Banco Santander, S.A. Q1 FY2022 Earnings Call

Good morning, everybody, and welcome to this conference call to discuss our financial results for the first quarter of 2022. Just as a reminder, both the results report and the presentation we will be following today are available to you on our website. I'm joined here today by our CEO, Mr. José Antonio Alvarez; and our CFO, Mr. José García Cantera. Following their presentations, we will open the floor for any and all questions you may have in the Q&A session. With this, I will hand over to Mr. Alvarez, José Antonio, the floor is yours.

Thank you, Begonya. Good morning to everyone. Thank you for joining us this morning. I'm going to start with the first quarter results, starting with the activity levels of the group in the quarter where we continue to have good customer meeting activity. We keep growing the customer base, two million more customers in the quarter, seven million more since March 2021. This reflects our growing business and increased customer satisfaction. As you know, this is one of our goals, and we rank in the top three in NPS in markets now. While the transactionality and the digital adoption keep growing at a good pace, forty-nine, almost fifty million digital customers, five million more than in March 2021, and transactions in digital channels are growing at fifty percent. As a result of this, our volumes in the balance sheet have launched and deposits have grown, both quarter-on-quarter and year-on-year, and we translate this into customer revenue growth that you're going to see in our P&L. So going to the performance, results, and profitability. The Q1 attributable profit was €2.5 billion, up eighteen percent versus first Q '21 in underlying profit and fifty-eight percent year-on-year when we compare it with the attributable profit. Remember that last year, we incurred around €500 million in restructuring costs that we don't have this year. On the cost side, and this is particularly important in this unexpectedly high inflationary environment, we will do the cost to remain well below inflation and allow us to improve our efficiency ratio in line with our guidance of getting to 45%. We improved our profitability ratios quarter-on-quarter, year-on-year. Our return on tangible equity went to 14.2% and EPS growing at 22% compared with Q1 '21. We continue to create value for shareholders. The tangible net asset value per share stood at €4.29, up four percent quarter-on-quarter, thirteen percent up year-on-year, including the cash dividends. When we go to the balance sheet and we look at the risk particularly credit risk, the cost of credit remains relatively stable at 0.77%, below our guidance for the whole year. And the NPL ratio stays at 3.26%. Remember that in the quarter, we have a like-for-like basis without this new finishing off to follow the NPL ratio far like ten basis points or something like that. The core equity Tier 1 was above 12%, at 12.05%, with good organic capital generation, 40 basis points from Q1 '22 earnings and minus 23 basis points from dividend accrual and the second share buyback that started mid-March. So going to our P&L. Let me mention that the exchange rates played a positive role, four to five percentage points you see in the third column in the slide, in current euros and constant euros -- current euros is four or five percentage points more, partially offset by hedging in the corporate center that our CFO will elaborate later on. As I mentioned earlier, we are at a profit of more than €2.5 billion, growing strongly year-on-year. In the quarter, attributable underlying profit recorded the same amount, and we had no extraordinary charges. I will elaborate on the different lines of the P&L later on. When we look at the regions, we see that we are around thirty percent in each of the main regions, Europe, North America, and South America, and the digital consumer bank around ten percent. Well, in addition to the revenues and profit, we also received an outlook from costs growing below average inflation. We will see later on controlled loan loss provisions and lower minority interest following the acquisition mainly of the Santander Consumer U.S. minorities. The quarterly series reflects our sustained profit growth quarter-after-quarter, but what I mentioned, customer revenue growth, the quarterly comparison of NII is affected by the count, as you know. So on a like-for-like basis, we are growing one to two percent in constant euros NII. The quarter-on-quarter fee income continued to increase, with positive performance in the majority of countries, partially offset by seasonality in South America, mainly in Brazil. Costs decreased quarter-on-quarter, thanks to our core discipline and partly due to bonus adjustments in the fourth quarter of 2021. In addition, our loss provisions remained flat year-on-year and up quarter-on-quarter, driven by the provision release in the fourth quarter of circa €750 million. Trends in euros were better, as I said, than in constant euros as growth rates were higher, benefiting from the positive FX impact in the quarter. So when we go in depth into the revenue, revenues were north of €12 billion. Net interest income accounted for 95% of total income. By line, NII grew 6% in constant euros due to greater volumes and higher interest rates by country and constant exchange rates; significant rises were recorded in the U.K. plus 15%, Poland plus 78%, Brazil 7%, and Mexico 7%. And on the other hand, Spain was affected by changes in the mix and lower ALCO portfolio, and Portugal by ALCO portfolio disposals that we executed in Q1 '21. Net fee income amounted to one billion, up 6% in constant euros, driven by improved activity, notably in high value-added products and services. You have the figures in the slide. Good levels of activity in cars, insurance