Banco Santander, S.A. Q3 FY2021 Earnings Call

Good morning, everyone. Thanks for joining today's Santander nine month 2021 earnings presentation. Every quarter our Group CEO, Mr. Antonio Alvarez will address the highlights on the group performance then the group CFO Jose Garcia-Cantera in detail. We'll comment on the different business areas trends before the CEO jumps into the key takeaways and obviously, we'll have plenty of time to answer your questions. Jose Antonio, please.

Okay. Thank you, Sergio. Good morning to everyone. Thank you for joining us in this Third Quarter Results Presentation. I think the results show the business momentum we are having with another solid set of results in Q3. The operating income pre-provision profit is growing 11% year-on-year in constant Euros. Revenue was up 8% driven by the rise in volume loans, deposits, mutual funds. And this comes along with the growth in a non-diluted way, increasing customers and greater utilization that led to strong revenue generation, efficiency improvement, and higher profitability. Specifically going to the numbers Q3 '21 profit was around EUR2.2 billion plus 2% quarter-on-quarter in constant Euros plus 5% in current Euros on the back of some Euro average depreciation year in the currency. Year-on-year is a bit different in the quarter, the year depreciated a bit against the basket of our currencies. 9M '21 group attributable profit, EUR5.9 billion, excluding Q1 as starting items 9M '21 underlying profit EUR6.4 billion. The numbers speak for themselves. We maintained, I will call discipline and showing credit quality, reflected in our cost of credit below 1%. Regarding capital, there's strong capital generation in the quarter, plus 48 basis points in Q3 enabled us to reach a fully-loaded core equity tier 1 ratio of 11.85% at the top end of our 11-12% target range. We continue to deliver outstanding growth and profitability. Return on tangible equity stands at 12.6%. Annual net asset value grew in the quarter, and the increase in the dividend per share rose 6.5% year-on-year. The board has approved a new remuneration policy for 2021 with a payout set at 40% of underlying profit, 50% in cash, 50% in buyback programs, entering distribution approximately in the region of EUR1.7 billion. In short, we are well on track to outperform the full year '21 goals that we established at the beginning of the year. And to reach our medium-term underlying return on tangible equity target in the region of 13% to 15%. Moving to customers, a great success on the transition has been a key driver of revenue and net operating income growth. We recorded a steady increase in total customers. And in turn, our customers are increasingly using our products and services through contact centers, digital channels, and the branches. As a result, digital customers rose by more than 5 million year-on-year. Digital transactions were up 39% year-on-year and grew across all the countries between 20% and 50%. Digital sales as a percentage of total sales reached 54% in nine months 2021, plus 10 full percentage points year-on-year. With growth in all products across the board, mainly those related to individuals, mortgages, consumer deposits, and investments. If we look at the last quarter, digital sales reached 57% of the total. Also, and this is important. We are top three by NPS in seven markets in which we operate. Regarding exchange rates, they had a small positive impact in the quarter, but year-on-year the still negative impact was -5 percentage points in revenue, and -3 percentage points in costs. Looking at the results in constant Euro, revenue grew, particularly customer-related revenue. We demonstrated core discipline and adapted to recent inflation, which has been significant, particularly not only in Argentina but also in Brazil, Mexico, and Chile. Additionally, we had a significant reduction in loan loss provisions, reflected in the quarter with some increases mainly in the U.S. We delivered a 9-month 21 underlying profit of EUR6.4 billion, up 87% year-on-year. Notwithstanding certain items in the third quarter, I recall that we recorded 530 middle restructuring costs in Q1. I will leave you with an overview of the performance