Banco Santander, S.A. Q1 FY2024 Earnings Call

Good morning everyone and welcome to Banco Santander's Conference Call to discuss our Financial Results for the First Quarter of 2024. Just a reminder that both the results report and presentation we will follow today are available on our website. I want to highlight that this is the first full quarter in which we are publishing results with our global businesses as the primary reporting focus, in line with our management structure as announced last year. Secondary reporting will include what used to be the primary method until 2023, primarily country reporting, European DCB, and others. We will explain later that changes compared to previous periods are reported in constant euros, except for Argentina, which is shown in current euros to prevent distortions. All information will be available, as always, in the Excel sheet and report published on our website. Now, moving on to the presentation. I am joined today by our CEO, Mr. Héctor Grisi, and our CFO, Mr. José Garcia-Cantera. After their presentations, we will open the floor for any questions you may have during the Q&A session. With that, I will hand over to Mr. Grisi. Héctor, the floor is yours.

Thank you, Begoña. Good morning to everyone, and thank you for joining us. First, let me share with you what we will focus on today. First, I will talk about our Q1 results in the context of our strategy. Second, José will then review our financial performance in greater detail, and then I will conclude with some final messages. Let's start with Q1. Q1 was another very strong quarter for Santander. Positive contributions from all our businesses, demonstrating the strength of our strategy and our business model. We are presenting a profit of €2.9 billion, that's an 11% increase versus Q1 2023, 9% in constant euros. As Begoña mentioned, excluding the impact of the temporary levy of revenue paid in Spain recorded in full in Q1, if you include that, this was another record quarter. Our customer focus and scale are driving profitable growth. Over the last year, we welcomed 5 million new customers, and our revenue in Q1 increased close to double-digit year-on-year in constant euros, supported by all global businesses and regions. We're executing on our transformation plan, which is already supporting efficiency improvements, leading to growth in profitability, and as a result, our efficiency ratio improved 1.4 percentage points year-on-year to 42.6%. Net operating income has grown double-digit year-on-year for the last eight quarters. Our return on tangible equity rose 55 basis points year-on-year to 14.9%, even more, 16.2% if we analyze the impact of the temporary levy in Spain. Finally, our solid balance sheet, with some capital ratios and robust credit quality, contributed to strong profitable growth and, more importantly, to shareholder value creation. TNAV plus dividend per share grew by 14% year-on-year from a combination of higher profit, increased shareholder remuneration, and fewer shares due to the buyback programs we have and are still executing. In the last 12 months, we increased TNAV by more than €4.5 billion. If we take a quick look at our income statement, as we usually do, we present growth both in current euros and in constant euros, although there were no material differences between them this quarter. Part of the reason is that for the first time, the variations in constant euros applied to all countries except Argentina, which is in current euros to mitigate distortions from hyperinflation. Our P&L was strong from top to bottom. The strong top-line performance was driven both by NII and record fees supported, as I said, by all the global businesses and regions. Revenue grew while costs remained flattish in real terms, in line with expectations and relatively stable over the last three quarters. We demonstrated the sustainability of our results with 11% growth in net operating income. Fourth, loss provisions continue to normalize as expected. Finally, as I mentioned earlier, during the first quarter, we recorded a €335 million charge related to the temporary levy in Spain, which was 50% higher than in 2023. Excluding this impact, profit rose 14% year-on-year, implying a growth of 12% in constant euros. As you can see, this is a great start to the year, and we are well on track to achieve our 2024 targets, targets that we comfortably reiterate. Good business dynamics supported high single-digit revenue growth. Our efficiency ratio improved, even as we are investing for the future through one transformation, and it is already better than our target in 2024. Cost of risk remained fairly stable, in line with our target of keeping it around 1.2% at the end of the year. The fully loaded CET1 ratio remained at 12.3% in Q1, having profitably grown our regions organically and accrued distributions in line with our 50% payout, and we have absorbed regulatory impacts. We are comfortably in line with our target of keeping it above 12%, even after Basel III implementation, and earnings rose year-on-year by 16.2%, putting us on track to reach our target of 16% for 2024. As you can clearly see, we're achieving these results backed by the operational leverage provided by one transformation, which is improving both revenue and cost. The efficiencies we have captured and the impact of our active spread management have already contributed to 174 basis points of improvements since 2023. Our global businesses continue to contribute to the group's profitability and have delivered 88 basis points in efficiency gains. Our initiatives to better serve our