premiums, turnover, and mutual investment have translated into higher fees across the world. In cost, as I mentioned at the beginning, we are working in a high inflationary environment. We are focusing here on two main points. One is to ensure that our costs grow less than inflation, achieving a minus 3.3% in real terms. That's particularly important. And the second is to keep improving our efficiency, which improved 1.2%, aiming for 45%. As you know, this is one of our key targets. When we look by regions, we are delivering as expected according to our plans in Europe in a much more difficult environment. It's true that we are showing here with the different reporting in Europe, but we are not far away. I think the CFO already guided you that the €1 billion cost savings will be closer to €800 million affected by inflation, but we are progressing very well in both Spain, Portugal, and the U.K., and also in Poland in a high inflationary environment, and we continue to deliver according to our plans, although affected somewhat by inflation in non-personnel expenses that are much more difficult to manage. In North America, we are growing well below inflation. North America's cost control has been difficult, but we posted a good achievement with a variation of minus 3.7%. You've seen the results of our other players in the same markets. And in South America, while the figure seems pretty high, Argentina is there. But also in Brazil, where inflation is running above 10%. The agreement with unions in Brazil that the sector signed in September last year was in the region of 10% to 11% and this translates to significantly higher costs above inflation. I do expect in Brazil to enter into two quarters of expenses growing less than in the last two quarters on the back of our efficiency plans. The cost of credit remains stable. No significant impact from the conflict in Ukraine. We have no exposure to Ukraine or Russia. Our cost of credit is currently at 77 basis points. In the last three months, it's 83 basis points. As you can see later in the country review, provisions normalize after releases in Q4. The NPL ratio stands at 3.26%, with 19 basis points coming from the new definition of default. Otherwise, the NPL ratio on a like-for-like basis would be through the impact of the new definition. Loan reserves and the coverage remain relatively stable. In coming quarters, the implications of the current geopolitical situation on our business performance and credit quality are still relatively uncertain, and we do not yet understand the duration of the conflict. However, I should say that our starting point is very solid. So the great diversification enables us the resiliency to face the crisis. Our exposure to regions in conflict is negligible, and we have enough tools at our disposal to ensure we meet our expected cost of risk of below 1%, even in the new scenario. When it comes to capital, our capital ratio, we had very good organic capital generation. Gross organic capital generation in the quarter was 40 basis points on the back of the good results I just presented to you. Twenty-three basis points went to shareholder remuneration, 15 basis points for the buyback, and 8 basis points for the accrual of our 40% payout policy. In the coming quarters, we will maintain our focus on the implementation of disciplined capital allocation measures across the group, achieving the targets we announced in Q4. In this regard, risk-weighted assets are growing below loan growth. Our front book is already delivering high risk-adjusted returns. We generated ROA of 2.8% in Q1 2022. The percentage of risk-weighted assets that do not cover the cost of equity keeps falling, and this is a good sign of our future profitability. Our policy to remunerate shareholders is poised to continue. The cash dividends of €3.4 billion are split 50-50 cash dividend and share buybacks. The second share buyback program with a maximum of €865 million started on March 15 and is currently under execution. As a result, the total shareholder remuneration is €3.4 billion, resulting in a 6% yield. In 2022, you know our dividend policy stated by the Board, and we reiterate in our AGM. When we look at the capital profitability ratios, both EPS, return on tangible equity, and tangible net asset value per share are heading in the right direction on the back of the bank's excellent capacity to generate results on a recurring and sustainable basis. Finally, before I hand to José, I would like to highlight Santander's strong commitments to ESG. You have in the slide our commitments regarding how we're progressing in different commitments, particularly in Green Finance, where we already originated €69 billion since 2019 with our common target of €100 billion by 2025. We continue to see good demand, and there is significant investment going into this field, and we are participating in this. We are developing green products and have initiated the development of an information system that allows us to track how our portfolio behaves regarding CO2 emissions. This is an important tool that we need to implement to track all our progress. Well, in the asset management industry, we have also set targets that you can see in the slide, and we are world leaders in renewable energy, signing alliances to progress in this field. The decarbonization targets you see are mainly related to the power sector, and we are progressing in line with these targets. These goals are included in the executives' long-term incentive scorecard, showing how committed we are to these ESG targets. I have referred to these targets on the screen, additionally, particularly active in the social space, particularly in the microcredit segment in Latin America. I now hand over to José who will continue the presentation with results by regions and global businesses.