in region and global business, and our CFO, Jose Garcia-Cantera will elaborate further, highlighting very positive performances across all of them. Once again, the U.S. Brazil CIB performance has improved significantly. The global business is performing very well. Wealth Management and Insurance and PagoNxt are delivering according to or better than our expectations and guidance provided to you. Our scores are typical for our geographical and business diversification. Each of our regions contributed roughly 30% to Group profit. Europe 29%, North America 29%, South America 30%, and on the Digital Consumer Bank 12%. Moving forward, I will analyze the quarterly trends in core lines, sustaining revenue growth and posted performance in trading gains in Q3 compared to previous quarters. On the other hand, net income remained stable, impacted by seasonality in Europe and strong figures in CIB and corporate investment back in business across the board. It will run you through these in more detail in the following slides. Cost control is crucial in the context of high inflation and increased expenses related to word activity, alongside higher loan loss provisions mainly in the U.S. NII was up 7% compared to nine months in 2020, at 1% quarter-on-quarter. On the back of higher volumes, loans grew 8 billion in the quarter and deposits grew 15 billion. Regarding margin management, we adjusted from the previous year where we observed a general repricing of liabilities in Europe, North America, and Chile, and improved loan spreads in the UK and U.S. In addition, there was a positive year-on-year impact of TLTRO that you are very familiar with. Naturally, there was no impact on a quarter-to-quarter basis. Lastly, average interest rates have remained lower than in nine months of 2020, despite increases in Latin America, particularly in Brazil, Mexico, and Chile, where rates have gone up recently in Poland. These increases will positively impact NII in the coming quarters. When we turn to fee income, we continue to recover from the lows in the second quarter of 2020, and the entire range of products showed higher activity levels year-on-year, albeit with some seasonality in the quarter, mainly in Europe. You have the figures for July, with all activities showing heightened engagement. Payment volumes improved significantly, card transactions rose sharply, and consumer activity continues to improve, with strong signs of recovery year-on-year. In Q3, mainly, the motor finance business has been affected by new vehicle sales that are impacted by the ongoing supply chain challenges. However, we have noticed some of the strongest activity we've seen so far in the U.S. Additionally, CIB and Wealth Management & Insurance generated a substantial increase in fee income, representing about 50% of the group's total fee income. Wealth Management & Insurance fees grew by 11%, driven by the significant increase in assets under management and insurance premiums. CIB fees rose by 19% on the back of significant activity in DCM, ECM, and the recovery of income to pre-pandemic levels across our footprint, except for the U.K. due to regulatory changes affecting drafting since April 2020. On the cost side, we continue to see significant pressure from inflation across all countries, particularly in Latin America, where group costs rose by 3.7%. In real terms, excluding inflation, costs were 1% lower, despite having higher IT expenses from increased activity and labor agreements. Our efficiency ratio improved by more than 120 basis points year-on-year to 45.6%. This is a very strong figure in the industry, mainly driven by gains in Europe. We recorded the highest efficiency gains in Europe, with a 1.5% reduction in costs, indicating progress in our cost reduction plan which we expect to accelerate in the coming quarters, increasing synergies. Notably, Spain exhibited a 7% increase in efficiency in the region. As I indicated earlier, costs were at 50% having improved by seven percentage points year-on-year. In North America, costs increased by 8%, largely driven by technological expansion, amortizations, and our U.S. $50 million donation to our community foundation that was recorded in the quarter. Notably, Mexico's