multinational corporates and SMEs through our regional coverage model continued to grow well, with revenue increasing 5% year-on-year. Finally, our proprietary and unique global technology capabilities have already generated 63 basis points in efficiency savings so far. Our global approach to technology has allowed us to capture €50 million in additional savings in Q1 for a total of €237 million since 2022. This has been mainly driven by the deployment of Gravity, new global agreements with vendors, process optimization in operations, and the implementation of the new IT and Ops shared services. Our business group overview shows that our common operating model supports value creation based on profitable growth. From the creation of a best-in-class customer experience and operational leverage from our global platforms and common tech. This is helping us to accelerate the achievement of our investor rate targets. This operational leverage is already very evident in our retail and consumer businesses, where the efficiency ratios improved close to 400 basis points and 200 basis points year-on-year, respectively. In CIB, we are building a world-class business, leveraging our ISO expertise to roll our US franchise without changing the risk profile, proof of which is the revenue, which grew 5% and reached another quarterly record, supported by the good performance in the US and strong client flows. Wealth continued to grow strongly, improving both efficiency and profitability. And finally, in payments, where we are managing more than 100 million cards group-wide, we are seeing good activity trends. In Q1 2023, we had a one-time revenue from a commercial agreement with one of our partners in Brazil. Excluding this impact, revenue grew 7%, and efficiency remained flat year-on-year despite our investments in deploying our global platforms. Now let's look at each business in greater detail. First, our goal in retail is to become the number one bank for our customers, which is key to our strategy. At the same time, our retail business is a great example that demonstrates the benefits we are generating from one transformation, as operational leverage has significantly improved the efficiency ratio. First, we continue to innovate to offer the best customer experience. For example, in Spain, our new digital onboarding is contributing to an increase of 630,000 net new customers year-on-year, while Santander Key already enables more than 4 million customers to approve transactions securely with a single click using biometrics. Second, we continue to implement a common operating model across our banks, increasing automation to free up time for our people to focus on commercial activities. As a result, the dedication of resources to non-commercial activities has dropped by 4% in the last nine months. Third, the deployment of our own global platform continued in Q1, and Gravity is already operational in Spain, the UK, Chile, and the US. From a financial perspective, this is also a great moment for retail. We are managing margins very carefully to make the most of the tailwinds from higher interest rates in Europe. At the same time, we benefit from our negative sensitivity to interest rates in South America on top of the strong operational leverage that we are obtaining from one transformation. As a result, our profit grew 22% year-on-year, with the following three things to highlight. First, double-digit revenue increase, driven by good performance, both in NII and fees, with all regions growing year-on-year, especially Europe and South America. Second, costs remain under control, flat in real terms as the benefits from our transformation in some units are offsetting the impact of inflation on salaries and investments. Third, provisions dropped slightly, with cost of risk fairly stable at comfortable levels across the group. The execution of the strategy is driving profitability improvements with growth increasing to 3% to 17.6%. In Consumer, we are working to become the partner of choice for our customers. We offer best-in-class global solutions that are integrated into our partners' processes. Last year, we launched a new digital onboarding for pure direct auto players, which has been well received because it allows our customers to complete their vehicle acquisition and financing fully aligned. We're also progressing well on simplification and automation, supporting a 15 basis point decline in our cost-to-total volumes ratio. Deploying global platforms is key to scaling our business, reducing cost-to-serve and improving profitability. We recently announced the launch of Openbank in North America this year, which will result in having a national deposit gathering platform for the US. Consumer is also delivering operational leverage, with net operating income growing by 7% year-on-year, driven by the following three elements. First, an increase in revenue due to positive commercial dynamics with volume growth, mainly in Europe and Brazil, good NII performance, and 22% fee growth, mainly from insurance. Second, costs dropped 4% in real terms as a result of the execution of our strategy and the efficiency plans we implemented last year in a more complex interest rate environment. Third, provisions increased year-on-year, mainly due to the expected cost of risk normalization in the business, both in Europe and the US, though still below the historical averages, as well as some impact from volumes and regulation. Last year, we started to prioritize profitability over volumes. So we are originating at high levels. The increase of volumes and good profitability levels