Banco Santander, S.A. Q3 FY2022 Earnings Call

Good morning, everybody and welcome to Banco Santander’s Conference Call to Discuss Our Financial Results for the Third Quarter of 2022. Just as a reminder, by the results report and presentation we will be following today are available to you on our website. I'm joined here today by our CEO, Mr. Jose Antonio Alvarez; and our CFO, Mr. Jose Garcia 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 Alvarez. Mr. Jose Antonio Alvarez, the floor is yours.

Thank you, Begona. And good morning to everyone. Thank you for attending this conference. To start this presentation, I should say that while we've been developing our activity in an unusual, highly uncertain macro environment, we've been able to keep growing our customer base and translating this into volume growth and revenue growth. The most remarkable change in the quarter broadly has been the acceleration starting the acceleration of NII. We took it out at 5% quarter-on-quarter, which is the main event on the back of activity levels and starting just to raise interest rates, particularly in the Eurozone where our exposure to higher interest rates is high. Our profitability improved significantly. Return on tangible equity stands at 13.6%. EPS is growing at 31%. On the back of the profits, we achieved in the quarter €2.4 billion after serving €181 million shares net of tax on minorities in Poland. The gross number was over €300 million related to the new payments holiday regulation. Excluding net profit, we grew 11% quarter-on-quarter and 10% in constant euros. In the nine months, our attributable profit reached €7.3 billion, an increase of 25% with a positive currency impact of 14% in constant euros. The credit quality on our balance sheet shows no signs of deterioration so far in the quarter overall, with ratios remaining below 1%, and we continue to generate capital at a good base. Finally, as you already know, we continue to deliver value to our shareholders both in terms of shareholder remuneration with the cost dividend we announced that the board approved last month and the growth in tangible net asset value per share that provides a combined cash dividend per share up 11%. Going into more detail into the region, you see that the growth is well spread across the board about in all processes is fairly balanced growth. We cannot say that we are growing in one part of the business; we are growing across the board. In constant euros, loans increased 2% quarter-on-quarter to €17 billion, with increases in almost all countries and deposits were up 2% also in the quarter with some shift towards tying the policies given the current interest rate environment. In total, loans and losses we do 7% and 6% in constant euros. Regarding our loan portfolio natural history, this doesn't change quarter-over-quarter. Yes, I should remind you that our portfolio is fairly balanced at one third. Individual mortgages mainly in the UK and Spain, with the UK being by far the largest at more than 50% of the total portfolio. Less than a third, close to 30% is consumer lending. The majority is auto lending in Europe and the US. Finally, we have an exposure of over €100 billion, close to 40% of our loan book mainly in SMEs and corporates. You'll see that all domains are growing: personal mortgages 7%, consumer 6%, and corporate. So, as I said, balance sheet growth across the board. Looking at the income statement, we provided growth rates both in euros and constant euros for you to analyze the diversity in the industries where we operate. As you can see, there was a positive impact from rising rates of around 5% to 7% points, partially offset by the effects of rate fluctuations in the corporate center, which is included in gains on financial transactions. In constant euros, revenue grew at a faster pace than in Q1 and Q2, and costs faced inflationary pressures but continued to grow below inflation. Thanks to these two factors, net operating income reached €21 billion, a record for the first nine months of the year. In loan loss provisions, one of the current topics in this particular environment, there were two opposing forces impacting the year-on-year performance. On one hand, in 2021, we had COVID-19 related loan loss provisions released in Q2 and Q4 of 2021 due to better than expected credit performance. On the other hand, in 2022, loan loss provisions included an additional €1 billion share in provisions related to updated macro assumptions, mainly in the US, Spain, and UK. The markup provision roughly speaking was €1.1 billion. Spain represents €200 million, the UK €300 million, and the US €500 million, while other countries accounted for €100 million, of which €500 million spent is against P&L, and the other €600 million is reassigned funds, mainly coming from COVID provisions that were off balance sheet. So, we are seeing, and this is an important development in the quarter, some normalization in the US, as we anticipated. In Brazil, we are realizing the costs of risk, which we will elaborate on this call. Additionally, we recall higher charges related to fund contributions for new resolution scams plus lower minorities and tax borrowing. The narrow south also showed €7.3 billion. Elaborating a little bit on the P&L trends, I should say, while there are positive trends in customer revenue, especially NII, the last quarter, we expect to continue as the positive impact of interest rate hikes and activity is fully reflected in different regions. The positive impact is just starting in Europe and is somewhat more advanced in other countries like the UK and the US, more so in Poland and Mexico. The negative impact has occurred in Brazil and Chile, as you know, where they are gearing toward lower rates. Secondly, our costs grew below inflation or re-use in most countries; our efficiency improved slightly to 45.5% compared with the full year of 2021. But this is being eroded by inflationary pressures in some regions, and due to the lag between the almost immediate impact on costs and the revenue benefit from higher rates arriving late. Thirdly, in general, we did not see any deterioration due to race in the key quality areas such as Harriers; we have very good quality of race in Europe under ECB oversight. Also in North America, where both the US and Mexico are in the process of normalization and are performing better than expected. In South America, costs from Greece in general remained stable, as Brazil has been stable for two quarters in a row, and we believe that we've already reached the peak in some indicators. We are more constructive on this moving forward. All-in-all, we are confident that the whole group will achieve our cost of risk target. Regarding profitability, I mentioned that our ROTE is at 13.6%. Earnings per share grew by 31%, backed by higher profit and share buybacks; we bought back 3.2% and amortized 3.2% of our group's capital. Finally, concerning our shareholder remuneration policy for 2022, I want to tell you about our intention; the board already approved a 40% payout which consists of half in cash - €8.83 in cash - and €979 million in buybacks that we expect to be approved by the ECB soon, and we will start to execute as soon as it is approved. As a result, the total remuneration in this first dividend will be €1.9 billion positive in our performance, and, as mentioned before, that is increasing for several quarters in a row given the profitability of the group and the more constructive exchange rate combined. Finally, on capital, we are very comfortable with our Tier One and core equity Tier One ratio remaining above 12%, a level that we consider to be very appropriate for our business. In the quarter, net organic capital generation was 26 basis points after 8 basis points accruals for the future cash dividend. The increase was partly offset by negative impacts from markets available for sale portfolios and models mainly related to market evaluations. At the same time, we continue to deliver on our commitment to disciplined net capital allocation. As you can see on the slide, risk-weighted assets grew well below loan growth, leading to higher profitability and a lower weight of risk-weighted assets relative to our return on equity below the cost of equity. Now, our CFO, Mr. Jose Garcia Cantera will take you through the results in more detail.