Thank you, José Antonio, and good morning, everyone. As usual, I will start with a brief summary of the regions and then move on to the countries for a bit more detail. We continue to leverage one of the strengths of our model, which is diversification and scale, improving the operating performance in all three regions and global businesses. In Europe, we are seeing significant improvements in the transformation of our business and in developing a common operating model. We achieved double-digit growth in net operating income and profit, reaching a 13.5% return on tangible equity. In North America, we are refocusing our position in the U.S. while maintaining disciplined capital allocation. We accelerated growth in volumes, generating a return on tangible equity of 24%. In South America, we are growing the number of customers and capturing new business opportunities, delivering an almost 27% return on equity. In the digital consumer bank, new lending increased by 17%, and profits rose double digits with a return on tangible equity of almost 13%. Obviously, we achieved this while enhancing our global business and connectivity with the regions. In this way, SCIB, consumer -- sorry, corporate and investment bank earned a return on tangible equity of 25%, and Wealth Management and Insurance achieved a return on tangible equity of 55%. We continue to progress in the digital development of PagoNxt, which I will discuss in a moment, while maintaining high profitability in our car business, obtaining a return on tangible equity around 30%. So moving to Europe, the business transformation to develop a simplified and common operating model is delivering good results with increased volumes. Especially in individuals, mortgages were up 6%, consumer lending was up 9%, and mutual funds up 3%. We experienced significant improvements in customer satisfaction surveys at the same time. Profit reached €1 billion in the quarter, increasing 30% year-on-year. Revenue grew strongly, with NII up 9%, supported by higher volumes and interest rate hikes in Poland and in the U.K. Fee income grew 7% due to greater activity. Our efficiency plans continue to bear fruit as costs ranked down 2%, with a 7% decline in real terms, and the efficiency ratio improved to around 48%, driving net operating income up by 12%. Loan loss provisions dropped 14% as the cost of credit started to normalize across countries, most notably in Spain. Return on tangible equity reached, as I mentioned before, 13.5%, up 3 percentage points year-on-year. Overall, we remain on track to meet our targets for the year. Our performance in Europe stands out not only for its positive results but also for the special initiatives implemented to support our Ukrainian customers and employees, as well as refugees and all those affected by the war. In this regard, we provided financial measures to facilitate transfers and cash withdrawals, made donations, and collaborated with NGOs to help refugees, such as the two planes chartered from Warsaw to Portugal and Spain. Going into more detail in Spain and in the U.K., in Spain, we increased the customer base by 200,000 customers in the first quarter, which obviously helped volumes, especially new mortgage lending, which doubled compared with the first quarter of '21 and exceeded pre-pandemic levels in consumer credit. Profit grew 21% year-on-year, supported by the execution of our efficiency plans and the lower cost of credit. Revenue remained under pressure due to ALCO sales in 2021 and the change in mix. We had a much better performance in fee income. The quarter-on-quarter comparison is benefiting from the deposit guarantee fund charges of the fourth quarter but is also supported by lower costs and loan loss provisions. In the U.K., we maintained very positive business dynamics. Gross mortgage lending rose to GBP 9.5 billion in Q1, near record levels. NII rose 15%, supported by increased volumes and higher interest rates, driving double-digit growth in revenue. Fee income comparison was negatively affected by the transfer of the Corporate Investment Bank activity from the bank to the London branch. We doubled our efforts to keep costs under control, thereby improving efficiency by 7 percentage points, which enabled net operating income to grow 3%. Loan loss provisions were higher following the normalization of the cost of credit; we expect the cost of credit to be around 10 basis points. The quarter-on-quarter comparison was also affected by the loan loss provision releases in Q4. Moving to North America, our strategy there is to accelerate profitable growth in the U.S. while creating a joint value proposition to improve customer experience, simplifying our business to generate efficiencies. The acquisition of Santander Consumer U.S. outstanding shares, along with Amherst Pierpont Securities and Credit Agricole LatAm wealth management operations, will improve our strategic focus and competitive position. We had solid growth in individual and commercial loans in Mexico and increases in auto and CIB in the U.S. On a like-for-like basis, we need to exclude Bluestem portfolio disposal in the first half; profit was north of 4% higher, benefiting from a better NII and the acquisition of minorities. In the quarter, we virtually doubled the profit recorded before the COVID-19 pandemic. In the U.S., we continue to make progress towards simplifying our business model across our four core businesses: Consumer, Commercial, CIB, and Wealth Management. Loans grew 8%, backed by CIB, Auto, and Wealth Management. During the period, auto originations decreased due to the semiconductor shortage that pushed the Manheim value index to an all-time high in early 2022. Customer funds continued to exhibit strong performance, while the overall cost of funds increased. Moving to the P&L, on a like-for-like basis, profits dropped 5%, basically due to higher loan loss provisions driven by normalization in the cost of credit. We also had more normalized leasing activity due to an increase in the share of lease vehicles repurchased at the dealership in this quarter; in Q1 '22, 24% were purchased relative to 35% in Q1 '21. NII was pressured by the runoff in Paycheck Protection Program-related balances. All in all, we recorded a very high level of profit, more than doubling the average profit in 2019. In Mexico, we had an excellent quarter, reflecting our successful customer attraction strategy. We delivered a 32% year-on-year increase in profit and also great returns on profitability due to the increase in revenues supported by NII, both from higher volumes and the rise in interest rates, along with higher net fee income. We also