Banco Santander, S.A. Q1 FY2023 Earnings Call

Good morning, everybody, and welcome to Banco Santander's conference call to discuss our Financial Results for the First Quarter of 2023. Just as a reminder, both the results report and presentation we will be following today are available to you on our website. I am joined here today by our CEO, Mr. Hector Grisi; 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 Mr. Grisi. Hector, the floor is yours.

Thank you, Begona. Good morning to everyone, and thank you for joining us. Let me just share with you what we will focus on today. First, I will talk about our Q1 results within the context of the strategy we outlined at our Investor Day. Jose will review our financial performance in greater detail. And finally, I will conclude with final remarks. Before we start, let me briefly remark that during the first quarter the financial system has experienced situations, we've confirmed that our strategy and unique business model are key factors that allow us to deliver solid and resilient results, even in times of market volatility as we have demonstrated today through our first quarter performance. As we announced at the Investor Day, we have entered a new phase of shareholder value creation. We are focused on maximizing value creation, aiming for the first time ever to deliver double-digit growth in tangible net asset value per share plus dividend per share with solid capital generation and efficient capital allocation that will allow us to improve our profitability and provide more returns to our shareholders. And we will achieve it, thanks to, first, our unique combination of local leadership and our global scale network that very few others can replicate. Our business model based on customer focus, scale and diversification, which provide us growth, cost and profitability competitive advantages, which is underpinned by an ambitious transformation plan that is already making Santander a digital bank with branches. Today, we delivered a solid Q1 with great progress in all our strategic objectives. TNAVps plus DPS improved 5% in the quarter. A strong capital generation increased our fully loaded CET1 ratio to 12.2%, and disciplined capital allocation improved the percentage of RWAs that create value and return on tangible equity reached an extraordinary 14.4%. In a difficult environment, we are growing customers and volumes. The deposits increased 6% year-on-year, which drove a double-digit revenue increase with good cost control. At the same time, we have maintained very solid liquidity ratios as a result of our conservative financial management strategy and a credit quality that remains stable with cost of risk well below our target in line with the medium low-risk profile of our business. These trends resulted in a profit of €2.6 billion, the highest in the last five quarters, while profitability improved and we also delivered strong capital generation. All in all, we are on track to reach our 2022 targets. I will provide more details later. Moving on to the income statement. Firstly, as we usually do, we present growth rates both in euros and constant euros. There was no material difference this quarter. Secondly, in January, we recorded a €224 million charge related to extraordinary banking tax on revenue in Spain, €202 million accounted in Spain and €22 million in DCB. Excluding this impact, profit rose 10% compared to the same quarter last year, 8% in constant euros. Additionally, we have positive and negative one-off impacts in Brazil, which do not affect profit. To better explain the business trends, they have been netted in the underlying P&L. Jose will go into more detail on this, please. And thirdly, the most notable movements in the quarter were, strong top line performance supported by NII and higher fees, supported by global and network businesses; costs have started the year in line with expectations, growing one point below inflation. We demonstrated the sustainability of our results with double-digit growth in net operating income, which was €8 billion. From a credit quality perspective, loan loss provisions continue to normalize. Jose will go into more detail on all these points later. This is a great start of the year. Good business dynamics that are translating into double-digit revenue growth with income increasing year-on-year across our regions and global businesses. We are implementing our One Transformation project, which is helping us improve the efficiency ratio to within the range of 44% to 45% that we established for 2023 and which makes us one of the most efficient global banks in the world. Our cost of risk remains contained in line with our target of keeping it below 1.2% at the end of the year. Our RoTE grew quarter-on-quarter to 14.4%, 15.3% if we do not analyze extraordinary banking tax in line to reach our year-end target. And we generated capital equivalent to 17 basis points after having completed the second share buyback program to reach a fully loaded CET1 ratio of 12.2%. In summary, very positive trends, which we expect to consolidate in the coming quarters as we progress towards the 2022 financial targets that we provided during our 2022 annual results presentation. As we announced at our Investor Day in February, we are building a digital bank with branches that makes our customers' lives easier with processes and products that are simpler and more attractive to them. This, together with our global network, are helping us to improve the levels of our activity, revenues and costs. This approach, combined with a disciplined capital allocation are the cornerstone of our value creation model. Now I will dedicate some time to explain how we're progressing. Our customer focus is driving volume and revenue growth across the group. We are progressing well in the initiatives that will help us to improve the way we serve our customers, and let me explain some of the most relevant ones. We're also taking advantage of our network effect to better serve our multinational corporates and SMEs through our regional coverage model that is growing at very high rates. Multi-Latinas and multi-Europeans are increasing revenue 53% and 72% year-on-year, respectively. We're also moving fast in the construction of our branch of the future to offer a best-in-class omnichannel experience across all the group. A good example of this is significant advances made in the digital onboarding processes in Mexico. We have a program that aims to better serve our customers through the use of data, which targets 80% of our customer base. It would help us to personalize our product offering, improve interaction with our customers and provide them with the best user experience. We have developed a common mobile app across Europe as a tactical solution while we implement the common front across all the group, which is already live in Spain, Portugal and Poland and will be also released in the U.K. at the end of 2023. Customer reception has been strong, as demonstrated in Portugal, where we have improved from number five to number two by customer satisfaction that is NPS through the mobile channel since the app was released. Our efforts to become a fully customer-centric bank are allowing us to grow the number of customers, loans, deposits and transactions per active customer at a very significant pace as shown on the right side of the slide. But customer focus is not enough. Simplification and automation are also needed, and we are making good progress in simplifying our product offering and fully automating our front and back-end operations. This is reflected in our leading position in efficiency and significant growth of 10% in net operating income per customer year-on-year. As we have discussed, one transformation is improving our local bank operations. We are bringing our 160 million customers onto a common operating and business model while converging into a common technology. We are simplifying our product offering to improve our customer experience and reduce costs. We also have already simplified our product catalog by 42% since we started the project two years ago. We are reducing administrative and operational tasks in branches. We aim to optimize around 80% to 90% of the overall customer-related processes, and we are progressing well. Spain, for example, has already optimized 40% of the processes in scope for 2023 and is expected to provide significant improvements. We are leveraging our global technology capabilities to accelerate digital transformation in Europe to make our processes fully digital end-to-end. Finally, we are migrating our core banking system to the cloud, a project which we call Gravity, making it more efficient, modern and scalable. This should result in the annual efficiencies of around €150 million upon full implementation with a 67% return on investment and a payback of three years. Overall progress at the group is at 30%. Once we have completed Gravity in Santander U.K. for a corporate platform migrations in CIB and Chile are expected to be concluded before the end of '23. These are just a few examples of our ambitious transformation program that will bring Santander's operations to the next level. Moving to our Global and Network businesses. The revenue is growing above the group average and already represents 39% of the group's total revenue. Several actions and initiatives to drive revenue growth are already in full swing. CIB is still growing strongly after record highs in 2022. We are strengthening the centers of expertise with value-added products and services, developing global and regional platforms, focusing on our areas of strength, such as energy, transition, infrastructure or projects trade finance, among others. In the U.S., we are reinforcing CIB coverage teams, strengthening product capabilities and fully leveraging the integration of APS to expand our ability to distribute risk assets. Wealth Management and Insurance revenue grew 43% year-on-year. We are working to maintain the positive trends by scaling up alternative and institutional products and promoting collaboration between Wealth Management and CIB, offering private banking and asset management products and services for CIB clients and vice versa. In PagoNxt, which is also growing strongly, we have progressed with the migration of Santander Payments in Spain to our Payments Hub platform and already manage a significant part of the payments in Europe. Merchant acquiring expanded its innovative value-added services, which is reflected in 27% year-on-year growth in total payment volumes. Auto revenue fell, affected by new lending and the performance of our leasing business in SCUSA as well as the negative sensitivity to interest rates. We have recently announced an agreement with Stellantis in Europe to become its key financing partner. We expect to increase the outstanding portfolio by 30% to €40 billion by 2026. At the same time, we continue to leverage relationships with OEMs, importers and mobility providers to grow our businesses in North and South America. We further strengthened our balance sheet and capital position. Our overall risk profile remains medium low and is proving to be predictable based on our diversification. Cost of risk stood at 1.05%. Provisions continue to normalize year-on-year as expected. LLPs performed well in the quarter as provisions dropped 3%, mainly driven by South America and North America. At the same time, we delivered strong capital generation. Our CET1 ratio reached 12.2% after having absorbed the full impacts from the second share buyback program and the extraordinary banking tax in Spain. Jose will provide more details in a moment. We will continue to leverage our transformation plan to deliver increased profitability and shareholder value creation on profitability. As I mentioned earlier, our RoTE closed at 14.4%, up 100 basis points in the quarter. If we do not analyze extraordinary banking tax in Spain, RoTE would have been around 15.3%. Earnings per share grew to €0.15, 11% higher than the 2022 quarterly average, supported by strong profit growth and lower number of shares following the buyback programs. Additionally, in the quarter, we delivered 5% growth in shareholder value creation as a result of our disciplined capital allocation and share buybacks. At current share prices, buybacks continue to be one of the most effective ways to generate value for our shareholders. We completed last Friday, the second 2022 share buyback program having repurchased around 7% of our outstanding shares in the last two years, which provides a return on investment of approximately 21% to our shareholders. These results demonstrate that Santander has a strong model and risk management capabilities that work very well even in the toughest environment. Jose will go now into more detail on the group's performance in 2023. Please, Jose?

