Banco Santander, S.A. Q1 FY2021 Earnings Call

Good morning, everyone. Thanks for attending this Santander First Q 2021 Earnings Call. As always, we have our group CEO, José Antonio Alvarez; and the Group CFO, José García Cantera, who will address the presentation. The slide we published early today, around 7:00 Madrid time. Before jumping to the questions, obviously, the CEO will address the highlights for the first quarter and the group performance, then the CFO, in detail, the different business areas review before handing over back to José Antonio for the key takeaways and then the Q&A. So with no further delay, José Antonio, please.

Good morning to everyone. Thank you for making the time to attend this conference call. So I should say that we have had a good performance in the first quarter. We have delivered growth in the quarter. Net operating income, the pre-provision profit increased 15% on the back of revenues growing 8% and costs being flat in constant euros. This was driven by greater volumes, repricing deposits, and strong cost control. In this environment, naturally, in the middle of the pandemic, digital adoption is accelerating and now more than 50% of our sales were made through digital channels compared with the 41% in Q1 2020. Compared with the first quarter of 2020, revenue was higher, efficiency improved a lot, mainly driven by Europe, and the cost of credit also improved notably to 108 basis points. Loan loss reserves stood at €24 billion, while non-performing loan coverage was at 74%. We have barely used the provisions overlay that we made last year. As a result, underlying attributable profit reached €2.1 billion, and the underlying return on tangible equity stood at 13%. In addition, we recorded an expected restructuring charge for the whole year, €530 million net of taxes, resulting in an attributable profit of €1.6 billion. The core equity Tier 1 ratio was 12.3%, with a strong organic generation in the quarter of 28 basis points, including 15 basis points that we accrue to remunerate the shareholders, equivalent to 40% of Q1 '21 underlying profit. The bank is accruing through the year or its intention to accrue through the year the proportional amount to 40% to remunerate shareholders once the supervisors allow to do so. The tangible net asset value per share grew 2% quarter-on-quarter. And while it's true that we still live in an environment with significant uncertainties going forward, particularly those related to the vaccination process, the ongoing economy is going to go back to normal. On top of this, as you already know, we announced our intention to make a cash offer to repurchase our outstanding shares in Santander México, around 8% of the stake in the company. This transaction is expected to be completed in the second or third quarter of this year. If we look at the quarter, I should say that we've been living in an environment where we have had still expansionary fiscal and monetary policies with very low rates, although we are starting to see some changes in the quarter. Brazil in our footprint already raised rates in the first Q. But in general, we still have very low rates across the board. In relation to the social front, lockdowns and restrictive measures of different intensity in different countries have significantly affected household, individuals, and consumer activity in the countries in which we operate. On the other hand, state guarantee programs had a negative impact on the revenue outlook, even as they benefited the cost of credit. So we have different speeds in the vaccination that are producing different outcomes among major economies. We are seeing already a significant rebound in activity in the U.S. The U.K. has had significant volume levels, and in the EU, we are starting to see some rebound, starting back in March and accelerating a bit in Brazil in April. Going to the group performance, I should say, starting with income statement, share rates had a strong negative impact year-on-year, 12 percentage points in revenue and 8 percentage points in costs. Excluding them, revenue grew driven by all the P&L lines. We continue to deliver an excellent cost performance in all the regions, especially in Europe. As a result, net operating income, as I mentioned before, grew 15% year-on-year. In addition, lower loan loss provisions compared with previous quarters and lower cost of credit, which I will describe later in more detail. All in all, the first quarter underlying attributable profit reached €2.1 billion. Finally, we recorded €530 million expected restructuring charges for the year as a whole, mainly in the U.K., around €300 million; Portugal, around €160 million; and Corporate Centre and others, around the remaining €70 million. Following this, Q1 attributable profit stood at €1.6 billion. Overall, all income statement lines performed well, supported by our diversification. However, geographies showed virtually the same weight, and the regions recorded a strong profit increase. Notably, the U.S. had a net profit of €660 million in the quarter. The Digital Consumer Bank, which contributes to 11% of the group's underlying profit, also increased its profit significantly. There is also the case for our global business, as CIB had an excellent quarter, with a result above €700 million profit. If we look at the trends in the P&L, we see revenues going up 3% quarter-on-quarter due to the strong performance in CIB on the back of our