Thank you, Antonio, and good morning, everyone. After the CEO presentation, I will go through our performance in more detail for the quarter. We look at the progress in terms of country and business, starting with profit. On the right-hand side, you can see the upward trend in profitability driven mainly by revenue which increased 5% in the quarter. This increase was supported by NII which also increased 5%, with rates accelerating in the last two quarters, primarily as Spain and Portugal begin to benefit from interest rate increases, in addition to the growth that we have already seen in countries like the UK, Poland, and the US. In North America, overall growth was 6%, with both countries growing more or less at the same pace. In South America, we were up 5%, supported by strong growth in Argentina, while Chile and Brazil showed negative sensitivity to rates, especially Chile where we had lower inflation in the quarter. In Brazil, NII remained stable following declines in previous quarters. I will explain this in more detail as we go through Brazil. The digital consumer bank was practically flat despite a neutral position in rates under the ECB. It's slightly negative in the first couple of quarters, but then it neutralizes, which explains this behavior. Net income was flat in the quarter, mostly due to weak performance in Europe due to seasonality. We had lower fees charged on deposits from large corporate CIB clients and one-offs in credit cards in the second quarter in the UK. On the other hand, South America increased 5%, driven by excellent performance in Chile and Argentina. Gains on financial transactions were higher, driven by CIB. Quarter-on-quarter comparison in other income was affected by the contribution to the Single Resolution Fund in the second quarter. This is our net interest income sensitivity to rates. This time around, we thought it would be better to look at forward rates rather than sensitivity to a 100 basis point change. So, this is the sensitivity of forward rates relative to rates remaining stable over the next 12 months. Obviously, it is fully compatible because now forward rates are almost 200 basis points. The sensitivity we showed in the previous quarter was 100 basis points for the Eurozone, for instance. Looking at the costs, the CEO has already mentioned that costs are growing below inflation, which is one of our targets. We are achieving this thanks to the transformation plans underway in all countries, particularly in Europe. We had a four-percentage-point improvement in the cost-to-income ratio at the same time that costs automatically adjusted with inflation in emerging markets. It takes a bit longer in Europe for that to happen. In South America, the rising costs are explained by the automatic adjustment of costs to inflation, particularly salaries in Brazil, Chile, and Argentina. Even so, costs in the region fell a little bit in real terms, and efficiency remains excellent despite a slight increase. It’s worth mentioning the investments that we continue to make in Mexico to modernize our infrastructure. In terms of credit quality, we are not seeing any significant deterioration. The NPL and coverage ratios have been stable in recent quarters, as has the cost of risk status; three exposures increased in line with the credit portfolio. As previously mentioned by our CEO, you can see the COVID-19 related provision releases in the second quarter and the fourth quarter of 2021, plus an additional over €1 billion in macro provisions in 2022. Mr. Jose Antonio Alvarez mentioned that half of which came through the P&L and half were reclassifications of COVID-related provisions previously created. Compared to 2021, long-term loan provisions increased in the UK, US, Brazil, and Poland, very much in line with what we expected. Looking closely at the quality of our portfolio, we maintain a low-risk profile balance sheet. It's mostly concentrated in mature markets, with 80% of total exposure and approximately 65% in secure lending, mainly backed by real estate collateral. Additionally, the main macroeconomic variables that affect our businesses, particularly unemployment, are expected to remain resilient across our footprint. Looking at the main countries, in Spain, 75% of our mortgage portfolios are floating. We have significantly reduced the average loan-to-value ratio and the percentage of mortgages with loan-to-values over 80%. The corporate portfolio has improved its rating, and as you know, the ECHO portfolio is performing very well and better than expected. Unemployment remains low and stable and is expected to stay that way. Housing affordability has improved significantly in recent years, and house prices are on average 30% lower in real terms than in 2008. In the UK, 12% of portfolios are floating, and the simple average loan-to-value of mortgages is 40%, with less than 5% having loan-to-values over 80% compared to 12% in 2015. The UK has a very low unemployment rate, which we believe will help avoid a sharp fall in prices. In the US, we've shifted the mix recently towards more prime loans, which currently represent 80% of the total auto portfolio, resulting in a better-quality portfolio. Used car prices are clearly above historical levels; they should gradually normalize, but this normalization will take place slowly due to the scarcity of new vehicles. US unemployment is at very low levels and is expected to rise, but by no means to the levels of previous crises. Lastly, in Brazil, activity is gradually recovering. We are growing in low-risk products, with 65% of the individual portfolio secured. The average maturity of our balance sheet in Brazil is a bit less than 1.5 years, which means that as quality deterioration emerges, it surfaces very quickly. In summary, we remain constructive on the future of our asset quality. Now let me delve into further detail on the main countries. Starting with