Thank you, Hector, and good morning, everyone. Following our CEO's presentation, I will provide more details on the group's P&L, risk profile, and capital performance. I will explain the income statement line by line in the following slides, but let me make a few initial comments. We had some one-off results in the quarter related to the reversal of tax liabilities in Brazil totaling €261 million, which includes €111 million in NII and €50 million in tax recovery, along with two provisions made to strengthen the balance sheet totaling €474 million, which net of taxes is €261 million. These movements had no impact on profit, and we have decided to reflect them in the lines of the underlying P&L and ratios to facilitate comparisons with previous quarters and better understand the underlying business dynamics in light of the year-end guidelines we provided at the Investor Day. Additionally, the P&L includes the extraordinary banking tax in Spain, which did affect attributable profit. On the right-hand side, you can see the upward trend in profit quarter-on-quarter, a 23% increase if we exclude the banking tax, which was driven by top-line growth. In terms of quarterly trends in costs in euros, we continue to see strong revenue improvement. In the first quarter, revenue was 3% higher than in the fourth quarter of '22 and €1.5 billion higher than in the first quarter of '22, particularly boosted by NII, which increased by €1.2 billion, and fees that were nearly €300 million more. We have a balance sheet that shows strong sensitivity to interest rates, mainly in Europe, coupled with healthy volume growth and active margin management, which led to a significant NII improvement in recent quarters. Therefore, the first quarter '23 was solid despite a lower day count and seasonal factors in the Americas. We experienced good fee income growth supported by value-added products and the network effect. Trading gains, although a small portion of our total revenue, increased due to customer-driven CIB transactions. It's important to note that 97% of our CIB revenue is customer-driven. Lastly, other income increased as the fourth quarter was impacted by the deposit guarantee fund contribution. Group NII rose 14% year-on-year, supported by volume growth, interest rate increases, and margin management. Overall, loans were up year-on-year with double-digit growth in DCB and South America, North America increased by 6%, and Europe remained stable, although we saw decreases in Spain and Portugal due to mortgage prepayments. Overall loan growth was 3%, supported by both consumer lending and mortgages. Similarly, total deposits increased by 6%, with Europe growing by 4% and South America, North America, and DCB each growing around 10%. I will provide more details on our loan and deposit structure later. Interest rate hikes primarily benefited Europe, Mexico, and the Corporate Center, the latter due to higher liquidity buffer remuneration. However, Brazil was impacted by a shift towards lower-risk products, and Chile and DCB suffered due to their negative sensitivity to rising interest rates. Group net interest margin improved from 2.45% to 2.63% as we actively managed our margins, maintaining discipline in managing deposit costs and loan repricing. Following market movements at the beginning of the year, our deposit betas are aligned with the figures we provided at Investor Day, and we expect this positive NII performance to continue throughout 2023. Regarding net fee income, it increased by 7% year-on-year, surpassing €3 billion, attributed to more customers and increased transaction activity in retail banking. CIB also performed well with a 16% growth across all regions, particularly in Europe, alongside positive trends in PagoNxt and card services. In Wealth Management and Insurance, we saw strong performances in private banking and insurance, while Asset Management volumes rebounded in the first quarter with net new money totaling €1.7 billion. Additionally, auto loan volumes continued to grow, although fee income in Europe faced challenges due to new insurance regulations in Germany. The fee evolution reflects our efforts to create a more capital-light business model. Moving on to costs, it’s notable that, despite inflationary pressures, costs increased at a rate below inflation. This primarily occurred in Europe, with real terms costs in Spain, the U.K., and Portugal rising around 3% to 4%, as salaries in Poland and Latin America are more closely tied to inflation changes. Our efficiency ratio is among the best in the sector at 44.1%, showing improvements both year-on-year and quarter-on-quarter, with remarkable performance in Europe revealing a 6 percentage point year-on-year improvement in efficiency. We will continue to focus on our cost and efficiency targets and expect to further reduce our cost per customer and improve net operating income per customer, as Hector mentioned. Credit quality remains strong, and the cost of risk is under control. Year-on-year, loan loss provisions grew, causing the cost of risk to trend towards the through-the-cycle average as anticipated. Notable changes by country included improvements in the cost of risk in Spain and Mexico, along with credit normalization in the U.S. from the very low levels of 2021 and 2022. However, first-quarter performance exceeded our expectations. Poland increased loan loss provisions due to higher Swiss franc mortgage provisions, while Brazil saw higher provisions year-on-year linked to individual consumer lending and overall portfolio growth. On a quarterly basis, provisions decreased, resulting in a 3-month cost of risk of 4.4%, which was supported by the high quality of our portfolio. The nonperforming loan ratio continued to improve, declining to 3.05% from 3.26% in March 2022, with significant improvements noted in Spain and DCB, partly due to portfolio sales during the period, as well as in Mexico. The portfolio distribution by stages remained stable. About 80% of our loans are concentrated in mature markets. Looking at the segments, our mortgages reflect low average loan-to-values, the consumer lending portfolio is well-collateralized and short-term with high returns, and the SME and corporate portfolios are well covered, with over 50% secured. Additionally, a significant portion of our corporate investment banking portfolio is investment grade. Now, let’s discuss Brazil and the U.S., two regions that have raised questions in recent quarters. Brazil's economy has performed well recently, and interest rate hikes were implemented decisively to control early-stage inflation, accelerating the credit cycle and increasing the cost of risk in 2022. Moving forward, we expect interest rates to remain stable and likely decrease post-summer. Over the past few years, we have worked to improve our portfolio mix to reduce our cost of risk. We have enhanced our customer profile, increasing the weight of new vintages with better ratings, and adopted a more selective approach in new business to focus on lower-risk secured portfolios like mortgages, agro, or payroll. Overall, due to our risk management, improved portfolio mix, and new lending profile, we expect to remain on target. Excluding one-offs in 2023, the cost of risk should remain stable compared to 2022. In the U.S., despite a challenging start to the year, our messages from the Investor Day have not changed. We anticipate the cost of risk will continue to normalize throughout 2023, remaining below pre-pandemic levels. We actually began the year better than expected in terms of credit quality, supported by stable used car prices and improved late-stage delinquency payments. Currently, our focus in auto lending is on quality and profitability over volume. Furthermore, we successfully increased the share of auto loans funded by deposits. Our conservative structural risk management and strong liquidity position us well to face tough scenarios. By the end of the quarter, our liquidity buffer comprising high-quality liquid assets exceeded €300 billion, with 97% being Level 1 assets. This diversified and stable funding structure supported year-on-year growth, as deposits increased across almost all countries and segments. The quarter-on-quarter decline in deposit balances was due to a seasonal drop in CIB client deposits, while retail deposits remained stable. Some customers utilized savings to prepay mortgages in light of rising interest rates in Europe. We observed movement from current accounts, time deposits, and mutual funds, but have not seen unusual deposit shifts in recent weeks following the recent bank troubles in the U.S. and Europe. In fact, we saw net inflows in deposits in February and March exceeding €2 billion. Regarding capital, we closed the quarter at 12.2%. The quarter's variations included 24 basis points of organic growth, primarily driven by robust profit generation, partially offset by risk-weighted asset growth, which included a negative 4 basis point impact from the extraordinary banking tax in Spain. Additionally, there was a 25 basis points drop from shareholder remuneration, which encompasses the complete effect of the second 2022 share buyback program, accounting for 15 basis points, and the accrual of the cash dividend at 10 basis points for the first quarter, considering a 50% payout. We observed an 11 basis points change due to adjustments in the regulatory framework, mostly from the EBA's clarification regarding CET1 minority interest calculation. Finally, a positive 7 basis points stemmed from market adjustments, primarily related to available for sale. Consequently, we increased our fully loaded capital ratio while meeting our capital productivity goals. As illustrated on the right-hand side of the slide, the improved front book RoRWA stood at 2.8%, alongside continuous asset rotation and increased percentages of risk-weighted assets that yield returns above the cost of equity. Our disciplined capital allocation, combined with our business model, reinforces our confidence in sustaining our commitment to rewarding shareholders. Now, I will hand it back to our CEO for the concluding remarks. Thank you.