strong activity with our corporate customers and the continued recovery in net fee income, up 4%. That came mainly from CIB and other activities because, as I said before, the activity with households was somewhat subdued in the quarter due to the lockdowns. Costs were down 3%, mainly driven by falls in North and South America, as the fourth quarter is usually affected by seasonal factors. As a result, net operating income increased 8% quarter-on-quarter. Loan loss provisions plummeted 5.5%, with growth base fall across regions and most markets. The Digital Consumer Bank also recorded sharp falls. Finally, underlying profit of €2 billion was notably higher than in the previous quarters. A focus more on NII: I should say that while NII grew 5%, it is a result of higher volumes, with an increase of 2% in loans and 8% in deposits; cost of deposit management positively impacted by TLTRO. Moreover, it's worth recalling that the first quarter always has some seasonality compared with Q4. As for year-on-year performance by country, I should remark the good performance in the U.K., up 24%, backed by higher customer variances and positive repricing actions that were partially offset by lower asset yields. Spain was up 10%, driven by higher volumes and TLTRO. Brazil was up 6% due to rated volumes that offset lower interest rates. The U.S. remained flat despite interest rate cuts. Mexico fell 6% due to lower interest rates and lower portfolio volumes, impacted by the pandemic and having a relatively cautious approach to carrying risk. When we go to net fee income, it continues to be affected, particularly in households, by the lockdowns in most countries and seasonality in Brazil. Despite this environment, the upturn in net fee income quarter-after-quarter from the loss of Q2 2020 allows us to recover to Q1 '20 prepandemic levels. From here, we expect to start to grow, assuming the pandemic behaves as we expect, on the back of better activity in the consumer household side of the business. Our strategy has remained focused on growing loyal customers and higher value-added services and products. This was reflected in a positive performance in CIB, Insurance, Wealth Management, and other businesses. In total, they account for 50% of the group's total fee income. Cash and traditional fees were dampened by the pandemic, and the U.K. reflected the impact of regulatory changes to overdraft since April 2020. By region, North America grew 7%, with price increases in both the U.S. and Mexico. South America saw 2% growth, with increases recorded in Chile and Argentina, while Brazil started to recover. Europe showed a decline of 4%, with generalized declines, except for Poland, due to lower activity in households as I have been commenting across the presentation. On the cost side, we see a very positive performance. In Europe, costs fell 4%. North America grew 2.8%, with relatively high inflation. South America is performing similarly well when viewed in real terms. Efficiency improved significantly at the group level, now staying slightly below 45%. I want to remark on the significant productivity gains in Europe, where the cost/income ratio now stands at 50%, whereas last year at this time, we were close to 60%. We are building a new operating model across the group that will enable us to accelerate our transformation and further increase productivity, remaining one of the most efficient global banks in the world. Going to credit quality: The NPL is basically flat. We improved the cost of credit to 108 basis points, driven by lower loan loss provisions in most countries, particularly in the U.S., Brazil, the U.K., and Spain. Looking at the 3-month annualized provision, the cost of credit in the quarter was 84 basis points, while in the first Q of 2020, it was under double that due to the provision overlay we took at that time. Loan loss reserves stood at €24 billion, with non-performing loans coverage of 74%. As I said, the overlay still in the balance sheet from last year primarily remains there. In summary, amid persistent uncertainties, especially in Europe, we see areas performing better than expected, such as the U.S. Looking forward, we also expect an improvement in individuals. Consistent trends on individual household credit quality are emerging, and we remain somewhat more cautious about corporates, particularly SMEs, which will depend significantly on the recovery of the economy we expect to start in the second and third quarters of this year. All this enabled the group to perform better than expected in cost terms. This strong operating performance translates to a return on equity ratio in the quarter of 13%, with EPS growing nicely and tangible net asset value also reflecting the good consistent and sustainable results towards the most important financial ratios. On capital, I already commented on the strong organic generation of 28 basis points in the quarter due to the net effect of a 43 basis points increase from profit and risk-weighted asset management, with a negative impact from shareholder remuneration of 15 basis points. This positive performance was offset by regulatory impact of 6 basis points from the IFRS 9 phaseout and market impact on the AFS portfolio. The full-year '21 expected restructuring charges of 10 basis points that we bring forward to the first quarter. Now we hand it to the CFO, José García Cantera, who is going to elaborate on the different areas of the group.