Spain, we continue to see a very dynamic market. We have had positive net customer growth every month since December 2021. We have increased transactionality and robust volume growth. Year-on-year profit was reported by our efficiency plans with a cost-to-income ratio down 2.4 percentage points and a reduction in loan loss provisions. The nine-month annualized cost of risk is 62 basis points, including €200 million from macro adjustments. In revenue, NII was under pressure in the first half. It started to ease in the third quarter, growing 10% quarter-on-quarter, beginning to reflect the increase in interest rates. Looking forward for the next few months, we see positive trends in NII, a lower cost base in absolute terms, and controlled cost of risk. In the UK, we continue to observe positive new lending trends. Higher interest rates are supporting NII growth. We experienced double-digit revenue growth alongside strong cost control. Costs were down 6% in real terms, resulting in over a 4% improvement in the cost-to-income ratio, driving strong operating performance which was up 20%. Net profit was flat due to higher loan loss provisions compared to releases in 2021. We are comfortable we will reach our targets for return on tangible equity and cost-to-income with double-digit growth in NII year-on-year and flat costs. Turning to the US, we observe very solid business economics for both loans and deposits; underlying profit remains high at €1.5 billion, well above average pre-pandemic levels, despite falling year-on-year due to competitive pricing and the normalization of the cost of risk. We continue working on normalizing our capital levels in the US. So far this year, over €3 billion has been upstreamed to the corporate center, gradually leading us toward a more transparent level of profitability in the US. Our long-term objective for the US remains to keep returns on equity around 15%. We maintain our outlook for the year 2022 of lower revenue impacted by leasing cost pressures and better than initially anticipated normalized cost of risk. In Mexico, another excellent quarter, profit increased quarter-on-quarter driven by a strong uptrend in NII and lower loan loss provisions. Costs were affected by the salary revisions that took place in July. We delivered higher profit year-over-year, supported by volume growth, interest rate management, higher fees, and excellent fee behavior. For 2022, we maintain our expectation of double-digit growth in NII and fee income, with higher costs due to our investments in utilization, inflation, and a cost of risk around 2%. The performance of asset quality in Mexico is excellent. In Brazil, we continue to grow our customer base on volumes, dealing with the pressure on margins from repricing. We tightened credit standards in high-risk portfolios, especially unsecured individual lending last September, and we continue this. We are growing in low-margin businesses, particularly CIB and mortgages. This changing mix is affecting NII, but the repricing of assets is expected to begin outweighing the cost of liabilities around the second quarter of next year. Interest rates have already peaked, and we have a 12-month repricing gap. We anticipate a gradual increase in NII in the second half of next year. Costs rose due to the automatic adjustment of inflation to costs, with salary agreements in September for 2023 at 8% relative to the previous 11%. We expect some positive developments for costs in 2023. The cost of risk around 4.5% aligns with our guidance, and we expect this to remain at these levels in the fourth quarter, potentially a touch higher but around 4.5% to 4.6%, gradually decreasing next year. In the Digital Consumer Bank, activity remains strong despite continued market contraction; we are gaining market share, particularly in used cars. We have had double-digit profit growth supported by fees and a very strong cost of risk performance. There is a challenging environment for new cars, but we believe we can continue to gain market share and maintain a high return on equity in the coming quarters. In global businesses, CIB reported its best quarter in history, gaining market share with all products. We expand in the US and maintain leading positions in different countries in Latin America. We lead in sustainability, ranking number one in Latin America, Europe, and globally in structured finance in the renewable sector. Underlying profits grew 36% year-on-year, with double-digit growth in all core businesses. The attributable profit represented 27% of the group's total operating profits. In wealth management and insurance, this unit's contribution to profits increased 17% on a like-for-like basis showing very good performance. Private Banking attracted new customers, up 6%, with new money rising to €10 billion and profits growing 30% year-on-year. Santander Asset Management was affected by market volatility but saw its contribution to group profits increase to 8%. Finally, in insurance, we had sustained growth in gross written premiums, with total profit contribution increasing 15%. We expect to maintain double-digit growth in profit contribution for this unit in the coming quarters. In Santander X, total revenue increased 75% year-on-year in cost terms, nearly 100% in euros, fueled by all four main businesses, especially merchants and training. We are surpassing our guidance of a 50% revenue target for the year; activity is performing very well here. In cards, I would like to highlight the efforts we are making to improve our credit card business. We currently manage almost €100 million in cards across the group. Thanks to active customer management, nine-month revenue was 25% higher year-on-year in cost and increased by 36% in euros, with very positive performance in both credit and debit cards across the regions. Let me now turn it back to Jose Antonio for his final comments. Thank you.