performance remained flat in real terms, with efficiency in the region standing at 44%. In South America, increasing costs rose by 9%, greatly influenced by the high inflation in Argentina. In real terms, costs declined by 3% in the region, while Brazil and Chile saw reductions of 6% and 1%, respectively. Efficiency in the region stood at 35% with continued improvement. In the Consumer Bank, costs were heightened due to changes in perimeter related to the leasing company we acquired in Germany, Sixt Leasing, and a joint venture in Italy that we launched this year. Finally, loan loss provisions have a cost of credit in the last 12 months of 90 basis points, compared to 1.27% in the same period of 2020. Taking into account only the first nine months of the year, the cost of risk was 83 basis points, performing better than expected due to lower provisions in most markets, mainly in U.S., Brazil, and Chile, alongside net releases in the UK. The NPL ratio remained flat year-on-year and slightly lower quarter-on-quarter. Total loan loss reserves amount to EUR24.5 billion, with a coverage ratio of 74%. I would like to remind you that the majority of the overlay we recorded last year sits on the balance sheet. We expect to make some releases in Q4, based on new macroeconomic scenarios, allowing the coverage ratio to reach around 80 basis points by year-end, assuming our view of the macro scenario remains unchanged. Lastly, regarding capital, I want to highlight the strong organic generation we achieved in the quarter, at 48 basis points. This figure is primarily supported by our risk-weighted asset management through securitization. We also recorded 16 basis points related to regulatory impacts, and an additional 17 basis points attributed to market performance. Overall, the core equity tier 1 ratio increased by 15 basis points to 11.85% on a fully-loaded basis, very close to the maximum level of our range of 11% to 12%. As you can see, we outperformed our peers, demonstrating our solid business model in Asia. When we discuss the ratios, the tangible equity is progressing well, earnings per share is progressing well, and tangible net asset value per share is progressing clearly. Our return on risk-weighted assets has reached 1.8% compared to 1% in Euros. After the ECB lifted the recommendation against paying dividends, our board approved a payout of up to 40% of underwriting profit, and we are entering distribution for a value of EUR1.7 billion, which includes buybacks. To date, around 30% of the buyback program has been executed. Finally, I'd like to mention our strong commitment to ESG. The bank has focused on sustainable and inclusive growth for many years, and we continue working on enhancing our financial products to support our customers in the transition towards a low-carbon economy. We have set an ambition to achieve net zero by 2050, as a founding member of the Net-Zero Banking Alliance, committing to set carbonization targets for carbon-intensive sectors by September 2022. We aim to reduce emissions in our power generation portfolio significantly by 2030. We have joined the Partnership for Carbon Accounting Financials to establish a general standard for harmonizing our published numbers. On the green finance side, we have mobilized EUR51 billion in renewable energy since 2019, leading in financial renewals across our key geographies. We issued EUR1 billion in green bonds, totaling EUR3 billion to date as part of our sustainable debt plan. Socially, our main goal is financial empowerment through our program Santander Finance For All. We’ve launched microfinance initiatives in Brazil, Mexico, Uruguay, Colombia, and Peru, having reached 6.2 million financially empowered individuals since 2019. We are also focusing on increasing the representation of women in senior leadership positions. In governance, we are committed to diversifying our board and including ESG metrics in our bonus scorecard. Our corporate culture is reflected in the strong engagement levels of 80%, significantly above sector averages. Lastly, our varied ESG initiatives have garnered external recognition, and I will now hand over to Jose to elaborate on the different business units and regions.