had lower loan loss provisions due to positive performance in our portfolio. In South America, we continue to focus on attracting new customers and leveraging business opportunities, strengthening connectivity and synergies across the region. We recorded overall growth in loans with good dynamics in individual lending in most countries. Deposits rose 6%, driven by both demand and time deposits. In terms of results, we grew profit 8% year-on-year, with double-digit customer revenue growth, although costs were heavily affected by inflation, especially in Brazil and Argentina. While total costs remained virtually flat in real terms, we faced higher provisions mainly driven by growth in individuals. In Brazil, we maintained positive trends in customer acquisition. Customer numbers increased by 12% year-on-year, and digital customers grew 18% year-on-year as we launched several initiatives for our multichannel strategy. In terms of volumes, mortgages rose double digits, car turnover was up 22%, and we maintained our leadership in auto. This great customer activity enabled us to absorb the rising costs and higher provisions driven by growth in individuals. The cost of risk stood at 3.94%. In Chile, we continue to expand Santander Life, Superdigital, and Getnet. We were very active in launching new strategic initiatives. As a result, we had very strong customer attraction with 11% growth year-on-year, and we maintained our top position in NPS while growing the balance sheet in both loans and deposits. In the P&L, we observed very positive year-on-year performance, up 28%, with revenues up 10%, cost growth below inflation, and a lower cost of credit. In the Digital Consumer Bank, we also had a solid quarter that reinforced our position. We are gaining market share quickly in Europe. We signed new strategic alliances with Stellantis for our Pago product. We launched a new leasing business in all markets in 2021, which experienced a 48% growth in new contracts year-on-year. We signed an agreement with Wobi regarding subscriptions, and Wilsenia, our buy-now-pay-later solution in Germany, has generated over 2.5 million new contracts in just 14 months. Additionally, new business activity is now above pre-COVID levels, having increased 17% year-on-year, up 13% in new cars and 29% in used cars. We are increasing market share in both the new and used car markets. Openbank continued to grow strongly, both in balance sheet terms and in the number of customers. This greater activity was reflected in fee income and leasing revenue growth. Costs increased due to investments in global transformation platforms and some inorganic transactions. Excluding these, costs increased by about 2%, or roughly minus 2% in real terms. We also observed very positive trends in credit quality with a further 25 basis points reduction in the cost of credit. Overall, again, very excellent results were achieved in the quarter by the Digital Consumer Bank, which increased 11%. Turning to our global businesses, in the Corporate and Investment Bank, our aim is to become one of the leading investment banks in Europe, consolidating our leadership in Latin America, and continue to accelerate growth in the U.S. Additionally, as leaders in the sustainable sphere, we completed in April 2022 our plan to acquire 80% of WayCarbon, a leading Brazil-based ESG consulting firm. In financial performance, Q1 was the best quarter in CIB history, with record revenues, attributable profit, and return on risk-weighted assets. Revenue was up 5% year-on-year, a very good quarter relative to already strong performance in 2021 resulting in a 10% increase in profit. It is worth noting that only 20% of our revenue comes from market-related activities, with 80% derived from customers. In Wealth Management, despite market volatility, our businesses grew due to our globally diversified value-added proposition and sales through digital channels. We were named one of the top three global private banks by Euromoney, and activity levels remained strong with net new money of around €3 billion in the quarter. Investment flows and asset valuations were less impacted than in previous crises due to our globally high value-oriented asset mix, contributing to a 10% rise for the group. In insurance, we achieved sustainable growth based on non-related business coupled with strong growth in digital sales, which were up 50% year-on-year. To summarize, higher revenue and total contributions to the group's profit in Wealth Management and Insurance achieved a 7% growth, up 14% on a like-for-like basis. Turning to PagoNxt, in the first quarter, we achieved several milestones in merchant acquiring; Getnet continued to deliver very high growth, increasing total payments volume by 40%, particularly in Brazil, our main growth driver, and in Spain, thanks to our customer acquisition strategy and increased merchant activity, along with traction in Mexico. In international trade, our One Trade platform currently connects our customers across eight countries. We continue to expand its capabilities to facilitate international instant payments between Spain and Brazil. We plan to launch real-time payments in other international corridors in the coming quarters. In summary, revenue doubled year-on-year in the quarter, though quarter-on-quarter is affected by seasonality. In Cards, I would like to highlight our efforts to improve our global card services, working to manage a total of 95 million cards through the group. In Q1 2022, we continued to grow strongly; turnover and the number of transactions increased well above 20%. This performance was also reflected in quarterly revenue, which reached almost €1 billion, 30% higher year-on-year. We had positive performance in credit, debit cards, and across regions. It’s worth mentioning that revenue in the fourth quarter is seasonally higher, yet we see a strong comparison quarter-on-quarter that indicates how solid Q1 2022 was. Looking forward, we expect to continue to grow the number of accounts, turnover, and revenue. Now let me finish with the Corporate Center. We reported an attributable loss of €460 million, which is relatively high, affected by negative FX hedging results, which were more than offset by positive performance of exchange rates in the countries' results. The quarter also experienced a higher liquidity buffer, and we recorded a negative tax impact due to the higher results of those businesses operating in Spain. On the other hand, we did not register any material changes in costs, and we saw a significant decrease in loan loss provisions and other provisions. Now let me turn it back to the CEO for his final remarks.