Yes, a few words regarding the outlook. As I mentioned, we expect significant revenue growth on the back of activity levels that will remain healthy, particularly in our global business with the capacity to generate additional net income. While the additional NII growth is benefiting from activity and interest rate hikes, I am optimistic about our capacity to keep growing our revenue in the coming quarters. On the cost side, we face inflation pressures that you've seen through the P&L, but I am confident that we will continue to improve our productivity and efficiency not only on the back of revenue expansion, which, for sure, is going to happen, but also due to our demonstrated capacity to manage costs below inflation. On credit quality, I recognize that the environment is highly uncertain, but looking at our balance sheet and loan book, I feel comfortable that we are prepared to face a more difficult environment, particularly with the current macroeconomic consensus. I am not overly worried about much harder scenarios; we are in a good position to manage these given the natural composition of our portfolio. On capital, we expect to remain above 12%. I feel that we have handled the average share impact from the portfolio better than our competitors, and at the same time, we continue to maintain disciplined capital allocation. All-in-all, we anticipate revenue to grow more than offsetting cost inflation pressures and potential increases in costs, thereby improving our profitability and value creation for shareholders. That's all from our side. We remain at your disposal for the questions you may have. Thank you. I forgot to mention that we have an Investor Day; on the last page of the presentation, I would like to highlight that I will be there. So on the 28th of February in London, we will have an Investor Day where we will update you on the prospect for the group. Back to you, Begona.