Thank you, Jose. To conclude the presentation and open the Q&A, I will briefly outline some final remarks that our vision for the coming quarters. Growth in customer volumes, robust revenue performance, double-digit NII growth, driven by positive sensitivity to rising rates in most countries and customer margin management. Fee income grew at high single digits, driven by our CIB payments and payment businesses. We expect this trend to continue in the coming quarters, mainly in Europe and Mexico. We are implementing our One Transformation plan. Our aim is to serve our customers more efficiently and foster process automation and simplification supporting our efficiency improvements. We will accelerate One Transformation further in the coming quarters. We have already identified business opportunities across the group, which will enable us to maintain strong global network businesses revenue. Finally, we have a solid balance sheet in terms of liquidity, solvency, and risk profile. We will remain focused on maintaining a medium low-risk profile and on capital efficiency and asset rotation to ensure a solid capital ratio. So as we embark on our new strategy phase, all these plans should increase revenue and improve the efficiency and profitability of our banks with the overall aim of supporting shareholder value creation and sustainability in profitability. As previously explained, our outstanding results in the first quarter put us in an excellent position to meet our '23 financial targets. However, we may meet them in a slightly different way than initially anticipated, depending on the evolution of the macro environment. We are convinced that we are going to achieve our 15% RoTE target, but probably through a higher contribution from Europe and Mexico and a potential lower contribution from the U.S. Finally, we're also optimistic regarding our medium-term targets that we announced at the Investor Day. As I told our shareholders at the Annual General Meeting, these targets are specific, ambitious, and achievable. We have the vision of where we want to go and the right strategy to get there, and we have the best team in place to put it in motion. So I am convinced that we will progress quarter by quarter to achieve our targets. Thank you very much.