Thank you Jose Antonio and good morning everyone. As always, I will start with a brief summary of the regions and then I will move into the main countries in the following slides. In Europe, we continue to grow our business while advancing in a common and more efficient operating model. We had volume growth year-on-year and quarter-on-quarter in almost all markets, and we expect these trends to continue in the coming quarters. This has led to revenues growing strongly at 12% year-on-year. As Jose Antonio mentioned, we had outstanding cost management alongside a strong efficiency improvement, and we also saw a low cost of risk at 48 basis points. This resulted in net operating income growth of 30%, doubling our profits. In North America, we experienced accelerated volumes though U.S. figures, as I will explain later, are affected by disposals in the year-on-year comparison. We had strong profit growth year-on-year, boosted by cost of credit improvement mainly in the U.S. and an increase in revenue. Excluding disposals, total income was up 7%. Return on tangible equity in North America was 13%. In South America, we continue to strengthen our regional ties, manifesting in solid double-digit customer and volume growth. Profit was up 31%, and the return on tangible equity stood at 20%. In the Digital Consumer Bank, we witnessed robust profit growth in the third quarter, leading to double-digit growth year-on-year as well. Now, let me go into the main countries. In Spain, the stock of loans was flat in the quarter as mortgages offset the decrease in lending to companies. Mortgages recorded the highest new business volumes in the last three years. Results in the third quarter were supported by strong net operating performance. Revenue rose 11% in the quarter, while costs dropped 4%. We will remain cautious regarding provisions in Spain, but we expect the cost of risk in 2022 to be approximately half that of 2021. Year-on-year revenue grew 4%, primarily driven by net fee income, especially in transactional and insurance products. Our cost reduction efforts were reflected in a sharp decline of 7%, improving efficiency by 6 percentage points, while loan loss provisions remained stable. We anticipate balance sheet trends to continue in the coming quarters, leading to stable net interest income, while fee income could expand at mid-single-digit rates. In the UK, the main trends noted in previous quarters persisted. The net interest margin continued to improve based on positive repricing on volume growth. The mortgage book grew 4%. The declining costs accelerated as our transformation program provided savings partially offset by IT investments and regulatory-related programs. This resulted in the efficiency ratio improving by 13 percentage points in the first nine months of the year. We recorded another quarter of zero loan loss provisions. Return on tangible equity in the first nine months was 11.5%. Like in Spain, we expect the balance sheet trends to continue in the coming quarters. Assuming no rate hikes, net interest income should stabilize while fee income would grow at low single-digit rates. We expect to reach a cost-to-income ratio below 50% next year, while the cost of risk should gradually normalize. Brazil closed another excellent quarter in terms of volumes, profit, and profitability. We maintained a strong growth rate in new mortgage lending with a record high in card sales. We gained 1.6 million new customers just in the third quarter. Profit was nearly 30% higher year-on-year at EUR1.8 billion, and return on tangible equity increased to 22%. We experienced positive NII performance due to larger volumes as a slight increase in average interest rates occurred, while net fee income also grew in insurance and capital markets. We reached record efficiency levels with costs increasing only by 1%, while inflation rose by 10% year-on-year. Loan loss provisions sharply decreased, reflecting a very positive cost of credit performance, which fell to 3.6%, a one percentage point reduction compared to the previous year. Going forward, we anticipate maintaining structural double-digit volume growth rates, which should drive further improvements in net interest income and fee income. We expect to keep costs growing below inflation and to maintain the cost of risk at similar levels. Looking at the U.S., the efforts conducted over the past several years prepared us uniquely to benefit from current market conditions. In terms of volumes, loan performance was affected by the Bluestem portfolio disposal, but excluding this, growth was 2% year-on-year, with auto originations increasing by 16% compared to the same period last year. Customer funds exhibited strong performance, growing 13%.Year-on-year performance is affected by Puerto Rico and other disposals, so I will comment on the year-on-year results on a like-for-like basis. Net operating income rose by 17% backed by resilient NII growth of 7%, strong auto leasing results, and fee income. Provisions decreased sharply, though we're beginning to see signs of normalization. We are proud to announce that this quarter in the U.S., we donated $50 million to the Santander Consumer Foundation to fund a multi-year program focused on transforming the lives of low-income students, young adults, and families across the country. This program will bridge the digital divide and aid students and families