Banco Santander, S.A. Q4 FY2020 Earnings Call

Good morning, everyone. Thanks for joining us for this Banco Santander 2020 Full Year Earnings Presentation. As every Q4 with full year presentation, we have today our Executive Chairman, Ana Botin, who will address with the CEO the performance of 2020, the different regions, and some country reviews. Then the Executive Chairman will disclose the progress on the transformation and the next steps that will kick off from 2021, concluding with a medium-term outlook and key takeaways before jumping into the Q&A session. So, with no further delays, Ana, please.

Thank you, Sergio, and good morning, everybody. I want to start by saying that I hope you and your loved ones are safe and well. It's been a difficult year for everybody, and all of us have lost colleagues and friends, and so our thoughts are with everybody that has had that terrible experience. Without further ado, again, welcome to our 2020 presentation. We will cover the results for the year, our views for the medium-term, and some of the strategic priorities that we will focus on in the next few years. Sorry for the technical difficulty. The cost of credit was at 1.28% and slightly better than the improved guidance that we provided last quarter. Finally, we continued to generate very strong growth in organic capital, reaching 12.34% at the end of the year, which is above our target range. In November 2020, we paid a dividend of new shares equivalent to EUR0.10 per share, and the Board of Directors' intention is to return to the 40% to 50% payout as soon as we can. We are also proposing to our shareholders at the end of March a EUR2.75 per share in cash against the 2020 results. Jose Antonio will review that in more detail regarding the full year results, but just to point out again, we delivered a EUR5 billion underlying profit, which comes after a 50% increase in provisions due to COVID and with very good cost control, as you can see, along with net operating income in constant euros that is up year-on-year. Again, these underlying results and provisions represent a prudent approach to the COVID-related potential losses that we have been guiding throughout the year. The strong underlying numbers are again supported by our geographical and business diversification. It has shown its effectiveness in previous crises; once again, this one has demonstrated our robust performance in the Americas. I want to highlight that North America has been our best performing region, showcasing the best underlying profit performance of 2020, with growth in loyal customers based on increased collaboration between Mexico and the US. Importantly, in the US, we delivered $1.2 billion net profit, which is a statutory attributable profit, and we also experienced growth in the underlying profit for the year. In Europe, we are focused on transforming the business, what we call One Europe represents a new operating model. We are confident this will lead us to results that will be increasingly positive. We are basing our growth on revenue increases and enhanced productivity. Crucially, we have generated EUR1 billion net cost savings, excluding perimeter, in the last two years. And South America remains the growth engine for the Group. We have delivered 19% RoTE, but very importantly, operating income increased 5% on a year-on-year basis in Brazil, while loyal customers and customer loans grew by 9% and 15%, respectively. Finally, we are increasingly diversified by businesses; you can see that CIB has produced very strong numbers, our wealth management performance is solid, and our Digital Consumer Bank, which culminates in a pro forma merger of Santander Consumer, Europe, and Openbank, now represents 16% of the total revenues. At the beginning, I mentioned COVID has been a challenge at a personal level, and we are clear that our priority throughout and ongoing remains our people. This is the best way we can take care of our customers. We have supported 6 million of our customers with moratoriums, lending EUR1 billion per day to SMEs and corporates. We have also supported our communities significantly with EUR100 million across the Group in aid in different aspects. This is something we are very enthusiastic about because we know it is foundational to our future success. Moreover, during 2020, we were very focused on embedding ESG further throughout the bank. This commitment is foundational to our ambition of being a more responsible bank. We have continued supporting our customers' transition to green initiatives. This focus has yielded EUR32.6 billion in green financing since 2019, and we have achieved net zero in our own operations in 2020, a commitment we will maintain moving forward. We are promoting financial inclusion, especially in the Americas, with approximately EUR500 million credit extended to micro-entrepreneurs, along with support for universities and scholarships. We are also dedicated to investing in our talent and diversity, striving to continue in this direction. Currently, we are close to 24% of women in leadership positions, alongside a very diverse Board made up of nationalities, with 40% representation of women on the Group Board. Fundamentally, the strong culture we defined as simple, personal, and fair, forms the bedrock of our strategic endeavor. After this introduction, I will pass over to Jose Antonio for a summary of both the Group and the businesses in 2020.