Thank you. We can start with a Q&A session, please.

Thank you. [Operator Instructions] We already have some questions in the queue. And the first one is coming from Ignacio Ulargui from BNP Paribas, please go ahead.

Thanks very much. Thanks for taking my question. Jose Antonio Alvarez, this will be your last results call; thus, I wanted to wish you all the best and thank you for the support all these years. I have two questions on the numbers. One is on the European loan book, how it's performing in the repricing of the asset side so far. I just wanted to get a bit of a sense of where we are standing in terms of the NII uplift that will come in the coming quarters, and linked to the NII I wanted to understand a bit better what has been the contribution of the DMTL in the quarter. The second question is basically linked to the cost-to-income ratio; you have for flat in your final remarks that you have to keep on improving. This goal looks to be fairly sticky, particularly in Latin America. Thank you.

Okay, in the first question, I mentioned a little bit about the European loan book. I stated that NII expansion is just starting in Europe. Particularly in the US, I noted that the central banks have had a varied reaction to raising interest rates. In this particular cycle, Latin American central banks reacted first. We saw Brazil going from 2% to 14%, Chile from 1% to more than 10%, and Mexico, reacting along with the Fed but starting at higher levels. UK and US came later, with the European Central Bank being the last one. I forgot to mention Poland; their reaction was also one of the first. When you look at the different loan books, I've seen the impact of higher rates in Brazil, which was a particular case with a negative effect in Chile. There is a trade-off between inflation and nominal rates, but we do see some reaction from the UK, the US, and Mexico that are in a midway position. Poland is further advanced. In the case of the Eurozone, the margin expansion for Europe is just starting; specifically in the loan book, we saw that in the quarter we had only limited representation, other than the new origination and related loans over the month. The mortgages that everybody follows were mainly represented in September, with a repricing in July that was lower than what we have now. I believe that the big appreciation will come in the next 12 to 13 months and will be significant, so during the quarter the figure I have in mind is around €60 to €69 million.

First thing, yes, so for the whole, that's €216 to €91. The first was €252 to €70 in the quarter.

Yes, okay. This is the impact of the DMTL. How to keep improving cost-to-income? Well, I mentioned in my final remarks that the natural consequence of revenue expansion and keeping costs growing below inflation will lead to improved cost-to-income. I realize that reducing nominal costs in Europe, particularly in CIB, is difficult in the current inflationary environment, and that likely will result in higher pressures on this cost ratio. However, as revenue improves and as conditions stabilize in South America, I am fairly confident that the cost-to-income ratio should decline. You will get specific details on this at the Investor Day in relation to this specific target.

Thank you, Ignacio. Can we have the next question, please?