Thank you, José Antonio, and good morning, everyone. I'll start by saying that our global scale, customer focus and diversification really helped once again with our business and profit growth in the quarter. In Europe, we are executing our business transformation to accelerate growth through a more efficient operating model that should allow us to progress towards our medium-term return on tangible equity target of 10% to 12%. In the first quarter, it was 8%. Loans grew 2%, and customers 7%, with positive trends since the beginning of the year in all markets. Revenue growth was 13% versus the first quarter of last year, with strong cost control and efficiency improvements. In addition, we had lower cost of risk at 51 basis points in the quarter. In North America, there was a sharp increase in deposits in both the U.S. and Mexico, while loans fell due to the negative economic impact from the pandemic and more importantly, from the disposals of Puerto Rico and Bluestem. Attributable profit was up strongly year-on-year driven by good net operating income and lower provisions in the U.S. Return on tangible equity was 12%, or 14% if we adjust for the excess capital in the U.S. In South America, we experienced double-digit growth in both loans and deposits. Net operating income and profits were up, driven by strong revenue growth and lower loan loss provisions in most markets. Return on tangible equity rose to 19%. Our Digital Consumer Bank achieved a 12% return on tangible equity, and we saw a significant pickup in activity in March. So in summary, we've delivered robust performance in all regions in the quarter, with strong business generation and positive trends in all lines of the P&L. Moving to the countries, starting with Spain. Our strategy remains focused on One Santander, where customer migration is advancing according to plan. We saw positive commercial trends in individuals, notably in residential mortgages, which were up 17% year-on-year, and Consumer Finance. However, loans fell slightly in the quarter, mainly driven by wholesale banking, in line with global corporate deleveraging. On a year-on-year basis, growth was 3% due to SMEs and corporates. Customer funds were 10% higher year-on-year, and notably, mutual funds were up 23%. In terms of results, underlying profit amounted to €243 million, almost 3 times higher than last year. We had resilient total income growing 10% in NII, although this was negatively affected by lower fee income due to reduced economic activity from the pandemic. Quarter-on-quarter, NII was negatively affected by lower day count, lower ALCO portfolio, and reduced volumes. We continued with the transformation of our distribution model, which enabled us to grow the net operating income by 9%. Loan loss provisions were down 29%, and the cost of risk improved relative to the previous quarter. Moving forward, despite the uncertainty that still remains, we expect NII to grow at mid-single digits while the cost of risk should remain below 2020, and operating costs should perform as expected. In the U.K., we had a very positive quarter based on volume growth, lower cost of deposits, and efficiency improvements. In volumes, we saw continued year-on-year growth in lending, driven by mortgages and SMEs. Customer funds were also up, boosted by retail banking deposits and mutual funds. Profits rose 6% year-on-year. Here, total income increased 12%, with net interest income up 24%, mainly from deposit repricing actions as well as higher customer balances, particularly in mortgages. Fee income was lower due to regulatory charges affecting overdrafts. Costs decreased, reflecting progress on our transformation program, with a cost of credit at 21 basis points in the quarter. In 2021, we expect to grow net interest income close to double digits, benefiting from new business pricing dynamics and lower funding costs. The recent changes introduced in the 1|2|3 account in April will drive additional improvements in our Q2 NII. We remain confident in our ability to reduce the cost base by mid-single digits in 2021, and we are not seeing any signs of asset quality deterioration in the U.K. In Brazil, we had an excellent performance at the beginning of the year, both in terms of volumes and results. We saw commercial activity recovering to pre-COVID levels, taking advantage of that to increase our market share in lending. We achieved the highest number of mortgage sales in the first quarter and in auto, we remain the leader in individuals as we increased our current account customer base. All this was reflected in greater volumes. Loans grew 13% year-on-year, mainly in individuals and government-backed SMEs, while customer funds rose 12%. In terms of results, profit was up 47% year-on-year, with return on tangible equity increasing to 21%. Total income was supported by very strong NII and higher gains from financial transactions. We achieved higher productivity with strong expense management, enabling costs to drop 3% in real terms and reach record efficiency levels. Loan loss provisions decreased significantly, resulting in a very positive cost of credit performance, which fell to 3.8% when looking at the last 12 months and 3.3% in the first quarter. Again, compared to the fourth quarter, profits were up 3%, driven by strong NII and cost reduction that offset lower fee income impacted by insurance seasonality. For 2021, we expect loans to grow faster than the market, while customer revenue should increase moderately, and costs should maintain a good trend. We expect the cost of risk to be lower than last year, and under no scenario should it exceed 4%. Moving to the U.S., we believe that the work we've conducted over the last few years is reflected in these numbers. Beyond the improved macro conditions that are obviously helping, we believe that our efforts over the past few years are aiding our performance in the U.S. Volumes were impacted by the divestiture of Bluestem and Puerto Rico that I referred to before. Excluding these perimeter changes, loans were up 1% year-on-year, with auto originations increasing 24%. Deposits continue to perform strongly. We had very good P&L performance with underlying profit of €616 million, the highest of any country in the first quarter. Net operating income increased 13% backed by strong NII from lease income, capital markets fee income, and expense management. Excluding the impact of disposals, net operating income grew by 19%. Additionally, loan loss provisions decreased by 81%. We made significant regulatory progress as the Fed terminated its 2017 written agreement with SCUSA, and we also upgraded Santander Bank's Community Reinvestment Act rating to outstanding. In