Thank you, Ana, and good morning, everyone. Excluding total income, which remained stable, we saw a decrease in activity and lower interest rates offset by higher volumes, a reduced cost of deposits, and strong performance in global businesses. We accelerated our cost reduction and expect to stay on track this year. As a result, net operating income grew 2% year-on-year in constant euros, despite higher loan loss provisions due to the COVID crisis, with credit costs aligning with our predictions throughout the year. Overall, underlying attributable profit reached EUR5 billion. The fourth quarter was particularly strong, as we improved our business activity, leading customer revenue to its highest figure in the last eight quarters. We recorded EUR13.9 billion in negative net capital gains and provisions, following the EUR12.6 billion impairment announced in June. The bank incurred charges of EUR1.1 billion in the fourth quarter, primarily from restructuring costs in Spain and other European countries, as part of our ongoing transformation process aimed at improving productivity and efficiency. We expect total restructuring costs in 2020 and 2021 to be around EUR1.5 billion, anticipating savings of EUR1 billion in 2021 and 2022. In Q4, customer revenue continued to rise, nearing pre-COVID levels. We experienced a 4% increase in net interest income compared to Q3, marking the highest net interest income in the past two years, mainly driven by Spain, the UK, and South America. Fee income grew by 3%, led by South America. Costs rose 4% in the quarter, partly influenced by seasonality, labor agreements in Argentina and Brazil, and increased technology expenses in Mexico. Thus, net operating income decreased by 3% quarter-on-quarter; however, it was 3% higher than in Q4 2019. Looking at customer revenue, net interest income increased due to higher lending and deposit volumes, which more than offset the interest rate impact and negative regulatory influences primarily observed in Brazil and Poland. Net fee income suffered due to the COVID crisis. In this challenging environment, our strategy remains focused on enhancing customer loyalty and growth in high value-added services and products. The quarter was very positive for Corporate Investment Banking and Wealth Management Insurance, which together made up 50% of our bank's fee income. Regarding costs, we observe a 6% decrease in Europe, a 2% reduction in North America, a 5% decrease in the U.S., while costs in South America rose by 1% excluding Argentina due to high inflation rates. We plan to continue reducing costs and improving our efficiency ratio in 2021. The cost of credit aligned with expectations; this year saw a 1.28% increase attributed to expected macroeconomic scenarios. This increase reflects forward-looking views based on potential macroeconomic conditions and assessments of anticipated credit losses resulting from COVID. However, overall credit quality trends remained strong in 2020. Non-Performing Loans decreased by 11 basis points, coverage increased by 8 percentage points, and loan loss reserves rose by EUR4 billion to over EUR24 billion. We reinforced Stage 1 at EUR22 billion and increased Stage 2 to EUR21 billion as well; detailed information regarding Stage 3 remains unavailable. This reflects the trends in credit quality and the ongoing quality of the loan book. On moratoria, we managed the process effectively, handling EUR112 billion in moratoria, with most now expired, leaving 3% classified as Stage 3. 78% of active moratoria are secured, concentrated mainly in Europe, particularly in Portugal and Spain, with extensions mandated by the Portuguese government until September. In Spain, longer initial terms are implemented, while in other countries, approximately 95% of moratoria are set to expire soon; the Spanish government has also taken measures to extend certain moratoria for vulnerable sectors. The capital ratio reached 12.3% following a 36% quarterly increase and a 69 basis point rise from the year before. This includes 104 basis points in organic generation, partially offsetting the impacts of restructuring costs, corporate transactions, and market performance. It also covers a 9 basis point accrual for 2020 dividend payments in adherence to ECB limits, allowing a maximum payment of EUR2.75 per share. The fully loaded core equity tier 1 ratio stood at 11.89%, and tangible net asset value remained stable at EUR3.79 since September, reflecting restructuring charges seen in the P&L. In terms of regions and noting the creation of One Europe, we are accelerating our business transformation for enhanced growth and operating efficiency. In terms of commercial activity, loans grew by 4%, mainly driven by SMEs and large corporations in Spain, alongside mortgages in the UK and SIB. Portugal’s loan book increased by 8%. Deposits rose by 6%, paired with a 5% increase in mutual funds, showcasing strong growth in Europe. Underlying attributable profit for 2020 totaled EUR2.7 billion, a 45% decline from the prior year due to increased loan loss provisions across all markets. Additionally, significant cost rises exceeded what we had anticipated. Total income and net interest income remained flat but improved in the latter part of the year, largely due to a recovery in commercial activity and consumer lending, and improved funding costs. Further details on Santander Spain and the UK will follow, though Santander Consumer Finance displayed a positive year, outperforming the market and demonstrating resilience. In Q4, profit rose by 14% compared to an already solid Q3, highlighting the benefits of diversification. I will discuss our ICO consumer loan project later. In Spain, we have actively supported our customers through ICO funding, granting EUR31 billion since the lockdown started; also, we extended EUR100 billion to self-employed individuals and businesses. We aim to improve customer experience and elevate our Net Promoter Score compared to competitors. Loans grew by 5%, while customer funds increased by 4%. In terms of the income statement, profit for the year was EUR517 million, reflecting a 60% year-on-year decline. This decrease was mainly due to reduced fee income from lockdowns and lower returns from real estate investments, along