Thank you, Jose and Hector. We can start the Q&A session now.

We already have the first question from Ignacio Ulargui from BNP Paribas. Please go ahead.

Hi. Good morning, everyone. And thanks for taking my questions. I just have two questions. The first one is on the outlook at group level for NII and fees. If I just look to 1Q, you have made the guidance provided by the bank in Investor Day and for 2023 of double-digit revenue growth. But as the year goes by, I think that target gets challenged a bit. So I wanted just to get a bit of your thoughts on what should we – particularly on NII, what should we see the acceleration coming? And based on the comments that you made at the end Hector, a bit of what would be the outlook for the U.S. NII after the performance of the first quarter. The second one is on cost of risk. I have seen a decline in NPLs in Brazil. Just wanted to be – to get a bit of your thoughts about how should we expect cost of risk evolving from here in Brazil and whether we have seen a beginning in NPL or it's just a seasonal effect? Thank you.

Thank you for your question, Ignacio. It's important to recognize that we will meet the numbers we communicated at the Investor Day and also our guidance. As I mentioned, we anticipate a lower performance in Brazil and the U.S., while we expect stronger results in Europe and Mexico. Understanding the combination of these factors and how we're managing the group is crucial to reaching our targets. Europe is projected to deliver the strongest performance for the full year of 2023, and we expect Mexico to have low double-digit growth. However, we foresee weaker results in Latin America, excluding Mexico, with the U.S. experiencing a mid-single-digit decrease. DCB will see a low single-digit decline, and Brazil is expected to show mid-single-digit growth, particularly in the second half of the year. I will have Jose share additional insights on the cost of risk.

Yes. To expand on the net interest income, we have not yet fully repriced our portfolio in Europe, primarily because mortgages adjust every 12 months. There is still significant progress to be made in Spain regarding mortgage repricing, as they are based on a 12-month Euribor. In Portugal, we are dealing with a 6-month Euribor. Consequently, we still have a way to go before reflecting the complete impact of mortgage repricing in our European portfolio. As for the cost of risk in Brazil, we anticipate it to remain relatively stable in 2023 compared to 2022, excluding one-time items. The cost of risk was 4.4% in the first quarter, and the €474 million provision we allocated in Brazil during the first quarter was primarily to strengthen our balance sheet, with about a quarter allocated to specific one-off cases. Therefore, the 4.4% figure for the quarter is clean, excluding those one-offs and accurately representing the asset quality trend for the quarter. As we look ahead, since interest rates are expected to stay high, we forecast better performance in our individual portfolios, as these are short-term and many have already matured. We have also been adding high-quality new vintages, although we might face some challenges in the corporate sector. Overall, excluding one-offs, we expect costs to be roughly flat year-on-year.

Thank you, Jose and Hector. Can we have the next question, please?

Next question from Francisco Riquel from Alantra. Please go ahead.

