic about this. Regarding other significant areas, you mentioned UK and Mexico, with no major changes expected there. Finally, pertaining to Spain, loan provisions increased this quarter; as you know, we possess a large SME book in Spain with significant overlaying. This is the area that remains most sensitive due to uncertainty; the scenario is still quite precarious. Consider that the implications of a pandemic lasting for another six months differ greatly from one that lasts for nine months or a year—especially in Spain, where the tourism sector plays a vital role in the overall economy, small fluctuations in the timing can have substantial impacts. Overall, I'm confident in the asset quality trends we're observing. As for Consumer Finance in Europe, the behavior there has also been strong, providing an optimistic outlook regarding the scenario, leading to expectations of a decrease in the cost of risk for Consumer Finance in Europe next year. These are the trends we're seeing across the board. Overall, we remain constructive, though we acknowledge the high level of uncertainty surrounding the situation.

Alvaro Serrano from Morgan Stanley. Please go ahead.

Two questions, please—on costs and capital. You’ve announced the €1 billion further cost synergies. Could you possibly provide a bit of color on where that’s coming from in terms of regions or businesses and whether that will materialize in a large charge in Q4? Relatedly, is there any opportunity for market share reduction or volume impacts as a result of such extensive cost cutting? Secondly, regarding capital, you noted a 15 basis point regulatory impact during the quarter with a further 10 basis points expected. Beyond Q4, what are the anticipated regulatory impacts, discounting Basel IV? Why the high confidence regarding the proposed dividend, which was approved by the AGM, making you the second bank in Europe to do so?

Let me address the first question; then I will pass it to José to elaborate on capital and potentially the dividend and the ECB. The €1 billion I mentioned refers to the One Europe project, where cash reductions are mainly in the UK and Spain, though there are also some decreases expected in Portugal and Poland. However, the size of the franchises points to the bulk of the reductions coming from the UK and Spain. The current 10% reduction pace in Spain is expected to diminish. You’ll see that in the UK, the trend moves in the opposite direction. There are also some anticipated cuts in Portugal and Poland. A notable point you raised was concerning our commercial reach and the potential effects on volumes and market share. I project that with current established trends, which were already quite pronounced before the pandemic—transactions in branches were declining 8% annually, while transactions in the digital arena grew at 40%. The pandemic has only accelerated this. Furthermore, sales volumes through digital channels continue to rise, illustrating entry into lucrative high-value-added products, particularly with regard to our open bank initiative. An example is open bank operations functioning at the same level of mortgage volume as our 200 branches. This all indicates that digitalization extends our commercial reach; it’s not solely about point-of-sale numbers. We may see fewer but larger branches. José, could you elaborate on capital now?

Alvaro, some inspections initially scheduled for this year were postponed due to COVID. They’ve yet to commence, and we cannot yet determine which will close next year. A conservative estimate indicates regulatory impacts will remain well below those we experienced in 2020. As for our capital ratio, we foresee it moving toward the upper end of the 11% to 12% range over the next 12 months. Regarding the ECB and the confidence in our dividend proposal, as I mentioned earlier, our solid pre-provision profit supports our reasoning. We have not reduced our pre-provision profit, which allows us to hedge against potential negative outcomes from credit issues amid the scenario’s uncertainty. We are making a case that positions our shareholders appropriately without subordinating them to requests to maintain lending at the expense of dividend payments. We have still performed well since the pandemic by boosting lending, providing liquidity, and consistently generating results. We are requesting the SSM approve our dividends based on these robust performances, understanding it ultimately falls to them to resolve.

The next question comes from Carlos Cobo from Societe Generale. Please go ahead.

I have a question regarding NII and your outlook for next year, specifically concerning Spain and the UK. In the UK, we’ve observed some improvements in new pricing and reduced swap costs. Do you anticipate a recovery in NII from here, or should we assume otherwise? The situation appears similar for Spain, albeit in a reverse manner, with Euribor exerting pressure on the sector. How do you see NII evolving in 2021? Additionally, I have a brief inquiry regarding mortgage formalization costs. We recently noted a new ruling from the courts, following a collective lawsuit against the Spanish banks, which appears to signal a trend for the sector. Are you considering this a potential risk that could heighten provisioning needs, contrary to previous case-by-case court rulings?

Okay. Let me elaborate on NII for both the UK and Spain. We had positive developments in this quarter, which should continue translating into the future. In Spain, we remain positive, although not as strong as in the UK due to the Euribor consistently getting into negative territory. Nevertheless, we believe both areas will remain in a positive position going forward despite various challenges. Regarding the issue of mortgages, if I’m interpreting you correctly, the new ruling pertains to up-front fees applied to mortgage loans. This situation concerns me less, as I don't foresee this progressing through upper courts to become a widespread case like those seen previously; it’s a fairly common practice applicable not only to mortgages but also to consumer loans and corporate lending.