with slower ALCO performance. Comparatively, net interest income grew by 1%, driven by volume performance, effective margin management, and favorable contributions from TLTRO. We achieved another positive year in cost reductions, down 10%. Finally, loan loss provisions doubled due to expected losses predicted in our macro outlook from the pandemic, along with qualitative assessments of vulnerable sectors. Despite these challenges, our credit quality portfolios remained solid, with NPLs dropping by 71 basis points and our reserves currently lower than pre-COVID, thanks to various support programs. December showed EUR1.8 billion in reserves, down from EUR3.7 billion in February, with coverage increasing by 6 percentage points. Loan loss reserves rose by EUR1 billion, with significant amounts in various stages: Stage I rose by EUR16 billion, Stage II by EUR3 billion, and Stage III slightly below EUR1 billion. In the UK, our transformation program is gaining momentum, showing results with loans increasing by 3% and customer funds by 8%. The 2020 profit was heavily impacted by COVID-19 and related regulatory changes. However, we offset this with an improved net interest income of 2% and a 6% reduction in costs. Although profits decreased year-on-year, they experienced an 18% increase quarter-on-quarter, following a recovery that began in Q3, primarily due to an increase in net interest income from a decline in funding costs. Costs improved by 3%, falling 6% year-on-year, and loan loss provisions stabilized, with the cost of risk remaining low at 28 basis points. Coverage improved by 11 percentage points, with Stage II in constant euros increasing by EUR6 billion and Stage III rising by EUR600 million. We anticipate fruitful performance in 2021, thanks to decreased funding costs and new business margins, accompanied by enhanced productivity from our transformation initiative. North America showed the best ordinary profit performance across the group in 2020, with overall volume growth of 4% and customer funds increasing by 19%. Despite a 3% profit drop, efficiency improved dramatically. In Santander US, maintaining a strong balance sheet and sustained profitability remained a priority. Loan volumes grew by 6% while deposits soared by 20%. Year-on-year profits increased by 4%, though the Chilean net interest income fell by 5%. The NPL ratio decreased by 16 basis points. We raised coverage by 50 percentage points, achieving a 210 basis point increase in constant euros, with Stage II up by EUR3 billion, while Stage III remained stable. In Mexico, loan volumes leveled off after a mid-year spike, while customer funds surged by 14%, particularly driven by a robust 24% growth in individual demand deposits. The region saw favorable trends in revenue and net operating income, though costs grew by 5% due to IT investments. NPL ratios rose by 62 basis points, while coverage decreased by 7 percentage points to 121%. Stage II grew by EUR2 billion in constant euros, while Stage III remained flat with a EUR200 million increase. The latter half of the year saw gradual recovery in South America, with loans up 15% year-on-year and customer funds up 18%; deposits grew robustly by 30% in the region, driving overall top-line growth, as mentioned by Ana, with strong revenue across all countries. Net operating income increased by 5% due to positive revenue performance and improved cost-to-income ratios. For the full year 2020, underlying attributable profit declined by just 4% amid COVID-related provisions. The NPL ratio fell by 47 basis points, with coverage improving by 9 percentage points. Brazil had a remarkable year, which I will detail later. In Chile, we achieved the highest NPS ranking with record growth in current accounts, reflecting a 42% increase in net operating income, which rose by 4%, bolstered by increased net interest income and strict cost control. Argentina, Uruguay, Peru, and Colombia reported higher profits driven by improved revenue performance and efficiency gains. In Brazil, the economy exceeded expectations. Santander delivered strong results in performance and volume, focusing on growth opportunities. In the second half of the year, commercial activity aligned with pre-COVID levels, leading to revenue growth and double-digit volume increases. Loans rose by 19%, and customer funds increased by 16%. Full-year net operating income increased by 3%, driven by revenue and efficiency improvements alongside higher volumes, countering significant margin pressures from lower interest rates. Provisions rose alongside controlled layers of net credit quality indicators. The NPL ratio settled at 573 basis points, while coverage increased by 13 percentage points. Underlying attributable profit dropped by 5%, maintaining a high return on tangible equity at 19%. For 2021, we remain positive, focusing on expanding our customer base, maximizing revenue across our businesses while sustaining high profitability and solid asset quality, ultimately gaining market share in Brazil. In global corporate investment banking, we had a successful year, continuing to support our clients to build market share; income rose by 15%, and profit grew by 23% due to 15% income growth and a solid 3% cost reduction. We achieved double-digit growth in core business areas, especially in global markets and global debt financing. In Q4, profits dipped as the improvement in net interest income and fee performance was largely negated by lower trading gains linked to CBA and reduced volatility during Q3, along with higher provisions tied to specific names due to COVID-19. The Wealth Management Insurance business performed well throughout the year, maintaining EUR370 billion in assets under management as of December; in constant euros, this showed a quarter-on-quarter growth of 4%. Total income generated accounted for 31% of the Group's overall fee income. Underlying attributable profit rose by 2%, driven by a 3% increase in revenues. Notably, private banking showed positive sales and business growth, while fees within Santander Asset Management increased by 9%. Finally, the underlying profit from Insurance rose by 18%, mostly driven by non-credit-related business. Now, I will hand it back to Ana to continue with the presentation.