Private Banking, BSI announced a transaction to acquire $4.3 billion in customer assets and liabilities from Crédit Agricole, which improves our competitive position in this highly profitable market. For 2021, we expect these positive trends to continue throughout the P&L and maintain a strong performance in asset quality. In Mexico, we continue to invest in digital channels, strengthening our value proposition with new products and services. Year-on-year, volume performance reflects the normalization of the corporate portfolio following the uptick at the beginning of the pandemic. Profit was down year-on-year, impacted by NII pressure due to lower rates and lower volumes. Total income declined, again driven by NII pressure, which was more than compensated by fee income and gains from financial transactions. Costs were slightly up due to higher technology investments, but in real terms, costs fell by 3%. Loan loss provisions dropped 7% despite some charges recorded for certain corporate customers. Looking at 2021, we expect flattish NII, while net fee income is projected to grow, supported by credit cards, insurance, funds, and investment banking. We believe the cost of credit should begin to improve in the coming quarters, with non-performing loans around 3% by year-end. Moving to our Digital Consumer Bank, we created this as the leading digital consumer finance bank in Europe, combining the scale and leadership of Santander Consumer Finance and Openbank's digital capabilities. As a result of the health crisis, new lending fell 3% year-on-year, particularly in January and February. However, as I mentioned, we observed a strong recovery in March. In terms of results, underlying profit was €291 million, 25% higher year-on-year. Total income increased slightly compared to 2020. NII was predominantly down due to lower outstanding balances in Spain and interest rate limitations in Poland, though this was offset by higher income from operational leasing activity following the acquisition of Sixt Leasing Germany in 2020. Costs rose by 1%, mainly due to digital investments in technology at Openbank. Excluding the acquisition of Sixt in Germany, costs fell 4% year-on-year. We observed a strong reduction in loan loss provisions with impressive credit quality performance. The cost of risk was 0.69% in the quarter. For the coming quarters, we anticipate strong cyclical growth in Consumer Finance post-pandemic, along with a gradual recovery of volumes and solid credit quality across the European customer base. Moving on to our global businesses, the Santander Corporate and Investment Bank delivered excellent results this quarter, holding leading positions in the rankings of Structured Finance, DCM, and ECM with outstanding results that reached record highs. Revenue rose by 44% year-on-year, driven by customer-related activities. Costs were 8% higher, but the efficiency ratio improved to an outstanding 31.8%. Although this quarter's results are unlikely to be replicated in the coming quarters, we expect a positive performance in 2021. The Wealth Asset Management and Insurance business continued performing well in the quarter. Total assets under management amounted to €370 billion, which is 12% higher year-on-year. Fee income for Insurance rose 5%, with total fee income representing 31% of the group's total, increasing by 3% year-on-year. Looking ahead, we foresee continuous growth in line with volumes in this business. This is the first quarter in which we report PagoNxt. Payments are a cornerstone of our strategy to grow and strengthen our customer loyalty. Santander serves more customers than any other bank, with over 150 million clients, including 4 million SMEs, more than 200,000 of which are international customers in Europe and Latin America. PagoNxt comprises three different businesses. Firstly, Merchant Solutions: Getnet is already one of the top 3 acquirers in Latin America, starting in Brazil. It is a highly competitive market, but the business is expanding. We are gaining market share and reached 15% in December 2020, up from 11.5% in 2019. In Q1, we launched Getnet in Chile, offering distinctive features in the local market and generating strong demand. Getnet in Latin America operates in Brazil, Chile, Mexico, and Argentina, boasting 1.1 million active merchants. This figure is growing 14% year-on-year. Total payment volume was €22.5 billion in the first quarter, a 26% rise year-on-year. We expect to achieve 20% to 30% growth in the medium term for these two metrics. This year is an investment year, and we anticipate generating revenues in Europe in the second half of the year, relying on the newly acquired technology assets of Wirecard, which have been purchased at a favorable price, allowing us to unlock their value quickly. The second component of PagoNxt is Trade Solutions. We have 207,000 clients with international activities over the last 12 months. Our global trade and international payments platform, One Trade, connects our customers across Brazil, Spain, the U.K., Chile, Portugal, and Colombia, presenting over 4,000 active customers. We aim to double the transaction volume yearly in this area. Ebury, with a presence in 20 countries, offers financial solutions to simplify international trade and has already attracted 15,000 active clients. We expect revenues there to grow by 30% to 40% annually in the medium term. The third component of PagoNxt is Consumer Solutions. Here, Superdigital, our platform addressing the financial needs of underbanked populations, is being rolled out across seven Latin American countries, presenting substantial growth opportunities. We believe we can double this business year-on-year; in Brazil, Superdigital already boasts almost 600,000 active customers with transaction volume growing 30% year-on-year. Now let me finish with the Corporate Centre, where we see results improved by 49% year-on-year, largely due to the positive impact of income tax from this year's release, coupled with charges recorded in Q1 2020, and the favorable trend in operating expenses, which improved by 7% compared to Q1 last year, driven by ongoing streamlining and simplification measures. On the other hand, net interest income was affected by the increase in liquidity buffer. We noted lower trading gains because of the positive hedging results recorded last year and anticipated higher provisions. The net loan loss provision line includes a charge of €150 million gross, €105 million net, which has not yet been allocated to any specific portfolio and was built due to the lack of visibility regarding the timing, pace, and strength of the economic recovery. With that, I'll turn it over to José Antonio. Thank you.