in educational programs to boost digital and financial literacy. Additionally, in line with the group strategy to allocate capital towards the most profitable business ventures and accelerate growth in the U.S., in the third quarter we announced two transactions that we have already shared with you. The proposal to acquire all outstanding shares in Santander Consumer. We only own around 20% currently, and the agreement to acquire Amherst Pierpon Securities. Both transactions are still pending regulatory approvals. Looking ahead, we expect high single-digit growth in loans, supported by consumer and CIB, with revenue continuing to grow driven by double-digit growth in NII while fees might contract slightly. In Mexico, lending began to show signs of recovery in the quarter as positive performance in personal loans partially offset corporate loan normalization. In the third quarter, NII was boosted by volume growth and higher interest rates, while fee income was impacted by insurance seasonality in the second quarter and lower financial advisory fees. Costs were affected by inflation, IT projects, and new outsourcing regulations. In September, the cost of credit remained well below 3%. We expect NII and fees to grow at high single-digits next year, while costs should increase below inflation, and the cost of risk should remain fairly stable. Regarding the Digital Consumer Bank, activity trends are generally improving. New lending was 11% higher year-on-year. However, in the third quarter, the microchip shortage hampered production, particularly affecting the new auto market in the early part of the quarter. Nonetheless, in terms of total income, September marked the best month of the year to date, driven by strong consumer lending and steady used vehicle volumes. Coupled with a 3% reduction in costs and the SRF contribution in the second quarter, there was a 32% quarter-on-quarter increase in underlying profits. For the coming quarters, we expect strong cyclical growth in consumer finance demand. The cost-to-income ratio should remain below 40%, while the cost of risk should gradually normalize. Turning to the global businesses in Corporate and Investment Banking, we hold leading positions in the rankings in structured financing in Europe and South America, as well as DCM and ECM in most countries we operate in. We are also among the world leaders in financing and advising on renewable energy. The excellent results in the third quarter underscore our revenue growth, which was up 12% year-on-year, and the efficiency ratio remains a benchmark in the sector at below 38%. Loan loss provisions started to normalize as well. In Wealth Management, total assets under management saw double-digit year-on-year growth. Commercial flows year-to-date in private banking and Santander Asset Management reached EUR14 billion. These flows constitute over 3% of total volume managed. In insurance, gross written premiums increased by 5% year-on-year. In summary, total fee income generated, including what's represented in the commercial networks, grew by 11%, while the total contribution to group profit increased by 16% year-on-year. Transitioning to PagoNxt, revenue climbed 41% year-on-year, bolstered by a strong surge in fees, which rose by 45% at constant exchange rates. We are clearly on track to achieve our projected second-half revenue growth of close to 50% versus the first half, and to reach EUR1 billion in revenue in the medium term. Discussion around the three components of PagoNxt starts with Merchant Solutions. Getnet continued to demonstrate significant growth. The number of active merchants on total payment volume increased across all geographies. Getnet Brazil augmented its market share in the country, reaching 16% of total payments and over 30% in e-commerce. We are developing an integrated offering for European customers in collaboration with Getnet Europe, alongside the integration of technology assets and talent acquired last January. Overall, we’ve reached a total of 1.2 million active merchants and a total payment volume of EUR81 billion in the nine months, up 53% year-on-year. In trade, our initiatives assisting clients in expanding beyond their domestic markets continue to evolve favorably. One Trade currently connects our customers in eight countries, reaching 7,300 active customers, a marked 80% increase since March 2021, with over 15,000 corporate customers growing at more than 500 new companies per month. Revenues are growing at over 20% compared to the first quarter. Lastly, on the Consumer Solutions side, Superdigital commenced operations in Argentina in the third quarter. Moving forward, we anticipate continued strong growth in revenue for PagoNxt, in line with 2021, which positions us to achieve the EUR1 billion revenue target in the medium term. We expect to surpass 2 million active merchants in this timeframe. Lastly, I want to touch upon the corporate center, noting the attributable loss of EUR1.6 billion in the first nine months, which is higher than last year due to lower gains on financial transactions. We had positive foreign currency hedging results in 2020, while there were no material differences in operational costs and significantly lower provisions due to last year's charges affecting certain holdings whose valuation was impacted by the crisis. Now I'll turn it back to the CEO for his final remarks.