Thank you so much, Jose Antonio. I want to reiterate how proud I am of the progress made since 2014. I am excited about the opportunities ahead. Our values have remained unchanged over the past few years; they still provide a robust foundation for the future of Santander as we strive to deliver. Our aim is to become the best open financial services platform by acting responsibly and earning the lasting loyalty of all our stakeholders. Allow me just a few minutes to illustrate how we have achieved results by consistently aligning our strategy over the years. As we review the past six years from 2014 to 2019, let’s emphasize that 2020 was an outlier in performance due to the pandemic. We have doubled profits and significantly improved our underlying return on tangible equity by more than 400 basis points, achieving 11.8% in 2019 and 12.34% today. Importantly, these figures reflect the transformation of our model, bolstered by an increase in our capital base of EUR29 billion—representing a 70% rise—with only a 13% hike in RWAs. This demonstrates a radical change in the model that we will continue to pursue into the future, which instills confidence regarding our outlook for the coming years. Looking ahead, we will maintain our successful strategy by efficiently allocating resources, focusing on profitable growth—this is what sets us apart from many peers—and, of course, creating shareholder value. We will continue to grow our RoRWA organically, especially from our businesses in the Americas. In terms of segments, we will keep investing and expanding our fee-based and capital-light operations, such as corporate investment banking, wealth management, and payments through PagoNxt. The Digital Consumer Bank, as I will elaborate on further, is a pro forma merger of Santander Consumer and Openbank, and is expected to propel growth in our earnings per share and tangible NAV per share. This, in turn, underpins our path for increased cash dividend growth, enabling us to achieve the 40% to 50% cash payout as soon as regulators allow for it. To capture organic profitable growth, we will persist in investing in geographies and businesses with higher returns on capital. In 2020, we made strides in accretive capital rebalancing, strategically reweighting our capital toward more profitable regions, principally the Americas, and shifting our focus to capital-light businesses, CIB, Wealth Management, Insurance, and Payments. We have established minimum profitability thresholds across all segments while also emphasizing faster asset rotation. Top management remuneration is aligned with these profitability objectives. Consequently, approximately 40% of our capital has contributed to generating double-digit underlying returns on tangible equity; this is a vital figure given the current environment for the industry. Our prediction is that the industry will remain challenging, even post-COVID, due to low interest rates and mounting competition. Yet, we have established three strategic priorities to build on our solid foundations: firstly, the One Santander model; secondly, PagoNxt; and lastly, our efforts in the Digital Consumer Bank. The essence of One Santander is to create a better bank for our customers to drive growth sustainably. Significant progress has been made, as I previously shared with you through our recent financial performance—achievements that we want to accelerate. By creating regions, we are redefining our operating model under One Santander, allowing us to leverage our 147 million customers according to clear principles. The key focus is simplification, where we aim to streamline our mass-market value proposition, redefine customer interaction, and enhance our capability across Europe and globally, creating a consistent model to share processes across various markets. This approach is not limited to One Europe; similar initiatives are adopted throughout the Americas. Ultimately, our goal is to rank in the top three NPS across nine countries, where over 50% of total sales will be digital, and to reduce our efficiency ratio down to approximately 40%. We are setting clear milestones as we execute on these three priorities. With respect to One Europe, we aspire to achieve an underlying return on tangible equity of between 10% and 12%, alongside an efficiency ratio of 45%. We will work across all regions but especially in Europe to improve the payments platform via PagoNxt Global Solutions. Our commitment to collaboration between the North American units indicates a 30% revenue growth in 2020, particularly in areas like Commercial Banking and CIB, as we aim for an 11% to 13% return on tangible equity and a 40% efficiency ratio in the medium-term. In South America, we aim to expand Getnet and Superdigital into other countries. Just yesterday, we announced the listing of Getnet Brazil; more details will be discussed later. Our ambition is to achieve an underlying return on tangible equity of 19% to 21%, up from the 18% for this year, while simultaneously maintaining the efficiency ratio at 35%. Now allow me to proceed to our second priority, PagoNxt. PagoNxt is a global payments company designed to consolidate various Group assets. Initially, it will concentrate on two segments: merchant acquiring and SMEs; additionally, it will also explore the consumer segment. Notably, payments have always played a core role in our loyalty strategy; they help us earn our customers' loyalty. Santander possesses the scale necessary to become one of the world's leading global payment platforms. The merchant acquiring sector is a global revenue pool worth EUR80 billion, which is fast-growing, particularly in e-commerce, projected to expand at 11%. Similarly, international trade represents another EUR350 billion revenue pool. We already have considerable scale within these businesses. To illustrate, we currently engage with over a million active merchants and business customers and reach EUR60 million through active credit and debit transactions, which would leverage our more than 4 million SME customers. This represents one of the largest segments within the banking sector, distinguished by over 200,000 SMEs trading internationally. Consider PagoNxt as the technology backbone that will facilitate the One Santander banks in leveraging our scale to connect with a unified set of products aimed at our 147 million customers. This strategy aims to build essential customer products, thus enabling accelerated growth while enhancing the customer experience. We anticipate that this will evolve into a single autonomous entity, potentially establishing one of the largest private FinTech companies globally. As already mentioned, we announced the 2021 listing of Getnet Brazil, promising improved visibility concerning high-growth revenue streams within our operations. I have