Thank you, José. I'm going to elaborate. Give me just 1 minute. On the back of the first quarter results, I should say that while the results are solid, consistent, and sustainable, revenue grew 8%, and we improved efficiency. As a result of this, net operating income grew nicely. We continue to build on our customer base; digital customers keep growing, loyalty to our customers is enhancing, and customer satisfaction places us in the top 3 in six of the markets we operate. We recorded the restructuring charge for the entire year and continue to focus on cost control and improving our efficiency ratio. The cost of credit improved, with an underlying profit of €2.1 billion reported. The core equity Tier 1 ratio is above our target, with the underlying return on equity rebounding to 13% in the quarter. Looking forward for 2021, I should say that we are increasingly constructive. Observing the business environment, we expect activity to increase as vaccination progresses, albeit at varying speeds depending on each country's vaccination progress. Amid some remaining uncertainty, we foresee lower costs of credit with better performance in individuals versus corporate sectors. We believe that demand for individuals and consumption will rebound, especially in countries with faster vaccination rates. This will facilitate greater fee income generation as activity soars. Outlook for the main regions suggests that in Europe, we expect high single-digit underlying returns on tangible equity driven by strong household activity rebound, margin management, net fee recovery, and execution of savings plans. North America shows underlying profit trends that should surpass initial expectations in the U.S., as shown by Q1’s excellent results. The auto business is well-positioned to benefit from strong demand for banking services leveraging our deposit franchise in the U.S. South America, amid the challenging environment, should see continued growth in Brazil, projecting an underlying return on tangible equity around 20%. The Retail Consumer Bank has witnessed a recovery in volumes, leading to solid credit quality, as seen in the U.S.; we anticipate potential growth in retail banking across Europe with operations in Spain, Portugal, Netherlands, and Germany through Openbank, expecting double-digit return on tangible equity in 2021 as witnessed in Q1. We are more confident that we will deliver on our medium-term goals as we progress through the year, aiming to improve the efficiency ratio, reduce the cost of credit, and significantly enhance our profitability. Thank you very much. Now we will remain available for any questions you may have.