Thank you, José. Just to finish this presentation before we go to the questions, let me share with you the outlook for the coming quarters, considering the situation in which we are developing our business. As a result of the geopolitical situation, we are facing an environment in which the consensus is shifting towards lower growth, which will be the case due to this war. I mentioned before that we are in a high inflationary environment that is triggering the reaction of central banks to increase interest rates in some countries, with markets expecting more increases. Taking all of this into account, I should say a couple of things. Our starting point is extremely solid. You see the results, you see the trends in our business activity, and you see our customer gathering. So the starting point is very solid. We face this environment from a strong position, and our capacity to attract customers and grow more profitable business in a high interest rate scenario will provide a significant uplift to our revenues. Naturally, in this inflationary environment, we need to be, as always, looking at matching costs. We think that we can continue to deliver cost growth well below inflation, as we showed you in the first quarter. Third, our capacity to control the cost of risk and keep it below the average across the cycle based on our customer knowledge and our anticipation in some markets makes me comfortable with the guidance we gave you regarding the cost of risk and our capital allocation strategy should continue to drive profitability improvement and maximize shareholder returns. This makes me confident that we are on the right track to achieve our 2022 targets, as shared with you regarding revenues, efficiency, return on tangible equity, and capital.

[Operator Instructions]. And our first question is coming from Ignacio Cerezo from UBS.

Two things for me. The first one is on Brazil. I mean it looks like the situation has kind of deteriorated versus the guidance you gave back in December, probably most of the lines are probably below expectations then. So if you can update how you're expecting basically '22 to be shaping up on the main lines in Brazil? And the second one is any information you can provide on the process of [indiscernible] in Mexico interest, timing, any information, actually, incremental information versus the one you shared three months ago?