of the new business makes us confident that profit will be growing close to double digits year-on-year by the end of 2024, even after the normalization we expect on provisions. As you can see, we are building a world-class CIB business to help our clients that leverages our strengths to grow profit while maintaining, at the same time, the same risk profile that is well under control. We are deepening our client relationships and increasing our capabilities in the US, building on areas of expertise to accelerate growth across all regions. We had a good start to the year, and we have a very strong pipeline with markets also performing strongly across the asset classes. As a result, revenue in CIB in the US grew 35% year-on-year. Also, we continued expanding and strengthening our centers of expertise including key industry groups, such as synergy transition, healthcare, among others, and product teams such as M&A and ECM. At the same time, active capital management continued to support greater origination and high profitability levels. Our business through CIB is capital-light, very much linked to customers, and with fees growing at a good pace year-on-year. CIB had a good result in Q1, with revenue up 5% year-on-year, even after the record in Q1 in 2023, making Q1 2024 the best quarter ever for the business. Almost all of our growth came from customer flows and was mainly supported by strong performances in global markets and global banking, both in global debt finance and corporate finance. Additionally, we are investing to expand our business to drive additional efficiency gains and further improve our profitability. As for wealth management and insurance, we continue our journey to build the best private banking and insurance manager in both Europe and the Americas. First, in Q1, Euromoney once again named us the best private bank in LatAm and the best international private bank in eight countries. Second, a major driver for growth in wealth is collaboration with other businesses, especially retail and CIB, by capturing network benefits. Third, we are developing global platforms across the three businesses while we digitalize our distribution and advisory capabilities to improve customer experience and promote growth. One example is the development of a global investment platform which we began in Q1 and will enable our clients to manage any kind of investment across all countries. In summary, customer experience, efficiency, and time to market improvements are accelerating growth helping us to maintain our high profitability levels. Attributable profit grew double digits on the back of strong private banking activity in a favorable interest rate environment, with a total fee contribution from Santander Asset Management and Insurance growing at or close to double digits, while costs remained fairly stable in real terms. As a result, efficiency improved four points year-on-year, and RoTA rose nine points to 80%. Finally, payments. We have a unique position as we are on both sides of the value chain, issuing where we manage more than 100 million cards group-wide and merchant acquiring. We are gaining market share as we strengthen Getnet's value proposition for customers through continued product development and a greater offering of value-added services. Growth of active merchants has been particularly strong in countries where Getnet has been mostly rolled out, such as Chile, Spain, or Portugal. We continue to migrate significant volumes of payments to the PagoNxt global platform to leverage the group scale. Around 1 billion annualized transactions are already running through the new global platform, and we expect to double this volume by the end of the year. Also, we have started to deploy Plard, our global cards platform. We have more than 45,000 debit cards managed already in Plard, and we are starting the migration of the debit portfolio with 1.5 million cards in dual-run in Brazil, and we have launched a friends and family pilot in Chile. From a financial performance perspective, payments delivered a strong quarter, with good underlying revenue trends in both businesses, combined with a positive performance of provisioning cards, drove 22% year-on-year profit growth. Finally, PagoNxt EBITDA margin reached 17%, showing good progress towards reaching our 30% target by 2025, which we set at our last Investor Day. As I mentioned in my opening remarks, the result of our strategy and our strong first quarter is aligned with our new phase of our shareholder value creation. Q1 has led to outstanding profitability growth and double-digit shareholder value creation for the fourth consecutive quarter. As I mentioned earlier, RoTE was 16.2%, if we analyze the Spanish bank levy, up 93 basis points year-on-year, reflecting the high levels of new business profitability. Earnings per share rose to €0.17, up 14% year-on-year, supported by strong profit generation and the lower number of shares following the buyback programs we have and are still executing. Finally, in the quarter, we delivered 14% growth in shareholder value creation, reflecting our disciplined capital allocation and the impact of the share buybacks. Buybacks continue to be one of the most effective ways to generate value for our shareholders. If we include in full the share buyback that is currently underway, we have bought back around 11% of our outstanding shares in the last three years, providing a return on investment of approximately 19% to our shareholders. I'll leave you now with José, our CFO, to go through more detail on our quarterly financial performance. Thanks, José.