Thank you, José Antonio. Thank you, José. Indeed, it's time now for the Q&A session. So please, operator, we can proceed with the first question.

[Operator Instructions]. We already have a couple of questions. The first one comes from Alvaro Serrano, representing Morgan Stanley.

Two questions for me. The first one is on growth. It's clear that provisions, overall, are much better. However, it seems like the market is not buying the growth outlook. My question is, what do you think is missing from consensus numbers? Are you optimistic about growth in consumer business? Is it purely Openbank? Are you planning acquisitions that we do not fully appreciate? And a comment on growth generally, particularly with the European focus. The second question is on capital. You're at 11.9% fully loaded, and it appears that capital build will be better for the remainder of the year. Would you consider buying back last year's script as a way to potentially regain some institutional investors who were disappointed last year?

Thank you for your questions. Growth is a very general question. Many areas and dimensions of our medium and long-term business are expected to grow because we have a solid foundation in numerous geographies, particularly in Latin America. This year, visibility is poor due to massive currency depreciation of 2020 affecting growth translation into Euros, as indicated by numbers from Brazil, Mexico, and Chile. In the consumer space, where we believe we can grow, lockdowns have hindered us. However, we have already noted rebounds in activity starting in March and April, provided the vaccination progresses as expected. We are also capturing growth opportunities in the Digital Consumer Bank. In auto, where we lead the market, we are starting to expand there. The Digital Consumer Bank presents opportunities in non-auto consumer finance that we are beginning to address. Additionally, through PagoNxt, which José elaborated on, we aim for growth in the coming years. Overall, our growth outlook is bolstered by operational income growing 15%, indicating that our performance is not solely driven by provision reductions but by top-line growth as economic activity rebounds. Regarding capital, as mentioned, our intention is to accrue 40% of underlying profit to remunerate shareholders, which could include dividends or buybacks, pending board decisions and regulatory permissions. Our aim is to sustain this growth.

The next question is from Francisco Riquel, representing Alantra.

Yes, I wanted to ask about Spain, starting with the top line. NII fell 4.5% quarter-on-quarter beyond the 2% due to lower day count. Can you provide guidance on this? In addition, regarding the cost of risk, it remains high for another quarter, which makes sense given that the Spanish macro is underperforming other geographies. Can you update us on how you see the credit cycle in Spain? When do you anticipate normalization in your cost of risk and at what levels?

Okay. Thank you, Francisco. Starting with NII: our guidance stays the same; we expect NII growth around mid-single digits for the year. You mentioned day count and reductions in volumes affecting this quarter's performance. However, we remain confident in achieving mid-single-digit NII growth for the entire year. In fee income, we expect significant progress starting in Q2 and continuing into Q3 and Q4. As for your second question on the credit cycle regarding the cost of risk, this is a complex issue. We’re optimistic about household credit quality, as favorable trends are surfacing in individuals where moratoria have expired, and we are witnessing encouraging signs. However, with SMEs, uncertainties remain due to various factors, particularly the impact of seasonal tourism. Visibility for credit cycles is low; I would estimate requiring at least two quarters of normalization to clearly assess pandemic-related damage in the SME sector.