Next question comes from Fernando Gil de Santivañes from Barclays. Please go ahead.

I wanted to discuss fees and the changes driving the new policy in Spain regarding fees moving forward. What should we anticipate from the changes occurring in fees starting this November? Additionally, you mentioned that cost restructuring in the UK and Spain is forthcoming. Will this entail branch reductions, personnel changes, or other measures?

Regarding the new policy in Spain, which you called a new policy, this is reformulation. What we’ve undertaken is a reformulation of current strategies to attract more customers who regard us as their primary bank; this step reflects such intentions. However, the most important changes are happening behind the scenes: we are placing heavy emphasis on a notable simplification of our product range—allowing us to offer a more transparent proposition while simultaneously cutting costs appreciably. We don’t foresee a significant transformation of fees as a result of this reformulation; it primarily concerns our simplifying cross-selling and reducing costs through clearer communication with customers. As for the details of cost restructuring in the UK, which you inquired about...

Yes, regarding the costs in the UK: we are actively working on several measures. Some cost reductions so far have stemmed from significant remediation processes that were complex at the corporate center level, such as dealing with PPI complaints, which are winding down. We have a considerable number of personnel—thousands working on that—and as this program concludes, we are witnessing reductions in that area. Additionally, we are restructuring the call center operations, incorporating new technologies that simplify operations. There are thousands of individuals working in UK call centers; new technology will streamline and improve service delivery in those areas. Other central services, particularly IT, are similarly being streamlined and improved. The reduction isn’t solely rooted in branch restructuring; rather, central services are being optimally adjusted.

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

I have two questions, to begin with. In your presentation, you stated the intention to merge Openbank with Santander Consumer Finance. Does this mean that you will begin offering mortgages in markets where Santander Consumer Finance operates but Openbank does not, for instance, Scandinavia, Germany, and Italy? Moreover, how should we conceptualize this merger between Openbank and Santander Consumer Finance? What implications does it hold for Santander? My second query revolves around the upcoming financial transaction tax from January next year. What impacts do you expect this might have on Santander, and is there a risk of Spain implementing a banking tax?

Thank you for your questions, Sofie. To address your first question regarding the combination of Openbank and Consumer Finance—Consumer Finance operates in numerous essential markets in Europe and Openbank is a fully-fledged retail bank. Our goal with this combination is to fully leverage the customer base acquired through Santander Consumer Finance. Currently, we have many borrowers who have benefited from Santander loans via third-party channels. The merge will allow us to consolidate our offerings and extend not only loans but a fully integrated product suite together with Openbank. Asked specifically about mortgages, this isn't our primary goal at this instant. We’ll continue producing consumer loans while working on point-of-sale financing and product developments. Also, as outlined, we’ll be significantly reducing the number of banking licenses while implementing a streamlined number of banks, likely three, with corresponding branches and mergers. This transformative move is designed for robust growth. Regarding the financial transaction tax, I anticipate the impact to be either minor or negligible. We intend to shift these costs onto our clients. It’s true transaction volumes might drop slightly, which could affect brokerage fees, but the total effect on our P&L should remain immaterial.

The next question comes from Jernej Omahen from Goldman Sachs. Please go ahead.

I have two questions, please. Firstly, can you describe the current process between a bank like Santander and the SSM for dividend proposals? I struggle to understand how Santander could propose a dividend at the AGM without extensive discussions prior with the supervisor regarding its appropriateness. I’d appreciate your comments on that. Secondly, at what point do you expect to hear from the SSM regarding the decision on dividends? Additionally, José Antonio, when you mentioned how Santander makes the case to the SSM for dividend approval, you cited strong pre-provision profits, increased lending, and consistent results. Everyone on this call agrees with this; however, the SSM traditionally does not discriminate among banks, which raises concerns. Do you expect the SSM to start differentiating between banks able or unable to distribute dividends in the future?

Thank you, Jernej. You asked about our process with the SSM. We have our responsibilities, while the SSM has its own. This morning in our AGM, we proposed a cash dividend based on current results and future expectations. So, we evaluated this position. What should we expect from the SSM? The SSM will conduct data analyses on the information we provided. To the best of my knowledge, they are expected to announce something by December this year regarding recommendations. They may of course have concerns about discriminating between various banks. I'd prefer not to speculate on their thought processes. What I can confirm is that we are committed to acting on behalf of our shareholders, considering bondholders, clients, and all stakeholders. Our numbers substantiate this claim, and we anticipate the SSM will recognize our position at the appropriate time, potentially in December.

Just a reminder that our minimum capital requirement is currently 8.5%. So, with a fully loaded ratio at 11.5%, we have a capital buffer of 300 basis points. In the worst crisis we've faced in decades, the bank is generating capital. We are attending to client requests consistently. Overall, this establishes a compelling case for enabling Santander to pay dividends moving forward.