previously highlighted our focus on merchant and trade solutions; bear in mind that we aren't starting from ground zero. We have made considerable investments and significant progress, especially in countries like Brazil and Spain, where market shares in acquiring solutions grew from 12% to 15% in Brazil and from 12% to 17% in Spain, experiencing a growth of 40%. Additionally, we recently acquired our stake in acquiring services from Elavon, which further reflects our belief in our ability to develop better solutions independently. We already have the scale, and we have demonstrated its effectiveness. Our overarching goal is to converge Getnet Brazil with our global Getnet platform, alongside Wirecard and SEMs, ultimately consolidating these into a singular company focused on acquiring. Our vision for trade involves delivering swift, efficient trade finance, supply chain, and FX payments. We are not starting from scratch, as we have made substantial investments in this area. Our current capabilities allow us to onboard 300,000 customers onto a week-long global trading platform, with Ebury at the core of our strategy. Ebury generated upwards of GBP100 million in net revenues, conducting 270,000 transactions—even amid challenging conditions—which further drives growth in the number of transactions per customer, witnessing about 3% growth on the year. Another key asset within trade is our Payments Hub, which has gone live as the main provider for Ebury in the last quarter. In December 2020, our Payments Hub efficiently processed over EUR30 million in incoming payments. We've established itself as the chief payments engine for all our corporate banking units in cities such as London, Paris, Milan, Frankfurt, Hong Kong, and New York. It is already extending services to third-parties external to Santander. Finally, Mercury is the platform that has allowed us to finance EUR6.6 million, with 60% of trades executed digitally. To date, more than 7,000 clients have been onboarded, with notable transactions involving medical supplies in 2020. The third priority, viewed in light of how Santander will transition into an open financial services platform to foster growth, entails using the merger of Santander Consumer with Openbank—a fully-fledged, cloud-based European Bank, authorized end-to-end by the ECB. We are confident this approach will yield remarkable results because Openbank already boasts proven success in cross-selling. As I previously indicated, this merger yields significant transformation. Santander Consumer encompasses 55,000 merchants and POS, while Openbank introduces 1.2 million customers with an annual reach of 6 million new consumers operating across 15 markets, including Santander Auto, which effectively caters to 75,000 dealers while sustaining high-quality service and growth franchises. My ambition is for the Digital Consumer Bank to run on a digital banking API model via a SaaS structure, which is imperative to capitalizing on data across both business sides, thereby generating growth and fundamentally altering our consumer operations. This approach aims to drive revenue growth while targeting a doubling of PAT in the medium term with a reach for 15% underlying returns on tangible equity. However, please note that achieving this will require time. We believe it's a paradigm shift. Our business model utilizes common apps, fosters a streamlined operating structure, and simplifies licensing. We have initiated these initiatives by launching Openbank in Germany, Holland, and Portugal, showcasing a unique management style. It will facilitate new auto consumer lending solutions while catering to the provision of new products for consumer stakeholders. I’d like to highlight that Santander Consumer Finance delivered 3% revenue growth during 2020 amidst a challenging environment, achieving a 12.5% underlying return on tangible equity. As previously mentioned, we have aggressive growth aspirations, with a targeted efficiency of 39% and underlying returns of 15%. I liken this to a flywheel effect, which accurately illustrates how the merger of these two businesses is propelling growth. This sequence commences with our substantial customer base across 23,000 merchants. They offer consumer financing at checkout, giving rise to 4.5 million contracts across large to small businesses and various industries while pivoting from offline to online. Additionally, our online-only business is experiencing rapid expansion. This development generates data-rich insight from initial transactions that can be leveraged to anticipate customers' future financial needs. Our ongoing customer relationship fosters a foundation for cross-selling banking products through Openbank, enabling expedited signup processes, even for loans, transforming user experiences, generating deposits, and providing lower funding for lending purposes. I already mentioned that our Digital Bank averages 4.5 products per customer. Notably, we achieved growth of more than 100% in new customers year-on-year during 2020. API services also attract new merchants, culminating in a cycle of increased customer acquisition where revenue growth feeds data depth and insight enhancements. To conclude, I wish to reiterate our goals based on the latest economic outlook published by the IMF and OECD, which include a cost-income ratio below 47% for 2021, a downward trend in the cost of credit from 12.8% to between 9% and 10%. Our medium-term aims consist of mid-single-digit revenue growth in constant euros and episodes of best-in-class NPS, aligned with our operational model. Lastly, I want to reaffirm our communication from 2019, where we set forth ambitions of 13% to 15% underlying return on tangible equity alongside 11% to 12% CET1. The Board's intent remains unwavering, supporting a cash payout on underlying terms of 40% to 50%. In summary, our strong underlying results in 2020 demonstrate resilience amidst this challenging year. This diversification has evidenced its worth, showcasing robust performance in the Americas while also delivering solid growth in our global businesses, thereby ensuring balance against more challenging conditions in Europe. Our credit quality remains robust, deteriorating by just 28 basis points due to active risk management. Moreover, we've consistently contributed to building organic capital, reaching 12.34%—already above our target. We are in a fortified capital position, comfortable with existing levels and buffers. Importantly, we are well-positioned to continue allocating capital to significant internal opportunities, generating profitable growth and value. Our clearly defined strategy for the future is comprehensive and allows us great confidence in meeting our medium-term objectives. Thank you once again, and we are now equipped to address your inquiries.