Yes, hello. So I wanted to ask about following the recent turmoil in the sector. I wonder if you as a management have changed anything within the group in terms of liquidity and interest rate risk and/or if you expect any regulatory changes in this front in general? And more specifically, I wonder if you can elaborate a bit more on the fall in deposits during the quarter. You mentioned seasonality in CIB, so do you expect to recover those deposits in the coming quarters? And also, if you can update your guidance in terms of deposit betas by the end of '23. You were previously guiding for 25, 30 in Spain, 40-50 in the U.K., and above 50 in the U.S. And just last question in terms of the ALCO portfolio in Spain, if you have changed your plans. You were aiming for €16 billion on average in '23 in terms of size, you're already above? I have seen in the slide, so you can also update on this. Thank you.

Thank you, Francisco. I mean, first of all, let me tell you, given the turmoil and everything, the group is actually responding quite well. We have seen all the levels in deposits basically maintain themselves. Individuals probably is the most important part in which 80% to 85% of our deposits are basically individuals, families, etc., which are basically very solid and very stable. In that regard, also, with all these times, you always be prudent about how you manage things. But I can tell you that our units are performing really well in that sense, okay? In terms of the deposits, it's always cyclical. The decrease in deposits was mainly in CIB as we described. It was actually not very meaningful to the total size of the portfolio, and we expect basically to get them back and is the normal flow of the business. In terms of the betas, I will have Jose give you a little bit of detail on that.

In the first quarter, we experienced a decrease of approximately €21 billion in CIB deposits in Europe, which was seasonal. In the fourth quarter, we saw a significant increase, which is typical each quarter. This quarter's increase was somewhat greater than in prior quarters due to substantial growth in customer deposits in Europe. This is linked to year-end balance sheet performance and is not a recurring issue, as it’s seasonal, and it does not impact our deposit structure. We strive to capitalize on opportunities, and in the fourth quarter, we did just that. The normalizing process is happening in the first quarter of the year, but I anticipate that this seasonal behavior will continue annually. Regarding betas, in Spain, the beta for retail banking is currently 6%, with an average yield of 22 basis points. In CIB, both European branches and global CIB have betas ranging from 80% to 100%. Whole balance sheet cost in Spain is 80 basis points, with an EBITDA of 25%. For the year, we expect this to remain between 25% to 30%, as most CIB business has already been repriced and we foresee a gradual increase in the repricing of retail banking. In the U.S., the beta is 35% at a cost of 1.67, with first-quarter betas slightly elevated, but still aligned with the system's average. In the U.K., the beta stands at 25%, with first-quarter betas between 30% and 35%, and we anticipate around 50% for the year. Our interest rate sensitivity remains consistent with the information provided at Investor Day, aligning well with Europe, while the U.S. outlook appears positive, especially in the U.K. On the ALCO front, we expected an average of about €16 billion in Spain, which we have nearly achieved, possibly exceeding it slightly depending on the opportunities to gradually expand the portfolio. It's important to remember that we are significantly below a neutral ALCO portfolio, and we are operating with a negative balance sheet, which is our desired strategy. We aim to gradually reduce that negative sensitivity. Therefore, building or acquiring an ALCO portfolio in Spain will not only pertain to 2023, but likely extend into 2024 and even 2025, as we respond to market opportunities we observe.

Thank you, Hector and Jose. Thank you, Paco for your questions. Can we have the next question, please?

Next question from Carlos Peixoto from CaixaBank. Please go ahead.

Hi, good morning. Thank you for taking my call. I wanted to ask again about the outlook for net interest income in both Brazil and the U.S. Also, could you confirm if I understood correctly that there is a €210 million one-off positive effect in Brazil's net interest income for the quarter? My second question is related to fees and the discussions we've seen at the European level regarding potential increases. Can you provide some insight into the potential impact on fees if an investment bank were to be introduced at the European level? Thank you.

Okay. I mean, to give you exactly how we see the NII, okay, is exactly the guidance that we give is €211 million, okay? So Brazil is mid-single-digit growth, okay? We're talking 8.9, and then the U.S. is 6.1, is down mid-single digits, okay? That's exactly the number.

Thank you, Carlos, for your questions. Can we have the next question, please?

Next question from Sofie Peterzens for JPMorgan. Please go ahead.

Hi, this is Sofie from JPMorgan. Thank you for answering my questions. I understand there have been many inquiries about net interest income. Could you provide more details on when you anticipate net interest income to peak in your main European markets? NII slightly decreased in the U.K. Do you believe we have reached the peak for NII, and that it will not significantly improve on a quarterly basis? When do you expect net interest income to peak quarterly in Spain, and what about in Portugal? My second question concerns the cost of deposits in Mexico, which rose nearly 1% quarter-over-quarter. Could you explain what caused this increase? Finally, regarding core equity Tier 1, you experienced 11 basis points of regulatory capital tailwinds in the first quarter. How should we anticipate any additional tailwinds or headwinds regarding capital? Could you provide details on the potential magnitude of any such factors? Thank you.