The next question comes from Ignacio Ulargui from Exane BNP. Please go ahead.

I have two questions. Firstly, what should we expect regarding revenue growth in LatAm? We have discussed the UK and Spain significantly; how do you foresee LatAm's consumer volumes recovering? A general outlook on fees and net interest income in Brazil and Mexico would be insightful. Secondly, regarding restructuring charges related to the €1 billion in cost savings, are you anticipating a level similar to previous levels seen in 2019, around €600 million? Lastly, what is the normalized level of cost of equity you have in mind? Historically, the bank has held this at specific levels.

For your first question regarding revenue growth in LatAm, we expect to continue seeing significant volume growth when expressed in local currencies; exchange rates are an additional factor. In local terms, our volume growth is noticeable in Brazil, while we also anticipate growth in Mexico, despite its more adverse economic situation. When we convert these into revenue, we might observe that the growth in volumes may outpace NII, largely due to potential margin compression and regulatory interventions we’ve seen in Brazil at the start of this year in particular so we anticipate that revenues will increase, though possibly at a slower rate than volumes. Regarding the restructuring charge, don’t take this as a guarantee; we are in the midst of negotiations. That said, I would expect a payback period of 1.5 to 1.8 years concerning the restructuring charges related to the cost reduction. Regarding the cost of equity, we publish this annually in our report. If I recall correctly, the range last year marked the lowest at around 8.0% and the highest near 9.0%. This is a reasonable span to use moving forward.

The next question comes from Adrian Cighi from Crédit Suisse. Please go ahead.

I have two follow-up questions. Firstly, regarding the 2021 outlook, you now expect the underlying RoTE to be in line with your cost of equity, which you indicated as being within the 8% to 9% range. Current consensus is projecting an RoTE below 6%, even adjusting for a cost of risk of around 130 basis points. Could you help bridge that gap? Secondly, about inorganic growth, the Santander Chairman supports consolidation yet seems hesitant to engage at the moment—what catalyst would motivate Santander to consider M&A opportunities in Europe or the U.S.?

In response to your first question, it appears that your forecasts might be owing to different revenue expectations. In particular, we’ve shared a more optimistic outlook than yours concerning revenues. If the cost of risk remains stable, further bolstered by our outlook for revenue growth and reduced costs, the anticipated overall performance would improve our P&L into 2021. As for M&A inquiries, our cautiousness stemmed from our struggle to establish a compelling equity narrative for meaningful engagement during these turbulent times. We are currently concentrated on reconciling ongoing challenges without diversifying our management's focus to external factors. This is the primary reason. We previously sought growth through M&A, but we already possess substantial scale in most markets. To the question on Spain—well, we don’t need to scale it further, as our market share hovers around 20%. We choose to emphasize enhancing our internal transformation, focusing on the projects we’ve mentioned, such as the One Europe initiative, the Consumer Finance and Openbank combination, and lastly the initiatives building payment platforms for SMEs.

The next question comes from Stefan Nedialkov from Citigroup. Please go ahead.

I wanted to further explore the 2021 guidance. When the pandemic began last March, you offered guidance regarding expected impact for 2020, which, in retrospect, proved overly optimistic. Given the serious uncertainties we face today, what enhances your confidence in the guidance you're providing for 2021, which notably exceeds current consensus? Regarding your stage-two breakdown for loans under moratoria compared with those not on moratoria— it appears the stage-two ratio is around 16% against a group total of 6%. Could you clarify your expectations for possible transitions from stage two to stage three regarding those loans next year?

I appreciate your questions. The first, considering the uncertainty and uncharted territory we are in, is valid. At the beginning of the pandemic, estimating impacts at that time was difficult. The basis for our current guidance relies on our experience with various actors in the crisis: we observed the central banks reacting—notably slashing interest rates and providing liquidity, which influenced stability in the markets. Moreover, governments established support mechanisms for lending to SMEs and corporate sectors. We didn’t know these dynamics before, but we recognize the supporting roles governments and entities are playing to ensure continued growth. I believe those trends will persist once health challenges seriously mitigate—such as with effective treatments or vaccines. Consequently, I trust our projections reflect a strong basis for revenue growth, especially once the pandemic stabilizes. As for the transition from stage two to stage three, moratoria affect two profiles of customers: one may take advantage of financial perks, leading them to take on a moratorium just for that benefit. The second group is customers seeking assistance due to fear concerning their finances. Given that over two-thirds of our moratoria are mortgages, I do not foresee any significant deterioration, primarily because paying a mortgage in Spain can often cost substantially less than renting. In summary, I do not anticipate a major upward movement into stage three.

I’m afraid we need to leave it here.

Okay.

Thanks, everyone. And yes, obviously, the IR team is at your disposal any time the rest of the day. So thanks very much, and see you next quarter.

Please, guys, take care of yourself. Bye.