Thank you, Ana and Jose Antonio. We now have time for Q&A, so let’s move forward to that.

Thank you very much. Ladies and gentlemen, we will now begin the Q&A session. Your first question comes from Jernej Omahen from Goldman Sachs. Please go ahead.

Yes, good morning, everyone. I have two questions, please. The first concerns the return on tangible equity target and how that might translate into growth for tangible book value per share. Given the circumstances, we've seen Santander record high levels of underlying profitability, but the tangible book value per share decreased this year for reasons we are all aware of. What gives you the confidence that meeting your targets will also be associated with tangible book value per share growth? My second question pertains to the EBA stress tests, which have announced underlying assumptions that appear to be quite severe, almost forecasting a perpetual recession. To what extent, if at all, do you expect the results of these tests to inform supervisory decisions around capital returns, dividends, and buybacks? Thank you.

Thank you very much. This year, as you've seen and mentioned, tangible NAV has been considerably affected by exchange rates. We are diligently working toward continuing and accelerating the model’s change, which we've achieved significantly over the past years. Essentially, we need to reallocate capital towards profitable growth while ensuring diversification. The US has consistently provided substantial returns in dollars, and we need to strike a proper balance between volatile currencies and those that are more stable, such as the dollar and euro, perhaps even the pound. This main approach is fundamental to our plans for improving tangible NAV—relentlessly reallocating capital towards high-growth, high-profit sectors and maintaining the right balance and diversification through each economic cycle. Regarding the medium-term target of 13% to 15%, I can affirm that it is predicated on revenue growth—specifically, we are aiming for mid-single-digit revenue growth as our base. In terms of 2021, we are optimistic about volume growth driven primarily in the Americas, along with expectations for positive asset repricing, the realization of half of the EUR1 billion or EUR500 million cost reductions in Europe, combined with a decrease in the cost of credit. We are keen on improving year-on-year performance, so we will apply the same principles as this year, but with even greater efficiency for 2021. In the medium-term, we will persist in our focus on those three priorities outlined, which are yielding substantial tangible results. As Jose Antonio mentioned, Corporate Investment Banking and Wealth Management now account for nearly 40%. These are higher return on capital businesses; we anticipate that the expansion of acquiring and payment solutions through PagoNxt will also be beneficial for the modification of our model. Regarding the EBA stress tests, there are particular considerations that Jose Antonio may wish to discuss. However, we are confident in our capital buffers and diverse portfolio. The fact that our pre-provision profit this year, standing at around EUR24 billion, indicates we could afford to double our 2020 provisions and still maintain capital—our buffers would still remain intact after accounting for that. All of this underscores our confidence as we move forward. We acknowledge that the outcomes of the stress test, which I suspect will reveal some detrimental aspects, need to be further examined, but I am confident in our ability to stay resilient through this process.

As you know, historically, we've performed well in stress tests, being a top performer. Our capital depletion was lower than our conservation buffer. We expect to continue performing well, even if the scenarios are more severe. Two issues we've been addressing that disproportionately affect emerging market exposure like ours are the static balance sheet—where loan books are relatively short term—and the new provisions for losses due to currency depreciation. It feels somewhat artificial, but it is what it is. However, we maintain confidence in our business model's stability and our ongoing diversification, bolstered by the strength of our pre-provision profit. We believe we have the strongest performance in comparison to our peers in the industry.

If I may add some context, I would like to point out that over the last decade, we've navigated two of the most significant global crises which have occurred in generations. Our model's stability is demonstrated well in our underlying profit performance for 2020, wherein we recorded approximately EUR5 billion; this figure alone is more than double the profit we saw at the lowest points during the crisis in 2008 and 2013. During that time, we had 70% less capital, signifying our remarkable progress. Thus, our earnings stability, coupled with diversification and our stress management capability, showcases without question our resilience through the previous challenges we've faced.

Thank you, Jernej. Next question, please.

Thank you. Your next question comes from Ignacio Ulargui from Exane BNP Paribas. Please go ahead.

Hi, good morning, everyone, and thanks for taking my questions. I have two inquiries; first, regarding the Fiat strategy, I would like to hear your thoughts on how you view the new business additions—Payments, Wealth Management, or Investment Banking Pools—impacting fee performance dynamics over the coming years. I've noticed a clear tailwind from existing funding cost unwinding, particularly visible in NII within the UK and Spain. I'd like to understand your perspective on the pathway for fees over the next couple of years, specifically relating to the relevance of the Payments business in this process. My second question pertains to our Brazilian operations; noting the notable performance which exceeded our initial expectations given the pandemic, what strategies do you plan to implement to further enhance the contribution from this market to the Group?

The growth in fees will continue to stem from Corporate Investment Banking, Wealth Management, and Retail, which notably plays a critical role as well. The One Europe strategy, alongside operations in the Americas, ensures retail fees also remain significant contributors. There's still uncertainty looming over the next few months, which could likely yield subpar fee performance in the first half of the year; however, we note that as things stabilize, performance in the latter half of the year typically improves significantly. With Payments in focus, you'll see more from the Getnet Brazil listing, which will illuminate our capabilities in this domain. We have already achieved incredibly strong performance in acquiring businesses within Brazil and Spain, thanks to the establishment of our Payments factory; as we expand this internationally, we should anticipate accelerated growth in this area. While addressing the timing remains complex, I project substantial gains within a few years. Our mid-term projections suggest considerable enhancement across all these sectors. Regarding Brazil, historically, we always face uncertainty during periods of crisis, and the performance has indeed been encouraging. Please bear in mind that Brazil is characterized by persistently low interest rates; currently, we enjoy a steeper interest rate curve, which we view positively. We are projecting growth in volumes along with positive asset repricing, which I already mentioned for 2021, alongside trending cost of risk downward, particularly in select geographies.

Our focus in Brazil primarily rests on growing volumes, as we anticipate a double-digit growth rate similar to what we achieved in 2020. This will be our critical driver. Margins are projected to stabilize more than we encountered last year. In 2020, we faced regulatory impacts, especially regarding personal checks which reduced our NIM and NII significantly. Overall, the main drivers of our franchise momentum can be seen broadly visa market share gains and our capability to expand customer volume, as we have witnessed previously in recent years.

Thank you, Ignacio. Next question, please.

Thank you. The next question comes from Ignacio Cerezo from UBS. Please go ahead.

Hello, good morning, and thank you for the presentation. I have a couple of questions; first, could you provide some clarity or insight regarding the regulatory headwinds concerning capital for 2021 and 2022? My second question focuses on the US business, where the cost of risk performance has been impressively favorable compared to initial expectations for the year. With the introduction of a new stimulus plan, including possible cash distributions to consumers, should we still anticipate an uptick in provisions, or might the 2020 provision levels be sustainable moving forward? Thank you.