The next question is from Ignacio Ulargui, representing Exane BNP Paribas.

I just have two questions. One concerns cost performance; how do you expect the €1 billion savings to perform now that you have separated the Digital Consumer Bank? When should we expect benefits from all restructuring charges in Spain, particularly in the U.K.? Secondly, regarding the cost of risk in the U.S.; we have positive performance in second-hand indexes impacting provisions. What would be the normal range for provisions in the U.S. going forward?

Okay. Thank you, Ignacio, for your questions. Regarding the cost performance and the €1 billion commitment in Europe and restructuring charges: we took necessary restructuring charges for Spain last year, I think it was in the fourth quarter; in this quarter, we took the expected charges for the U.K. For Spain, we expect cost reductions in the high single digits, while the U.K. should see mid-single-digit reductions. As we focus on the Consumer Bank, we've seen reorganization and growth. The €1 billion in savings will predominantly come from Spain and the U.K. The second question regarding the cost of risk in the U.S., the cost of risk here tends to be influenced by our loan loss provision strategy. While we are not releasing provisions, we are still provisioning in the U.S. Thank you.

The next question is from Daragh Quinn, representing KBW.

I'd like to return to the provision charge in the U.S., particularly the consumer business. A loan loss charge of just 300 basis points this quarter is significantly lower than historical averages. Besides this year, what do you consider a suitable medium-term outlook for the provision charge in the U.S. consumer business? The second question, regarding Brazil and cost growth, historically, your guidance has been for costs to grow below inflation. In Q1, we've seen a nominal reduction in costs. Is that simply due to specific trends this quarter or a result of greater cost control in Brazil?

Thank you, Daragh, for your questions. Regarding the U.S. provisions: indeed, the current quarter's charge approximates 300 basis points, significantly lower than historical rates. The fluctuation is related to mix and how we manage our balance sheet, meaning what remains. Margins between prime and subprime are substantial. I believe the cost of risk may normalize in the high single digits when conditions stabilize, but to discuss a timeline is difficult given market uncertainties. On the costs in Brazil: we are actively enhancing productivity, with digital sales performing exceptionally well. The nominal cost reduction observed reflects strengthening control and operational restructuring while pursuing growth opportunities. We have successfully captured market share in favorable products. I will hand it back to José.

Yes. For regulatory charges in capital, we expect small charges that may range between 5 to 10 bps. The two largest expected charges for this year relate to low default portfolios, occurring in the second quarter, expected at approximately 8 basis points, and the new definition of default, which we deem to be uncertain in terms of timing and amount needed, likely under 10 basis points. Thus, we anticipate seeing around 25 to 30 basis points in regulatory charges for the remaining three quarters this year.

The next question is from Carlos Catena, representing Societe Generale.

Two quick questions: on the U.K., I expected better performance in net interest income, possibly on the low end of expectations. Can you elaborate on why NII declined in the quarter? And as for legacy assets in Spain, which I believe affects the entire sector; how do you plan to address your high stock of non-performing loans in Spain? Will this require a top-up in coverage as you exit this portfolio? Additionally, regarding stage 1 portfolio, how much of the restructured loans and payment holidays do you maintain as performing?

Thank you, Carlos, for your questions. On the U.K. NII: as José elaborated earlier, we still expect an acceleration in the NIM in Q2 due to reductions in deposit costs, combined with growth in volumes from mortgages, which makes us optimistic. The quarter itself had reductions attributed mainly to day count and incidental lending activity. Regarding legacy assets: we have maintained a conservative provisioning policy in Spain, aiming at approximately 100 basis points on average. In addition, we remain vigilant regarding potential impacts in light of SME loans affected by the pandemic. The temporary protections on loans are working as anticipated, providing some security. As for restructured loans and payment holidays: customers requesting payment holidays remain classified as stage 1 while in those arrangements. Once moratoria conclude, we classify based on payment behavior, allowing us to maintain stability in our classifications.