Okay. Thank you for your questions. Let me elaborate on Brazil. I should say first that our expectations are not materially different than those we had in the last quarter. Let me share with you where we stand in Brazil. So as you know, we tightened our credit standards back in September last year. As a result, we are growing our portfolio less. But for the whole year, I feel comfortable growing the portfolio in line with inflation, so more or less in line with the inflation in the country, around ten percent, a bit less, a bit more. So this is our expectation. Our customer spread has expanded significantly in the business. The spread went up more than 100 basis points. It's true on the other side, it was more than offset by the ALCO positions that were impacted by increasing rates that elevated almost ten full percentage points, naturally impacting the NII and the NIM coming from ALCO compositions. This is what you see in NII. So revenue-wise, on the net interest income, I feel that we can grow high single digits; no issues there. And I am even more optimistic on fee income, where I anticipate double-digit growth for the whole year, although the quarter shows some seasonality here. The costs have been challenging to manage. As I mentioned, the agreement with unions back in September increased salaries by 11%. We expect that in the second or third quarters, costs will trend down, and we will see the agreement with unions from September. I believe we will be able to manage to grow around inflation for the whole year. Finally, regarding the P&L, you see that in the quarter, there was an increase in the cost of risk that we anticipated, going from 3.75% or a figure like that to something above 4%. I remain confident that we'll be in the range of 4% to 4.5% for the whole year. So that's my view. I would not say there is a deterioration, but rather that it's a more complex environment. Although, I should also mention the war in Ukraine appears neutral to positive for Brazil. So I'm not as pessimistic as you seem to be about the trends in Brazil. Regarding the second question on Banamex, I don't have much more to add other than what we have already stated. Our Chairman discussed conditions; we are going to participate in the analysis of the deal, but there's nothing more I can state at this time since we do not have additional information aside from what is publicly available. The process, as far as I know, has not officially started.

So my first question would be, if you could just kind of remind us of your order partner agreements. How should we think about the Chrysler fee agreement that comes in next year? And could you just remind us what your new agreements in the U.S. are? You also had some new agreements in Europe. So could you just remind us what the potential impact from the agreements in Europe are? And related to that, if you could also talk about the U.S. cost of risk because it remains very low, below 50 basis points. How should we think about a normalized risk level in the U.S. And when do you expect loan losses in the U.S. to normalize? And then my second question would go back to Brazil. In terms of asset quality, we are starting to see some signs of kind of higher cost of risk, but also higher ratios in Brazil, and the NPL was at 5.7%, and at the same time, coverage fell to 101%. So how should we think about the asset quality outlook in Brazil? How concerned are you about the potential credit bubble given that rates have gone up so much?

Okay. Thank you, Sofie, for your questions. The first one regarding Stellantis and our agreement with them. As you know, we have an excellent relationship with Stellantis. We reached a very satisfactory agreement in Europe, and as a result of this agreement, we're going to focus on the main markets of Stellantis in Europe, which are France, Italy, and Spain. As a result of this agreement, our portfolio with Stellantis in Europe is going to grow by a couple of billion, around €4 billion to €5 billion. The total portfolio is approximately €30 billion, and we will be adding an extra €4 billion to €5 billion due to this agreement. In terms of the U.S., Stellantis, Chrysler bought a small finance company, and they plan to develop this company. While this company is relatively small, we expect to continue to be the preferred provider for PagoNxt for a while; how long this lasts will depend on how fast the other company evolves. However, I believe we can continue to underwrite significant originations on Chrysler and Stellantis in the U.S., along with other originators. We reached an agreement with Mitsubishi, and we have agreements with certain dealers and originators in the online space. I feel comfortable that we will maintain our traditional car subprime business and the near prime space will remain relatively stable at least in the U.S., provided the car market recovers activity levels. I'm satisfied with the developments on this front and the agreements with Stellantis Chrysler. You mentioned the cost of risk in the U.S. and Europe. It's true that, in Europe, we are seeing low unemployment levels, which means the cost of risk in the used car markets is one of the lowest levels and we are not seeing any particular developments here. The main KPI here is, to me, the employment rate, yes. As long as the employment rate remains low and the labor market trends are solid, I feel comfortable with the current cost of risk and even expect it to stay or drop lower as a result. In the U.S., we are returning to more normalized levels, as we've noted in trends. José mentioned earlier the special situation of the used car markets in the U.S., which has changed dynamics. When leases expire, lessors tend to keep the cars instead of returning them to auctions, which diminishes gains from disposals of leases. However, the cost of risk is going to normalize. As for Brazil, I have elaborated on the cost of risk already. You pointed out higher NPL ratios and coverage for outlook and the potential situation. As I indicated, my best guess now, based on the information we have, is a cost of risk in the region of 4.5%. So it may take two or three quarters before we see a return to previous levels, but this is my best estimation here. There are significant decreases in disposable income combined with higher rates; this was to be expected. It was why we reduced our split in the consumer lending in the last quarter last year, and we took the same position in the first quarter. I hope this answers your questions. Not just on the point of view of Brazil, I would add that we expect to see some normalization in credit quality. The issue can be managed effectively, and it will be contingent according to the evolving economic landscape. We remain committed to our strategy and cautious about exposures while ensuring we offer deserving products to our customers.