Regarding the US, we have been continuously monitoring this, aligning our outlook with peers that have disclosed their results. Our performance aligns with regional and larger banks when considering risk profiles. Our prudent provisioning efforts will remain in force, and the stimulus measures will be crucial in this context. I don't foresee substantial deviations from what our peers are experiences. In terms of consumer lending, we find ourselves right within our peer range, and we're performing exceptionally well.

Concerning capital and regulatory headwinds for 2021 and 2022, the distinct impact of regulatory changes in 2020 was roughly around 40 basis points. In 2021, we expect similar trends to persist, albeit at a lower impact than 2020. It's more challenging to predict with absolute accuracy at this stage, but we presume the impact will be mitigated compared to that noticeable during 2020. In 2022, we hope that the trend will stabilize downwards, as we anticipate significant risk-weighted asset reductions from various models we are currently developing.

Thank you, Ignacio. Next question, please.

Thank you. Your next question comes from Francisco Riquel from Alantra. Please go ahead.

Thank you, and I appreciate you taking my questions. I'd like your insights regarding the Getnet listing in Brazil—will there be plans to offload more assets from PagoNxt into this unit, and what are your ambitions regarding this listing? Will there be an eventual monetization of this asset? On another note concerning the US business, could you provide an update on your strategic outlook for the retail side? I've also noticed a front-loading of some restructuring expenses and would like your commentary on the cost cutting initiatives in that segment. Thank you.

We have recently announced the listing of Getnet Brazil; this is not a sell-off. It pertains to listing Getnet Brazil. Our subsequent announcements around PagoNxt will provide further insights throughout 2021. The aim is for PagoNxt to incorporate three lines of business; primarily, it would focus on acquiring businesses. In this case, we plan to unify Getnet Brazil with the Getnet mobile platform and potentially Wirecard along with SEMs. Our vision is to create a global merchant acquiring business through this listing, with Getnet at its core.

In terms of our US operations and strategic direction, we intend to continuously boost efficiency. However, we recognize that, as SCUSA expands, costs may trend upwards. Nonetheless, I predict overall efficiency in the US will stay relatively stable. We are not currently implementing specific restructuring initiatives akin to those we’re executing in Europe this year.

As for the strategic view on the US, the US market stands out due to exceptional risk-return characteristics in comparison to markets around the world; it's large, with abundant talent, stability, and noteworthy innovation. Strong connections to Latin America and Europe fortify our position. Santander Consumer and SBNA are increasingly working together. A significant portion of Santander Consumer's origination is financed by SBNA. Hence, we perceive the US as a singular market rather than fragmented pieces. Even throughout this year, despite a few one-off benefits, we enjoyed adjusted profit growth compared to the previous year from the US. Accordingly, I would emphasize that we recognize our positions, and we will steadily continue collaborating, with rising revenues observed in CIB and commercial banking increasing by 30% year-on-year. There are no current plans for divestment. We are intensely committed to urban areas by fostering collaboration across markets in Spain, Mexico, and the US, enabling innovative culture transformation.

Thank you, Francisco. Next question, please.

Thank you. Your next question comes from Carlos Cobo from Societe Generale. Please go ahead.

Thank you for your presentation and the insights regarding your future vision. I would appreciate if you could touch on regulatory impacts for 2021; it would help clarify if there is still an impact in the range of 10 to 15 basis points for 2021. Can you please update us on this? Additionally, I have two strategic inquiries. Given that Payments are a global business, why begin with the Brazilian subsidiary? I seek understanding behind the decision to initiate in this manner rather than promoting a more global approach. Lastly, could you elaborate on the outlook for COVID losses, emphasizing visibility for 2022? What default scenarios should we anticipate for 2022, especially concerning Stage II loans? Thank you.

We definitely believe that outlining the Getnet listing in Brazil marks an initial step in the construction of a global platform. This project is geared toward developing a system parallel to the banks—a unified payment system that would enhance bank performance across all divisions. Think of One Santander as a solid customer relationship-based operations network, while PagoNxt serves as that global platform aimed at acquiring payments. That said, proceed cautiously—we will expand globally in due time, and we anticipate gearing toward that objective over the next few years. Regarding regulatory capital, I expect the overall influence of capital impacts in 2021 to be below the 40 basis points range observed last year. The designs from the teams and models will still resonate with some variability, but my estimation points to a lower impact than 2020, providing you are all correctly following these developments.

As for the COVID losses in 2022, I emphasize uncertainty exists still in this sector as we progress in 2021. Our predictions consider the IMF framework while modeling around the health situation. If we are correct in anticipating our scenarios under IFRS 9, we've already built provisions around EUR4 billion, theoretically covering most or all potential losses that should arise. We may encounter discrepancies should we veer toward more negative or positive scenarios, but we are grounded in a conservative and prudent approach.

Thank you, Carlos. Next question, please.

Thank you. Your next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead.

Hi, good morning. I have two questions regarding capital allocation. First, it seems like the journey toward capital building may be nearing completion, signaling a future emphasis on growth. However, could you clarify how you envision payments diverging from your natural footprint? What underpins your confidence in attaining growth outside your established markets? The second question remains focused on the Digital Consumer Bank; are you targeting to double profits? What regions are slated for the most significant growth? Some of this growth may originate outside your primary footprint—especially in markets like Germany where you have penetrated successfully. What are the sources of growth outside traditional spaces? On a sector-wide scope, given that the industry is accumulating capital at historic levels, how might this trend affect competition? Might it catalyze M&A, even cross-border transactions? While you have continually stated your stance against being involved in M&A, what specific circumstances could lead Santander to reconsider? Thank you.