Thank you, Sofie. Okay, really quick. I mean, as Jose was explaining to you, in terms of NII, what we see in Europe, we're still not where I believe we're going to be. I mean, mostly, the majority of the portfolio will reprice in probably April and May, okay? So the portfolio is still repricing, and we're going to see those impacts mainly in Spain exactly at that time probably to the mid through the cycle of the year and towards the end. It also is going to depend on what's happening with the deposit impact and how the market is basically going to react towards that. So in that sense, we'll see that. In the U.K., we're basically seeing things stable, okay? We basically see that we're still basically building up the way the portfolio has been going and also Portugal, we expect also to continue better towards the end of the year. In the terms of what you were talking about growth in deposits in Mexico, you're right, is still lagging behind. The growth in customers in Mexico is starting to peak. What is important to do in Mexico was actually to change the onboarding that we had with clients, okay? And that was part of the things that we needed in order to compete head-to-head against our competitors. So in that regard, you're going to see an increase on the deposit base in Mexico in the following quarters, given also the new payrolls that we have contracted that are coming into the portfolio. Also, you're going to see a very good increase in time deposits as basically the market has turned very competitive, and we will also be focused on profitability. What we've been doing in Mexico is mainly maintain our deposit base of individuals, while the costly deposits from corporates were basically leaving them aside also to have much better margins, okay? In terms of capital, Jose, would you like to comment?

Yes, Sofie, as you mentioned, the QNA from the EBA showed a positive increase of 13 basis points. We experienced a slight decrease of 2 basis points due to other updates, including model and regulatory changes. In corporate investment banking, we anticipate minor negative impacts from regulatory and model adjustments, roughly a few basis points per quarter for the remainder of the year. In terms of organic capital generation, if we look at the first quarter, the share buyback reflects two quarters, and we faced the full effect of the Spanish tax, which accounted for 4 basis points. Therefore, the first quarter only accounted for 1 basis point. If we consider a clean measure of organic capital generation, we generated around 10 to 12 basis points in the quarter, consistent with our historical performance. We typically generate 10 to 15 basis points per quarter, and we expect this trend to continue for the rest of the year.

Thank you. And thank you, Sofie, for your questions. Can we have the next question, please?

Next question from Ignacio Cerezo from UBS. Please go ahead.

Hi, good morning. Thank you for taking my question. I've got one in the U.S. and one in Spain. The one in the U.S. is if you can elaborate a little bit on the cost of risk drivers in the future, breaking it down between probability of default, loss given default, what kind of measures are you taking to alleviate basically the increased installments on the auto business, in particular, for clients that gives you comfort basically that again, provisions are not going to go above pre-COVID levels. And the one in Spain, if you can give us a little bit of color in terms of the breakdown of your deposit base between retail, corporate, and large corporate. What kind of behavior are you basically seeing in each of those segments from a customer point of view, how pushy, especially the retail side actually are being these days in terms of chasing additional remuneration. Thank you.

Thank you, Ignacio. Let me explain to you exactly what's going on in the U.S., okay? In terms of cost of risk, we expect the cost of risk actually to be better than we expected at the beginning. What we saw a little bit some of the vintages on '22 started to being a little bit more complicated than we expected. But it's quite interesting to see that normally, when you see customers in those vintages started to get delinquent for more than 90 days, usually will repossess between 90% and 95% of the autos. What's been happening and it has been quite surprising is that whenever we see the clients going delinquent beyond 90 days, we see that they basically are calling us restructuring and start paying us back. So we have seen a decrease of repos from around 90% to 95% to around 59% to 60%, okay? That's basically 30 points. That's why you see the cost of risk is getting much better in the U.S., okay? To your question basically of going back to pre-COVID levels, what's going on there is that we have changed the mix of the portfolio. Pre-COVID, we had a lot more in subprime and deep subprime. Today, we have a much larger part of the portfolio of prime and near-prime in the business. So that's why the portfolio is never going to go back to the levels it had. Also in '19, we have Bluestone, okay? If you remember, we actually eliminated that JV back in 2021. And that was basically very complicated in terms of cost of risk. So that's another part of the portfolio is actually much better because of that. So in that sense, we believe that the cost of risk in the U.S. even though is normalizing because it's going back to pre-COVID levels, it's not going to be as that as it used to be, but it's much better than we expected at the beginning. In terms of the breakdown in deposits, I don't know, Jose, if you would like to...

In Spain, the Spanish business, we have €246 billion in deposits, individuals and SMEs is €229 billion, corporate clients, €18 billion. When we look at the public perimeter, that includes the branches and CIB in the branches, we have €15 billion in global corporate investment banking. The total is what you see in the accounts of €301 billion. Thank you.

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

Next question from Carlos Cobo Catena from Societe Generale. Please go ahead.

Hi, thank you for the presentation. Just a couple of questions because most of the doubts have been clear. But on the U.K., we've seen how cost of deposit also starting to accelerate. And if you could elaborate a little bit on the structural hedge. And when do you foresee the peak in net interest income because you've said this year, it's going to be more of flattish NII, if I understood correctly. Does it mean that we still have to see the benefits of the structural head going forward in '24 and '25 or how do you expect NII to combine competitive dynamics and the structural hedge upside? And the second one, if you could just explain a little bit better what was this change in the EBA criteria to have that positive impact on capital, just to understand the rationale. Thank you very much.

Okay. I'll take the two of them. Let me answer the second one first, which is easy. What basically the EBA has ruled that minority interest in local currency does not need to be adjusted with the exchange rate because obviously, if capital is eventually used, let's say, Brazil, if capital is eventually used in Brazil, it will be used in reals, not in euros. So before this, the interpretation was that the capital needed to be adjusted through the exchange rate and now obviously, because the capital will be used in local currency, it doesn't need to be adjusted. That's a net between positives in some countries like Brazil and slightly negative in some countries like Mexico, where the currency has appreciated net-net, 13 basis points. U.K., okay. So in the U.K., yes, we still have around €100 billion structural position, which will help NII going forward. We would expect mortgages to go down this year more or less around 5%. So volumes a bit down in the year, but very positive NII sensitivity to rates, and we still think rates might go up a little bit. So we would expect NII to go up mid-single digits, probably a bit more than mid-single digits. So that's the expectation for this year in the U.K.