Just I have two questions. On one side on lending growth outlook in Spain, I mean, performance in the quarter has been strong. If you could just update a bit on the outlook for the Spanish NII and the rate sensitivity domestically? And also, I guess, I have a question on the [indiscernible] side. If you just could elaborate a bit on what were the changes in perimeter or the initiatives that you are posting in the Digital Consumer Bank? What do we expect going forward? If I just may, I mean it's very early probably, but if you could just give a bit of a sense of what should we expect of the impact in Poland from the measures announced yesterday by the Prime Minister, it would be very useful.

Okay. For the third question, I got the information yesterday, and it's probably too early so I can't elaborate more on this at present. I'm sorry. Over the coming days or weeks, once we have a better understanding, our IR department will be more than happy to share our views. But currently, it's premature; naturally, the trends are not positively for the banking system, but it is difficult to say at this stage and to guide you with any impact. Lending growth in Spain is robust; the mortgage market has been quite strong in the last two or three quarters, which has been one of the main drivers. The other driver is more in the CIB space where we have been primarily focusing on renewable energy and also the energy sector. The lending growth you see comes primarily from these two areas: mortgages and CIB. The middle market and SMEs haven't seen a strong activity yet. Regarding NII sensitivity, do you want to elaborate more on this?

Yes. The sensitivity we have in the group is in Europe. Continental Europe is around €1 billion for a 100 basis point parallel shift in the interest rate curve; approximately €250 million in the U.K. and €200 million in the U.S. In South America, after having raised rates earlier, we are nearing the point of neutrality already, which will probably be positive in the next year.

Your question regarding the consumer bank, specifically about our initiatives and changes in perimeter. We made an acquisition of a leasing company in Germany, along with a joint venture of 50-50, and we bought from the market. Additionally, we entered the business in Greece with the main importer of cars, and we are currently developing this business. These developments, along with the agreements with Pago and others, indicate that this is business as usual, in a way, implying the transformation of the perimeter to promote business growth.

The first question would actually be on the outlook for cost of risk in Spain. I believe that in the fourth quarter, you have guided to roughly 50 basis points for the full year, where the first quarter is around 60 basis points in my math. But I was wondering if you keep the guidance for the full year or if the changes in the -- with the war in Ukraine and rising energy prices mean some changes on that front. Then on the second question regarding the capital. I was wondering if you could give us some color on the pending regulatory impact that you see for 2022? And if there are any in 2023? And on a related question, what would be the current minimum level that you would be willing to see common equity going down to in the context of an acquisition, say, on an execution basis, to have some references.

Okay. Thank you, Carlos. The outlook for cost of risk in Spain: we provided guidance of around 50 basis points. If I remember correctly, we said we would help the cost of risk from last year, which was about 97 or close to 100 basis points. I remain comfortable with this guidance, even in the new scenario. I don't think this will materially affect our expectations for cost of risk in Spain. It's true that we will have the expiration of extensions starting in April, and well -- I've talked to you many times about some uncertainties around this. Some uncertainty remains regarding how those customers will behave, but the risk we have here is only 25% of the outstanding volumes, which is not going to change our outlook for the whole year materially. Regarding capital, I will leave José to elaborate on the regulatory impact that will come. I should mention that we do not plan to issue shares potentially to buy Banamex, neither in the parent company nor in the subsidiary in Mexico, and this remains the case. So the conditions we established for potentially buying Banamex remain in place, including not issuing shares. José, do you want to elaborate on regulatory capital?