Thank you. The next question is coming from Francisco Riquel from Alantra. Please go ahead.

Thank you for taking my questions. I wanted to ask about Brazil, in particular, first about the NII. You mentioned in the past presentation that there was a two-quarter lag between the peak in the Selic rate and the trust in NII. Now I hear from your comments that the NII in Brazil would not grow fast until the third quarter of ‘23. Could you please update the NII dynamics in Brazil and if you can please give us an update on your NII guidance here? Secondly, in Brazil, could you comment on asset quality? What is driving the MPLS this quarter in unsecured lending for individuals, and can you update on the 4.5% cost of risk guidance for ‘22? How much of a deviation do you see in normalizing from here and going forward? Thank you.

Okay, let me give you the big picture on Brazil and specifically the questions you raised. We’ve been in a margin-compression situation due to higher interest rates acting on the balance sheet toward lower rates, and second, we changed our underwriting standards back in September last year, leading to a mix change with lower yields affecting our NII. Presently, we are becoming more constructive as we've seen costs of risk align with expectations. This means that we are positioned to grow more steadily. We'll gradually offset costs as the growth in activity leads to an increase in NII. The pace often means volumes grow faster than NII for a while, but this gap will reduce over time as we reprice our assets accordingly. In terms of asset quality, I reference the 4.5% to 4.6% costs of risk guidance based on the macro environment. We are in a situation where growth has been limited in the corporate sector while maintaining good quality in SMEs. We don't see fundamentally problematic issues with the quality of the vintage we are analyzing, except in the unsecured individual lending area, where we do see pressure.

Thank you, Francisco. Can we have the next question, please?

Yes. The next question is coming from Alvaro Serrano from Morgan Stanley. Please go ahead.

Good morning. A couple of questions from me. I want to touch on Brazil, as I think you've been pretty clear, but I have one question on the UK and another one on the US. In the UK, you've now raised your wanting to account, and you've got pretty competitive remuneration on deposit remuneration. When we think about the next few quarters going forward and considering what's going on in the mortgage market, do you still have capacity to grow the NII? I'm worried about your overall ability to grow profits in the region given NII potential headwinds from repricing mortgages, minimum deposit sensitivity, and the obviously deteriorating economic outlook. Secondly, on the US, I think you mentioned gradual normalization; some of your peers in the auto space have warned during this results season. Could you update us on how delinquencies are performing? Are we back to normalized levels? And in this context of normalization, is a 300 basis points provision charge for 2019 what you have in mind for a reasonable fully normalized charge? What would that look like?

Okay, thank you, Alvaro, for your questions. Concerning the UK, you mentioned a competitive deposit market. Indeed, we do have a longstanding loan book, primarily mortgages. While we plan to keep retail funding in line with this loan book, we need to react as you suggested. I believe we can grow NII despite these competitive pressures. Jose mentioned the beta as well; we enjoy some margin expansion that we must react to while taking deposit market dynamics into account. Overall, I do expect NII to keep growing nicely in the UK in the coming year. Particularly regarding mortgages, we might see a shift as we foresee about one-third of our mortgage book, roughly €60 billion, being remortgaged over the year. This increase should help offset the rising deposit costs. In the US, I refer specifically to auto lending. There is margin expansion due to our competitive deposit base, and the cost of risk has increased but less than expected. Leasing presents one challenge, as we haven't seen gains on the disposals that we experienced the previous year. Overall, we are performing quite well; 80% of our book is prime auto loans, and I don't foresee us reaching the delinquencies we faced in 2019.

Thank you, Antonio, and Alvaro. Can we have the next question, please?

The next question is coming from Sofie Peterzens from JPMorgan. Sofie, please go ahead.

Yes, hi. This is Sofie from JPMorgan. My first question is if you could just repeat the TLDR in NII benefit story. I couldn't quite hear that. My broader question is on cost growth in Europe; you've reported very strong cost performance in Europe, but how should we think about the wage agreements that are coming off, and also higher investments and IT costs? How should we foresee overall cost growth in Europe going forward? My second question is, when do you expect the cost of risk for Santander to peak? It sounds like Brazil will still be seeing relatively high costs of risk; your risk from the UK is trending up. Can you comment on how to think about the cost of risk for us and what level could that reach? Thank you.