Thank you, Carlos, for your questions. Can we have the next question, please?

Next question from Marta Sánchez Romero from Citi. Please go ahead.

Good morning. Thank you very much. My first question is about the net interest income from your euro balance sheet. The challenge we face is that transfer prices among the different components of that balance sheet make it quite difficult to assess your net interest income performance and compare it with competitors. You indicated at the Capital Markets Day that you expected to generate €1.7 billion of additional net interest income from the euro balance sheet this year based on that curve at the time. Could you please provide an update on that figure today and how it is divided between Spain, the corporate center, the digital bank, other Europe, and Portugal? My second question is regarding U.S. deposits. Expanding your deposit base is one of the pillars of your strategy to enhance profitability, but this is increasingly costly. What do you anticipate the cost of deposits in the U.S. will be by year-end, and what strategies are you implementing to differentiate yourselves and attract deposits while potentially paying more than your competitors? Lastly, could you give us an update on the U.K. regarding your expectations for mortgage margins? Thank you.

Sorry, I'll take the first question. Marta, I will follow up with the breakdown. Essentially, it's all related to the euro balance sheet. The sensitivity analysis isn't particularly complex, but I'll provide you with the details soon. The sensitivity remains unchanged. As we mentioned, we have estimated €1.7 billion based on the forward rates as of December. During the first quarter, the curves have fluctuated, but they are essentially where they were at the end of December. Therefore, we anticipate a sensitivity for the next 12 months that is comparable to what we've observed in the first quarter, consistent with the guidance we provided. As Hector explained, we expect the repricing of our mortgage portfolios in Spain and Portugal to gradually accelerate throughout the year.

Thank you, Jose. Let me provide an update on U.S. deposits. The accumulated beta in the U.S. has reached approximately 35%, with a cost of about 1.67%. The higher interest rates impacting savings accounts have positively affected time deposits. The majority of our U.S. deposits come from individual customers, which have proven to be very stable. We have not lost any individual deposits. There has been some movement in the mid-corporate sector, which we are diversifying, but it is not significant. Importantly, we do not anticipate substantial increases in deposits. While there is considerable competition in the market, our deposit base has remained stable even under these conditions. Therefore, we do not expect a significant increase despite competition from other players in the market. We are not altering our current views on U.S. deposits.

The margins for the U.K. mortgage business are currently under pressure, and we anticipate slightly weaker margins moving forward. Our market share for stock mortgages in the U.K. stands at 11.3%. However, in the first quarter, we originated about 6% to 7% of the market, as we are concentrating on high-quality mortgages that typically yield lower margins. Nevertheless, we believe that our structural position, combined with volume growth and margin management in the U.K., should result in mid- to high single-digit net interest income in 2023.

Thank you. And thank you, Marta, for your questions. Can we have the next question, please?

Next question from Andrea Filtri from Mediobanca. Please go ahead.

Thank you for taking my questions. I have one question and two quick clarifications. First, if we take your Q1 numbers and the clean underlying number you provided, and simply add up until the end of the year, we would project a profit of €11 billion in 2023, which is significantly higher than the consensus. Where do you think the consensus is being overly conservative regarding your estimates for 2023? For the first clarification, regarding the Brazilian cost of risk, you mentioned it would have a flat trajectory excluding one-offs. I want to confirm that the €474 million charged in provisions this quarter is not a one-off. So, the guidance you're providing indicates a cost of risk of 4.4% to 4.5% for 2023. For the second clarification, I didn't quite understand whether your previous guidance was related to NII growth or volumes when you mentioned Mexico up double-digit, U.S. down mid-single digit, and Brazil up low-single digit. Thank you.

Let me address the consensus and the cost of risk in Brazil. We have a more optimistic view on fees, and the first quarter reflects strong fee performance, driven by contributions from our global businesses. Our global units, including CIB, Wealth Management, and PagoNxt, are performing exceptionally well. Regarding the cost of risk, we projected it to be below 1.2%, and for the first quarter, it stands at 1.05%. There may be some skepticism in the market about our ability to manage the cost of risk effectively. This relates to net interest income and costs overall, but primarily to provisions and fees. In Brazil, the €474 million isn't reflected in the P&L; it has been allocated to strengthen our balance sheet, with approximately a quarter dedicated to one-off cases and the rest for general reinforcement. The cost of risk at 4.4% in the first quarter is clean, without any one-offs for specific instances. Looking ahead, if interest rates hold steady at 13.75% until after summer, we might see a gradual rise in cost of risk due to a slow decline in the corporate sector, although it shouldn’t exceed last year's cost of risk. Therefore, we anticipate the cost of risk to align with 2022, excluding the one-off that is already accounted for in the first quarter's provisions. I hope that clarifies my comments, and now regarding Mexico.

Yes. On Mexico, what I can tell you is that you're going to see very good growth in terms of NII, okay, because of your positive sensitivity there. Also, what you're going to see is very positive growth in terms of fees because we are growing clients in a very good way, okay? Mainly credit cards is one of the main drivers. Also, CIB is an important driver of fees, okay? And also, you're going to see that the cost of risk is actually very much under control, okay? So you're going to see an all-in-all very good performance in the country, given that particular situation and also that economic situation in the country is doing very well.

Thank you. And thank you, Andrea, for your questions. Can we have the next question, please?

Next question from Britta Schmidt from Autonomous. Please go ahead.