Thanks, Jose. Once again, I think we are presenting solid results in the third quarter, consistent across geographies and businesses, supported by the right metrics. Volume growth translates into higher revenue, efficiency, and solid credit quality. We continue to build capital, and our return on tangible equity now exceeds our cost of equity. As a result of these strengths, and following the lifting of the restrictions on distributor recommendations, we will resume our dividend policy and continue to focus on improving our profitability while assisting our customers and society at large. We aim to keep growing our customer base, strengthen loyalty by enhancing satisfaction, support digitalization, and facilitate financing, thereby fostering sustainable business growth with a positive impact on society. In short, we are witnessing business improvements underpinning our confidence in profitable growth ahead. For that reason, we are confident in our ability to make progress toward our mid-term target returns on tangible equity of 15%, as I mentioned at the start of this presentation. Thank you very much for your attention. Now, we will open the call for any questions that you may have.

Thanks Jose Antonio. So now we can proceed with the Q&A session. First question.

Thank you, sir. The first one is coming from the line of Alvaro Serrano from Morgan Stanley. Please proceed, sir.

Good morning. Thanks for taking my questions. My first question is on capital and maybe if you can provide some guidance. Thanks, Jose, you've already provided quite detailed guidance on the P&L, but can you give us some insights on capital as we think about 2022? Are we past the majority of the headwinds, or is there anything remaining? And any thoughts on Basel 4, if that's an additional impact or not? My other question is on costs. You mentioned the EUR1 billion cost-cutting guidance in Europe, but costs in the group were slightly higher in the quarter. Can you share your thoughts on the plans, particularly in the UK, and what’s proving so difficult to achieve these cost reductions in the UK? It feels like it has been years since we've discussed these cost plans in the UK not delivering. What is proving so difficult, and do you think you can reach the EUR1 billion target? Thank you.

I will address the cost issues and refer you to the CFO regarding the capital question. Regarding cost cutting in Europe, we committed to a EUR1 billion nominal reduction in costs across four core businesses: Spain, the UK, Portugal, and Poland. We're progressing well in Spain and Portugal. In the UK, we are a bit behind but I believe that this year we will be at a running rate of EUR600 million in nominal cost reduction. I am confident that we can ultimately reach the EUR1 billion target. The delay in the UK is mainly due to some compliance investments we are making, which require us to allocate resources there. Nonetheless, we remain committed to delivering the EUR1 billion we mentioned by 2022.

Concerning capital, we do not expect any further regulatory adjustments this year. For next year, we have a small influence from minorities, and we will have some impact from updating the models, but this should be significantly less than the impacts we encountered in 2021. Throughout the year, we expect to be at the upper end of the capital range. Regarding Basel III, we need to see the final legislation. We saw a draft leaked a few days ago, which indicated the ILM equal to one. If confirmed, the impact on Santander would be minimal. As you are aware, we will not be affected by the output floor. Therefore, with ILM one-to-one and some adjustments, the impact will be very small.

Thank you. Our next question, please.

Next question is coming from the line of Fernando Santivani from Barclays, please go ahead.

Hi. Good morning. Thank you for taking my questions. My first question is on Spain's NII and how you see trends related to pricing and volumes going forward? The second question is about the U.S. and how you foresee the franchise long-term without the agreement with Chrysler. Thank you very much.

On NII in Spain, we are observing significant activity in the individual space, particularly in mortgages and consumer lending, which is thriving. However, the corporate sector is not as dynamic. The NII has been notably influenced by the level of Euribor. Assuming that the Euribor remains at its current level, we expect the NII to remain in line with what we have shown today. In regard to the U.S. franchise, while there's a reduction in the agreement with Chrysler commencing in 2023, we will continue to do business with them. Since Chrysler is a non-finance company, it will take time for them to start underwriting the subprime and near-prime sectors where we specialize and we expect to retain a considerable portion of the business. Moreover, we are diversifying away from Chrysler, having aligned with three different providers, ensuring a robust relationship with our core business along with further OEMs.

Thanks. Moving on to the next question, please.

Thank you. The next question is from the line of Francisco Decalt from Elantra. Please go ahead.

Yes, and thank you for taking my questions. My first question is about Brazil. The bank in Brazil is performing very well, delivering returns above 20%. However, macro risks are increasing with inflation exceeding 10%, leading to concerns over fiscal spending driving long-term growth expectations down for 2022. In this context, could you share how you see the main KPIs in Brazil regarding volumes, margins, costs, and the cost of risk? The second question is about the other revenue lines, particularly those you included in the EUR500 million for the third quarter, especially in Spain, which was much higher than expected in most consumer businesses, the Digital Consumer Bank and the U.S. What can you tell us about the nature of these revenues and whether they are recovering?