Let me give you the figures. The group has €88 billion in TLTRO, €60 billion in Spain, €20 billion in Santander Consumer Finance, and €7 billion in Portugal, so you can calculate the potential implications easily. Thank you, Sofie.

Regarding growth in Europe, the wage agreements differ per jurisdiction. In Poland and the UK, we've been updating salaries along with inflation. The situation is most relevant in Spain and Portugal. The agreements in Spain are in effect until the end of 2023, and we are starting negotiations for a new agreement with unions, potentially in 2023. Therefore, I believe costs will remain around 3-4%. We will monitor efficiency efforts while also seeing pressures on costs due to rising inflation and the desire to be competitive in the market. On the cost of risk, it is difficult to predict. There are macro uncertainties, and we are looking closely at various factors. We see stable risk dynamics for the time being and foresee our expectations peaking potentially next year based on current macro conditions. We want to ensure our financial agility and resilience going forward.

Thank you, Sofie. Can we have the next question, please?

The next question is coming from Carlos Cobo Catena from Societe Generale. Carlos, please go ahead.

Hi, thank you. Thank you for the presentation. A quick question on the NII sensitivity please. For Spain and Europe, you mentioned the updated way you calculate the sensitivities, but could you briefly explain your view on the mix of deposits? What are the time deposit data that you find reasonable to assume going forward? The same thing for progressives; you already explained how you expect NII to evolve over the following quarters, but how does that compare with the slide showing that the NII upside in Brazil is only €100 million? If you can explain or reconcile those two guidances, that would be helpful. Thank you.

Currently, almost 100% of our deposits are in current accounts, but they will gradually shift into a mix likely combining money market funds, term deposits, and certain life insurance products. Historically, the beta was usually between 60 and 80%. In relation to deposits from current accounts, it's challenging to determine now given the extended period of negative rates that had almost allowed us to forget this structure. Previously, 30% to 40% of current accounts offered no remuneration, while 20% to 30% received median remuneration and the remaining 30% were high sensitivity. Overall, it's been determined that about 25% is essentially what we assume across the overall deposit book. This is what's reflected in what Jose mentioned about expanding NII. Please note that the €100 million NII growth in Brazil is a projection based on the forward rates – it's a like-for-like measurement accounting for these rates. The expectation is that as we move along the next year, the NII impact will grow steadily as volumes increase.

Basically, because if interest rates stop increasing, as we said, we are employing end-September figures and the 12-month lag will limit full pricing impact flexibilities over the assets and liabilities for the next year. If you look beyond the 12 months, naturally sensitivity is much greater.

Thank you, Cantera. And thank you, Carlos. Can we have the next question, please?

Yes. The next question is coming from Marta Sanchez Romero from Citi. Marta, please go ahead.

Good morning. Thank you very much for taking my questions. The first one is a follow-up on the US. Just a clarification on the cost of risk, because Antonio mentioned that we won't go back to 2019 levels, which if I'm right is roughly 310 basis points. I think in the past you have guided us toward the through-the-cycle level of 250. Are we going to be somewhere in between for next year? How do you see that? Also, in the US, if you could elaborate as well on the loan growth expectations and your risk appetite generally for the auto lending business? The second question is on deposits in Europe. You have a loan-to-deposit ratio above 200% in the digital bank and 115% in the UK. It's true that you've got excess deposits in the Spanish balance sheet, but strategically, will you be chasing deposits to balance the books in the digital bank? Are you going to be setting the price and potentially pushing prices higher? I think you've already launched a new platform in Germany to gather deposits. So what do you see the cost of deposits? Can you give us some color on betas across different businesses for the next 12 to 18 months? Also, if the ECB changes the terms on the PMPRO, would you be repaying all your TLTRO funds or will you be holding on to them? Thank you.