Good morning. I'd like to ask a couple of questions regarding the deposit trends in Spain, specifically the decline. Can you break down the trends between corporate and retail deposits? Additionally, I'd like to follow up on the cost of deposits in Spain, which saw a significant increase quarter-on-quarter. Did you swap any of your deposit base, and is that figure included in the total? Also, there was an expansion in loan yield related to the management of your net interest income in Spain. Do you focus more on the customer spread or on the individual costs of the balance sheet? Moving on to Brazil, could you clarify that last year's cost of risk, excluding one-offs, was around 460 to 470 basis points? Regarding the situation with Polish FX, do you anticipate more provisions for the Polish Swiss franc mortgages? Lastly, on the regulatory front, do you foresee any reconsideration of deposit insurance charges or the funding of deposit insurance funds, either in Spain or globally? Thank you.

Deposits in Spain fell to between €21 billion and €22 billion due to a decrease in corporate deposits, while retail deposits remained mostly unchanged or slightly decreased during the quarter. The early mortgage repayments reflect a consistent trend. In February and March, there were positive trends in both retail and corporate deposits, as the €21 billion drop was linked to year-end balance sheets of our corporate deposits. Regarding your second question, we do not swap deposits. We manage net interest income and interest rate risk primarily through our asset side, not the liability side. If I understand your question about managing NII correctly, we typically focus on customer margins and the overall net interest margin of our interest-earning assets. In Brazil, the cost of risk...

Cost of risk is around 4.58%. Excluding the one-off we had, the mortgage portfolio in Poland is currently 48% reserved. We are evaluating our next steps based on how the portfolio develops, but we are at 48% coverage of the total portfolio.

Thank you, and thank you, Britta, for your questions. Can we have the next question, please?

Next question from Alvaro Serrano from Morgan Stanley. Please go ahead.

Hi, very quickly, hopefully. Two questions for me on provisions. On the U.S., I know you touched on an earlier question on it. But I just wanted to understand the car prices so far have been better certainly year-to-date. And looking at the citation data that's also doing slightly better and the NPLs are down. So why the provisions in a seasonally lower quarter, they didn't go down as much. Is there a lag effect here? How quickly do the secondhand car prices feed into the model? Maybe some handholding there? And I don't know if you could be more specific on your updated views for the full year cost of risk in the U.S. And on Brazil, I don't know if you've touched on this, but should we expect any more top-ups or one-offs in Brazil beyond the recurrent cost of risk that you've already touched on Jose? Thanks.

Alvaro, regarding the provisions in the U.S., it’s important to clarify that I previously discussed the performance of the vintages. The earlier vintages are performing quite well. However, we have a couple of points to consider. First, with the stimulus, we significantly reduced our provisions. Currently, we need to make some provisions to ensure our portfolio aligns with IFRS standards. The new definition introduced two years ago didn't impact us as much in the U.S. because the portfolio was performing differently. Upon transitioning to IFRS, the new definition of default requires us to create more provisions, even when the portfolio is performing well over 90 days. This can be complex to explain. Essentially, IFRS doesn't account for the irregular performance of the portfolio. In Europe, portfolios over 90 days typically lead to repossession, whereas in the U.S., these portfolios are performing much better. Clients may pay intermittently, which accounts for the variations and movements in provisions related to car prices. You are correct that car prices are significantly better than expected, and the Manheim prices are also at favorable levels. Ultimately, we estimate the cost of risk in the U.S. to be around 2%, which aligns with our expectations.

So 2% compared with 3% pre-pandemic, all right? So as we were saying, it will gradually normalize, but it is actually performing a little bit better this year, and it will not reach pre-pandemic levels because of the change in the mix that Hector was referring to. But this year, we would expect it to be around 2%.

Okay. And in terms of Brazil, it's exactly, Alvaro, as Jose just explained to you, rates in Brazil at around 13.75%, okay? Inflation is actually just below 7%. What Jose was explaining to you, if the rates continue to be that way, there might be the possibility that some of the big corporates or medium-sized corporates start to suffer, okay? We don't see that individual portfolio would suffer because it's shorter-term is managing a different well and is a little bit inelastic to the rates, both the corporate portfolio in the mid corporates, mainly in SMEs could suffer because of that.

But at the same time, individuals are improving. And you can see that actually in the first quarter cost of risk isolated at 4.4% because we are growing in high-quality retail loans, and the old vintages are maturing very, very quickly. So even with that possible, and we don't know, but it might have a possible deterioration in the cost of risk in the corporate sector, we would still expect to be in line with the guideline that we gave at Investor Day for a flat cost of risk year-on-year, excluding one-offs. And no, the answer is no, we don't expect any significant one-offs for the rest of the year.

Thank you, and thank you, Alvaro, for your questions. Can we have the last question, please?

Next question from Fernando Gil de Santivañes from Bestinver Securities. Please go ahead.

Hi, thank you very much for taking my question. Just a quick one on liquidity and LCR ratios. How do you see the year-end LCR ratios at a group level, Spain, Portugal and the U.S. base? And can you please remind us of the TLTRO maturities that the bank has. Thank you very much.

So no, the LCRs. Very difficult to predict around, but 130 to 140 in every unit at least. For the group, it might be a bit higher than that because of the liquidity of the Corporate Center, but when we look at specific units, 130 or above. TLTRO, we have €25 billion left. So we have repaid €65 billion. This €25 billion will mature gradually until 2024. The €25 billion, €4 billion in Santander Spain, €18 billion in Santander Consumer Finance and €3 billion in Portugal.

Thank you, and thank you, Fernando, for your questions. Thank you all for your attendance. Santander's Investor Relations team is at your disposal for any and all questions that you may have.

Thank you, everybody.