We are indeed performing well in Brazil thanks to market share gains, especially in retail spaces, credit cards, and insurance. While you noted the increasing macro risks, the inflation and rate hikes being implemented by the central bank are manageable. Although you may see a temporary negative impact, our capacity to keep momentum in the business remains strong. Regarding KPIs, I do not anticipate a significant impact on the cost of risk other than what may arise from the mix with retail growing at high double digits and corporate sectors growing possibly at mid-single digits or slightly lower. Also on the topic of other revenue lines, particularly in Spain, we are seeing some businesses gradually returning to normal, and this line is expected to keep growing sustainably. Those figures are conditional on the economic outlook continuing to improve.

Thanks for the question, Francisco. Now, let's move on to the next one, please.

Thank you. The next one is from the line of Adrian Cighi from Credit Suisse. Please go ahead.

Good morning, Adrian Cighi from Credit Suisse. Two follow-up questions from my side, one on Brazil, and one on capital. In Brazil, we see NII increase in the quarter by 8.5% in Euro terms. And my understanding is the first-year impact of rate increases has a negative impact of EUR63 million from a 100-basis point rate increase. This year, the central bank has raised rates by over 400 basis points. Are we seeing the effect of these rates reflected in these results, or should we expect a delayed response in the coming quarters? Given the aggressive cycle we're currently undergoing, any insight into the timing and extent of impact would be appreciated. Sticking with Brazil, we've seen notable fluctuations in FX in recent weeks. Can you also update us on where your hedges stand? Briefly on capital, you had a 17-basis point headwind in the market and others. Can you provide more context about what drove this given that there were limited spread movements this quarter? Thank you very much.

In Brazil, concerning the impact of rate increases, while we initially faced a negative impact, quarterly observations show retail volumes expanding in line with higher margins. We've noted volumes grow close to 20%. In summary, we grew around 11% in NII compared to previous quarters. Given the 63 million euro impact you mentioned, it will be more evident as time proceeds. I now hand the floor to our CFO.

The largest impacts in terms of the available-for-sale portfolio affecting capital have been seen primarily in Poland, Brazil, and Chile, averaging around EUR500 million each since the start of the year, contributing to the overall impact on capital. In terms of hedging, we continue to hedge our capital ratio to ensure that FX movements do not affect it. We already have some currencies hedged for the next year, and we tactically adapt based on our market expectations. However, our primary focus remains on capital hedging, which we consistently pursue.

Thank you, Jose. Our next question, please.

Thank you. The next one is coming from the line of Sophie Petersen from JP Morgan. Please go ahead.

Yeah, hi. This is Sophie from JP Morgan. I have a couple of follow-up questions. Firstly, regarding Brazil's net interest income. While I acknowledge the mix effect, we noted that loan growth in Brazil was only 2% quarter-on-quarter in Q3, but NII rose 5% quarter-on-quarter. Were there enhanced outflow performance in Brazil contributing to this NII growth, or is this merely a function of the mix effect? Secondly, I'm aware that while regulatory impacts are expected to lessen next year, can you remind us how much of Amherst Pierpon and any other factors we should consider regarding Tier-1 impacts outside of regulatory matters? Thank you.

On NII performance in Brazil, the shift you noted between retail and corporate sectors is impacting the overall mix. The ALCO portfolio has reduced significantly and thus the corresponding NII is influenced. I will pass my comments regarding regulatory impacts to Jose.

Regarding Amherst Pierpon, this is subject to regulatory approval, but the impact is expected to be around 9 basis points, while the buyback of SCUSA minorities will account for about another 10 basis points, which we hope to recognize by year-end. Concerning regulatory charges, we foresee next year, a change in the accounting of minorities to add around 10 basis points to the overall capital. Besides that, we might see some moderate impact from new models but overall, next year’s total regulatory impacts will be significantly smaller than in 2021.

Thank you for your questions. Moving on to the next one, please.