The next question is from Fernando Gil de Santivañes, representing Barclays.

Could you elaborate further on NII in Spain and Europe, specifically the contribution of TLTRO programs this year? Additionally, can you comment on the management changes we've seen and how they may influence strategy in the new management teams?

The year-on-year increase in revenue stemming from TLTRO should sum between €300 million to €350 million for 2021 compared to 2020.

Moving to management changes: we have undergone structural changes with the intent to better integrate operations across our European landscape. This includes appointing executives with European responsibilities over specific products; we aim to drive efficiencies and better service delivery. The implementation of a unified strategy underpins this integration. Welcome to questions for further clarification. Thank you.

The next question is coming from Sofie Peterzens, representing JPMorgan.

As a follow-up on the TLTRO benefit; what was that figure? Also, could you comment on Santander's view on M&A or disposals? Any updates on strategic M&A ambitions? Furthermore, how do you perceive the outlook for interest rates in Brazil, and how should we think about NII progression going forward?

In summary: the TLTRO benefit year-over-year for 2021 is expected at €300 million to €350 million.

Regarding M&A activity, we are focused solely on organic growth. We are not currently seeking significant acquisitions; our tender offer for shares in Mexico is minor and is intended to maintain strategic growth. On Brazil: we expect interest rates to continue rising, given inflationary pressures. José, do you have rate sensitivity figures for Brazil?

Brazil is very much balanced. A 100-basis point parallel shift in the interest rate curve is less than €100 million. For the group as a whole, a parallel shift upwards of 100 basis points is a positive €1.75 billion.

The next question is coming from Adrian Cighi, representing Credit Suisse.

Two questions: one on capital expectations and the impact of upcoming stress tests on Santander. Is there visibility on how harsh the tests may be? On asset quality, could you update us on the overlay provisions made last year and how much remains unused?

On capital, we generally perform well on stress tests across our diverse portfolio; it is too early to provide numerical estimates, but we are confident regarding our outcomes. For asset quality, the overlay provisions totaled around €1.6 billion; perhaps we've utilized about €150 million thus far. The majority remains in reserve to handle potential future losses, especially concerning consumer sectors that exhibit positive trends currently. Given uncertainties, we emphasize a prudent approach.

The next question comes from Jernej Omahen, representing Goldman Sachs.

I'd like to ask about capital return prospects, specifically regarding the status of discussions with the SSM on dividend returns. Have any changes occurred due to recent events? Secondly, regarding risk-weighted asset growth for this and further years, what number seems realistic for the group?

We haven’t received new information pertaining to capital returns since our last update. We maintain a constructive understanding towards the SSM based on provisioning levels versus economic uncertainties. Around risk-weighted asset growth, we don't expect significant growth as the market remains active, allowing us to release capital through securitization. Therefore, projected growth should be limited. José, any further insights you wish to add on this topic?

This year, we don’t foresee risk-weighted asset growth. In the long term, we anticipate 3% to 4% growth, excluding regulatory changes.

We are seeing that we are running out of time, but we can take one last question. So let's proceed with the final question.

I have two questions on capital. Do you have any sense of the U.S. fiscal reform impact, particularly concerning DTAs? Secondly, regarding the charges in Poland, which I believe are related to the FX mortgages, how much more of such charges do you expect throughout the year?

On the fiscal reform, you can calculate the effects. The primary element is the final rate, and though the increase will affect us marginally, I don't have precise numbers since the expected rates remain uncertain. Regarding the capital charges in Poland, we expect provisions to rise due to the FX mortgages. Our current provisions remain around €200 million. As you know, final rulings by the Supreme Court are expected around mid-May, which might affect our provisions.

Okay, we need to end it here, everyone. Thanks very much for attending this call. The entire IR team is available for any follow-ups. Thanks, and keep safe.

Thank you, everyone. Take care. Goodbye.

Take care.