As stated previously, I will reiterate that our interest in crossing borders for M&A within Europe is negligible; we would require significant regulatory changes to even contemplate this action. We've proven successful in Digital and Payments, as we believe we are already capable of maintaining adequate client relationships and scale. Scaling is crucial; our expenses over the past six years have gradually improved, as indicated by a 47% cost-to-income ratio, projected to remain below 40% in coming years given our scale. We are already aware that this market cap extends across Europe and the Americas, with number one positioning in terms of customer counts. This year, we guided towards single-digit revenue growth based on substantial momentum. In terms of customer earnings, we recorded stable revenues in 2020, which I deem remarkable. Although there's ongoing uncertainty impacting fees in the first part of the year, I'm confident our strong results will drive growth with PagoNxt and the Digital Consumer Bank. In regards to doubling profits in the Digital Consumer Bank, we have an extensive customer base, with 18 million active clients at Santander Consumer and onboarding 6 million new consumers annually. I encourage you to consider the flywheel approach I previously articulated. The virtuous cycle is critical for leveraging insights. This transition is not going to happen overnight, perhaps not until 2022 or longer—but the foundations are solid. Moreover, in the past year, we've also seen a significant double-digit return from the Consumer Finance segment, further solidifying our aspirations for efficiency and underlying returns. Lastly, there is ample opportunity for growth across both the consumer and credit sectors. I want to underscore that we are continually primed for cross-selling opportunities, while our technology infrastructure for Openbank enables extensive markets for us. We are concluding it is an intriguing approach in this envisioning line; for now, we're closely examining the margins.

Thank you, Alvaro. Next question, please.

Thank you. Your next question comes from Daragh Quinn from KBW. Please go ahead.

Hi, good morning, and thank you for taking my questions. Could you elaborate on capital targets and dividends, given you generated capital this year and appear set to return toward your targets? I would assume that even with our cash dividend forecast, you would still be generating organic capital. Could you discuss how that might shift or change your perspective on the optimal capital levels moving forward? Also, on dividends, could you confirm that you have no intentions of utilizing scrip dividends, as we've seen previously, which has been a hindrance to TNAV per share growth? Regarding business performance, I have an inquiry about margin stability in two regions; the UK's margin has improved significantly with NII performance, particularly linked to changes in pricing policy on 123 accounts. What can we anticipate looking ahead? Additionally, in the US, outside of consumer operations, the banking business has struggled in margin and NII. What are your thoughts regarding this situation and the outlook?

We are aiming for capital ratios between 11% and 12%. Going forward, we anticipate that we will witness greater capital flexibility in our capital strategies. We've briefly discussed our cash dividend distribution between 40% and 50% based on underlying profit, which will take effect once we're permitted to do so. The significant factor here is our strides in transition are producing results in performance outcomes. For example, we’ve focused on an operating level transformation aimed at a more sustainable growth path. In these conditions, we actually anticipate growing our earnings alongside organic capital growth while remaining prudent regarding balance sheet scales and lending proportions, ensuring stronger performance yields. We are committed to providing a growing cash dividend level compared to prior years. We previously reverted to a scrip in 2020 as we needed to distribute dividends to shareholders, including retail clients. The board's objective, as consistently stated over the last several years, is to pursue 100% cash dividends; that is what we are targeting for 2021. We will maintain communication regarding recommendations leading into Q4, while firm confirmations will be dependent on ECB guidelines from that time frame. As for operational performance, let’s pass over to Jose Antonio for more insights regarding the UK. Then I’ll turn it over to him for the US.

As for the UK market, we have seen a considerable improvement in terms of margins and NII as a result of our recent pricing policy modifications on 123 accounts. We anticipate these trends continuing through 2021. While regarding the outlook for US operations outside consumer banking, we're experiencing ongoing challenges regarding NII performance. Still, we are committed to navigating those challenges and enhancing efficiency wherever possible. Overall, we expect to implement measures that will facilitate better outcomes.

Thank you, Daragh. And I believe we can take one more question.

Thank you. Your last question comes from Fernando Gil de Santivanes from Barclays. Please go ahead.

Hello, good morning, and thank you for taking my questions. A quick question on Spain's NII trends—how much are you accruing on TLTRO, and how do you foresee this impacting 2021 and 2022 moving forward?

This question is addressed to Jose Antonio. Can you elaborate?

Currently, we hold around EUR75 billion in TLTRO. Additionally, we believe we can benefit from the new conditions recently described, projecting an increase of approximately EUR300 million in 2021 relative to 2020—of which we expect EUR250 million to originate from Spain.

I believe we are out of time for more questions today. Thank you very much, everyone. Thank you, Ana and Jose Antonio, and the investor relations teams.

I apologize for the length of the presentation, and I appreciate your patience. We usually receive requests for more time for questions, which we've endeavored to address all inquiries. This last question illustrated that we are very pleased with our results, and should you have any follow-up questions, feel free to contact us. Stay healthy and safe. Thank you.

Thank you. Goodbye.