Thank you. The next is coming from the line of Carlos Cobo Castena from Societe Generale, please go ahead.

Hello, and thank you for the presentation. I have a couple of questions. One is regarding Stellantis. You've mentioned the impact in Europe, but reports suggest they are in the process of restructuring partnerships in Europe. Could you clarify from where you are in negotiations and if there is any risk of losing joint ventures or portions of the partnership? Furthermore, have you considered a different approach to capital allocation within the group, and if not, why not? Running with a tight capital ratio versus market perception might hinder stock rerating. Might unlocking capital help to maintain a comfortable buffer that could be rewarded by market perceptions? Would it be nice to hear your thoughts?

Regarding Stellantis, we are having positive discussions and I remain optimistic about the continuation of our existing relationship. I believe we will continue to be their preferred partner in the coming years based on our strong collaborative performance. Concerning capital, I remind you that our capital targets stand at 11-12%. Our current position is quite comfortably close to the upper end of that range. In fact, among Europe's biggest banks, we maintain the lowest capital requirements. Based on our findings during stress tests, we continue to manage risks effectively. Thus, I don't see a pressing need to alter our operational approach concerning capital and I assure you, we plan to maintain our standing within the targeted capital range. Finally, Jose, do you want to add any information?

Indeed, among the larger European banks, we are the one with the lowest capital requirement. Our MDA CET1 buffer currently stands at 340 basis points. Capital, being a scarce resource and inherently costly, naturally prompts us to focus on optimal allocation. However, I concur that we are currently well positioned to navigate effectively with our capital management strategies.

Thank you for your questions, Carlos. Let's proceed to the next query, please.

Thank you. The next question comes from the line of Daragh Quin from KBW. Please go ahead.

Hi. Good morning. Thanks for taking my question. I just wanted clarification on your comments regarding the cost of risk into Q4. I believe you mentioned a provision release, which would lower the overall charge from 90 basis points to 80 basis points for the full year. I wanted to confirm this. Additionally, you indicated that you're at the high end of the capital range, not expecting much change in Q4. With lower regulatory headwinds anticipated in 2022 and considering your profitability guidance, could you be more specific on why the CET1 ratio wouldn't exceed the stated range, or is the increased profitability being offset by higher RWA growth? Thanks.

Regarding the cost of risk, I mentioned in the presentation that we must update our macroeconomic forecasts, and the overlay recorded from last year remains in the balance sheet. We’re looking to release a significant portion of the provisions, primarily tied to macroeconomic improvements, estimated between EUR700 million and EUR1 billion, which should occur in Q4, potentially bringing the year-end cost of risk down to approximately 80 basis points as outlined before. For the capital guidance, we have set boundaries that the board believes are appropriate for our ongoing risk assessments. Hence, if risk-weighted assets grow at an average of 6%-7% going into 2022, our ability to sustain an 11-12% target range throughout the year will remain intact.

Thank you for your clarity, Daragh. We’ll take one more question before we close, please.

Thank you. The next is coming from the line of Mario Roberto Gasta from Best Inverse Securities, please go ahead.

Hi, good morning. My first question is related to NII in Spain. You stated that you expect NII stability going forward. What are the assumptions regarding costs embedded in this stability? Are you assuming that current conditions will remain in place throughout 2022? Additionally, regarding your return target, while I recognize you provided mid-term guidance, could you provide some directional insight for next year? Do you expect your returns to improve compared to 2021 levels?

Regarding NII in Spain, we assume current conditions will continue, not forecasting any increases in rates, so we anticipate navigating through 2022 with rates similar to 2021. However, I see our position concerning the Euribor is relatively strong, giving us confidence for the upcoming year. On return on tangible equity, I expect that it will indeed be higher in 2022 than it was in 2021. While we don't provide exact guidance, you can project these trends based on our current trajectory and anticipated improvements.

Thank you for your insights, Mario. We now need to conclude the Q&A. Thank you everyone for your participation.

Thank you for your questions. Take care.