Yes, in terms of regulatory charges and models this year, we estimate the same range we mentioned in the previous quarter, 20 to 25 basis points this year more or less. For '23, we wouldn't expect any significant changes, but it's still very far away. But with what we know today, there should be little impact.

I first want to ask a follow-up. If you were to be interested in acquiring CT Banamex, again, quoting you, without the possibility of issuing capital, you would have to rely on organic capital generation. So could such an interest potentially change the payout targets that you have currently? Or would any shortfall in the required funding come from any potential divestitures? Then, if I may, some questions. One, around the cost of risk. The cost of risk for the quarter was still quite below the guidance for the year, even without allocating the COVID overlay, which I understand was the case. Have you had updates to your IFRS models? Are you waiting to see how the macro continues developing? Therefore, do you anticipate a pickup in provisions later in the year? Could another potential release of provisions offer upside to the cost of risk guidance for this year? Around Spain, in line with what Carlos was talking about, but more from the loan growth perspective: how do you see the mix evolving? Do you see the extension of the ALCO guarantee revitalizing the corporate segment this year? How is the high inflation and rising energy prices in the country impacting the consumer book? Have you seen any weakness there so far? Lastly, about the interest rate sensitivity that you provided for Europe—it’s now lower than what was disclosed at the end of 2021. Can you maybe give us some color on this change?

Regarding your question about Banamex, this could affect our buybacks; however, the dividend policy for this year is public. We intend to maintain the payout of 40%, balancing cash dividend and share buybacks. There is no intention to change this. Regarding organic capital generation, I am confident, yes? You see the quarter and I anticipate we will keep growing. I think return on tangible equity and risk-weighted asset growth, which in the quarter was at 3%, is likely to continue. As a result, our capital generation attributable to the payout policy will be significant. Regarding the cost of risk update, I mentioned earlier the main changes. The primary drivers were Brazil—a point I elaborated on with the cost of risk increasing to about 4 to 4.5%—and in Spain, where we note a decline. Regarding customer demand, we expect to see a strong mortgage market, and corporate sector growth is not at this stage expected as significant. We are seeing demand mainly for energy-related sectors and infrastructure. The final aspect regarding interest rate sensitivity: as we come from negative to positive territory in Europe, there will naturally be a maturation effect on the overall portfolio dynamics.

I have just one more question on the ALCO portfolio. I see that its size has gone up by €9 billion this quarter. I was wondering if you could update the strategy around the European portfolio. When do you expect this to go up? And how far can you go? And is this included in your forecast outlook that you have provided?

We do not have an ALCO portfolio in Spain at this stage, and I believe around €2 billion in Portugal. We are not anticipating any increase in this rate within our forecasts.

Additionally, José Antonio already referred to this; we didn't increase the ALCO portfolio size in any country during the quarter. The increase in euro terms is due to the exchange rate.

Two quick questions on lending and revenue growth outlook. First of all, in Brazil, it looks like you are continuing to grow below the system. I was just wondering whether you expect to remain more restrictive versus the market through the rest of this year and whether you're aiming to change the mix of the book in Brazil going forward? And the second was on the European consumer business. You've talked about the inorganic opportunities. We talked about unemployment being a very important lead indicator for risk in the consumer business, but perhaps from a revenue and loan growth outlook, leaving aside the inorganic opportunities given the inflationary pressure data, what are you seeing in terms of customer demand levels at this point in time? How do you expect that to trend through the rest of this year?

On lending in Brazil, as I indicated, we will maintain our lending standards until we see stabilization in the risk premium. I expect the next two quarters to indicate stabilization in this area. If so, we may confidently start to grow stronger in the latter part of the year. This is my expectation, but we need to monitor data trends closely. In terms of our consumer finance experiences in Europe, aside from inorganic opportunities, we are incredibly recognized in the market, which is catching new business. We are efficiently gaining significant market share, enhancing our importance within the sector. With respect to customer demand, regarding the current supply issues, new car availability is limited while demand remains strong, particularly in used cars.

Yes, that was the last question. Thank you.

Thank you all for your participation. Thank you for being there. Goodbye.