Okay, the last question is the easiest one. It depends on the terms. We are prepared to repay the full amounts next year; if the terms change and it no longer makes sense to hold on to those funds, we will repay. We could immediately repay almost all excess liquidity we have today; the liquidity that we will build to repay would let us cover those funds.

In the US, our cost of risk in 2019 was close to 310 basis points. The normalization is expected to be lower than that. Due to reconciling various aspects in the mix, we expect our prime and subprime loans to influence our portfolio dynamics significantly. The long growth expectations will revolve around two main sources. We are targeting prime customers with competitive offerings. In terms of auto lending, we have begun to diversify our portfolio and added agreements with various OEMs, notably Mitsubishi, to further strengthen our long-term positions. We aim for responsible growth while maintaining margins to ensure profitability, which will guide our decisions in the auto space. Regarding deposits, in our consumer bank, we expect to grow a couple of billion in deposits, perhaps around €20 billion to €30 billion over the next couple of years to close the gap between loans and deposits. We aim for balance in that sector, particularly in Spain and the UK, where funding strategies are being reinforced to better manage portfolios.

Thank you, Garcia, Antonio. And thank you, Marta. Can we have the next question, please?

Absolutely. The next question is coming from Carlos Peixoto from CaixaBank. Carlos, please go ahead.

Hi, good morning. Thank you for taking my questions. Kudos to Jose for his last presentation; it was a pleasure all these years. My question was actually on the NII in Spain. You provided the sensitivity to stable interest rate scenarios, but could you complement that with sensitivity to further hikes? Considering the expectation is that we will receive some hikes in this week and possibly before year-end. Finally, on NII in Poland; what type of evolution do you expect going forward? Do you believe there could be some margin compression given the higher deposit costs as the political pressure seems to be mounting?

Carlos, as I mentioned earlier, the analysis we have shown here is consistent with previous figures. For Spain, we show that sensitivity to a stable environment is around €750 million for each 200 basis points of increased rates. So, I expect the impact of additional increases to be substantial. The sensitivity you've seen, particularly through this range, will certainly provide a basis for more rigorous measurements of NII growth expectations.

In Poland, we've had a very significant margin expansion driven by increased rates and the fact we have enjoyed lower funding costs. However, while more margin expansion is challenging, I remain comfortable that we can sustain the net interest margin, which is being maintained at its existing levels back through pricing assets against pressures from rising liabilities. Overall, good NIM assumptions for our strategy in Poland.

Thank you. And thank you, Carlos. Can we have the last question, please?

Yes, the last question is coming from [indiscernible]. Fernando, please go ahead.

Thank you for taking my questions. A couple of questions, please. The first one on Spain: What is your view on the potential impact that changes may have on the card of good practices around vulnerable families? This is one. Secondly, on Poland, the payment holidays provision you mentioned; are you forecasting or seeing any more coming in the next quarter? Lastly, can you provide a little bit of information on the ALCO strategy and the mix you have in the Spanish portfolio? Thank you very much.

In Spain, the way we assist vulnerable customers with mortgages is part of our normal business practices. We have agreements with authorities on how to support these clients; therefore, any additional provisions needed will be reflected in our macro scenario. Our current assessment suggests we shouldn’t need further changes as wage pressures have already been accounted for. If they worsen due to rising inflation or lack of disposable income, this consideration has been embedded into our modeling. Specifically regarding payment holidays in Poland, we believe provisions are sufficient. We will evaluate if any claims come through and adjust accordingly. But looking ahead, I do not expect this to be significant. On ALCO strategy, we began gradually building our portfolio. It’s important to recoup our position and moving forward we are eyeing the future trends that will align with prudent investments across our mature markets.

Thank you, Jose. There are no further questions.

Thank you, everyone. Following this results presentation, I tried yesterday to count the number of times I've addressed you, and I determined that I've done so 72 times in the last 19 years. So, good luck, everyone. Keep following Santander as always. It's an interesting equity story, and profitability is expected to improve going forward. Thank you. This is my last message to you. Good luck. Bye-bye.