Thank you, Héctor, and good morning everyone. I'll go into more detail on the Group's P&L and capital performance. But let me first remind you that we are presenting growth rates in both current and constant euros and also that the full impact of the Argentine peso devaluation last December for the whole year was accounted for in the fourth quarter, which introduces some distortions quarter-on-quarter. Let me also, as Héctor mentioned, highlight that what we present here as constant is local currency for all countries, but Argentina. Argentina is in current. By doing that, we try to avoid the impact of hyperinflation. But also by doing this, we are lowering the growth rates that show us constant. For instance, net profit instead of growing 9%, with Argentina in constant, is growing 13%. NII is growing 20% instead of 16%, fees would be up 8% instead of 5%, or total revenue would be increasing 12% instead of 9%. So we are trying to be transparent and show the underlying performance of our business without considering the impact of hyperinflation in Argentina. Now let me go to the main components of the P&L. As Héctor said, we are reporting exceptional results for the first quarter. We are starting to see the benefits of our transformation programs in terms of operating leverage in retail and consumer, and obviously, the very positive momentum we are experiencing in both Europe and Latin America at the same time. Revenue grew 10%. Actually, 12%, if we only look at customer revenue, supported by strong NII, the highest quarterly fee income in our history, while costs were fairly stable for the third quarter in a row. Net operating income grew 11% year-on-year. Cost of risk remained fairly stable, supported by strong labor markets and risk management provisions that increased slightly due to the expected normalization in some countries, but we see no asset quality pressures anywhere. Additionally, we had a higher impact from taxes year-on-year, driven mainly by stronger performance in Brazil, where we have a higher effective tax rate than the group average. And also the fact that the temporary levy in Spain is not tax deductible from the corporate tax level. The full impact of this tax levy in Spain is accounted for in the first quarter and is 50% higher than last year. As you can see on the right-hand side, excluding this impact, profit would have increased 14% year-on-year or 9% quarter-on-quarter, and Q1 would have been another record high. Let me break down the P&L, starting with revenue. There was strong growth driven by customer revenue again this quarter, which made up more than 95% of our total revenue and explain almost all of the growth in the quarter. Year-on-year, revenue increased 9% with all businesses and regions contributing. This growth was primarily supported by our retail business, which is growing at double-digit rates with good performance in net interest income and fees across regions, and consumer driven by our good profitability levels in new businesses and strong volume growth in Europe and Latin America. CIB also had a great performance as revenue reached an all-time high in the quarter backed by outstanding performance in the US. We also delivered double-digit revenue growth in wealth, driven by solid commercial activity in private banking and asset management. Payments are also showing very good underlying trends year-on-year as both PagoNxt and cards are growing if we exclude the one-time positive impact recorded in Brazil in the first quarter of last year, as Hector explained. Finally, at the corporate center, high liquidity buffer remuneration was compensated by the negative impact of FX hedging. Most of our revenue growth came from NII, which continued growing in the quarter, particularly in retail and consumer, representing 82% of group's NII, which went up 16% year-on-year on the back of active price management in retail in Europe, especially deposits and also in Mexico, along with the benefits from the negative sensitivity to rates in South America, both in retail and consumer, and the fact that now forward rate curves in Europe are a bit higher. In terms of profitability, we have improved net interest margin year-on-year even if we exclude Argentina. This was mainly explained by higher yields on assets as we actively manage credit spreads to take the most out of our interest rate environment. These gains from credit yields more than outweighed higher funding costs, which we were able to contain thanks to our disciplined deposit remuneration in Europe and downward deposit re-pricing in Brazil, leading to a notable margin expansion. The only country where we saw a slight increase in EBITDA in the quarter was the UK. Going forward, we expect the positive momentum in Europe to continue, we expect to benefit from the interest rate cuts in South America, and we expect an improvement in our consumer business throughout the year, boosted by high profitability levels of the new origination. As a result, very good NII outlook for the year. In the context of low fee income growth in general due to subdued loan demand and weaker consumer activity, we generated record net fee income of €3.2 billion in the quarter. Even if we exclude Argentina, growing strongly quarter-on-quarter despite strong seasonality in payments in the fourth quarter. We also delivered solid growth year-on-year, supported by most of our businesses with retail growing 9%, driven mostly by higher activity in Brazil, outstanding performance in consumer fueled by insurance. CIB also growing from very high levels in the first quarter of last year, especially in the U.S. on the back of our strong dynamics in DCM and customer-related markets activity. Wealth also had a great performance, particularly in private banking, higher volumes in asset management, and protection businesses in insurance. Payments was impacted by the usual seasonality from Christmas and Black Friday in the fourth quarter and the aforementioned one-time positive fee recorded in the first quarter of 2023 in Brazil. In terms of efficiency, significant improvement in our ratio to 42.6%, which remains among the best in the sector. As we have already mentioned, structural savings from our transformation are already becoming evident in terms of operational leverage, especially in retail and consumer as costs remained stable at around €6.5 billion for the last three or four quarters. Average inflation continued its gradual decline across our footprint, dropping from 12% a year ago to 4% in the fourth quarter, and we were able to maintain costs fairly flat in the year in real terms despite the lagged effect of higher inflation on salaries and other costs and our investments in transformation. By business, costs remained well under control in retail, consumer, and wealth, which represents 75% of our total cost base. However, total cost rose 5%, reflecting our strategy to reinforce our CIB franchise and develop global payments platforms. We expect structural operational leverage from our new operating model to become even more evident in the coming quarters and years. Credit quality, as I have mentioned, shows no signs of any pressure. In terms of credit quality, which remains robust with cost of risk fairly flat in the quarter across our footprint, in line with our expectations. By global business, credit quality remained stable at low levels in the quarter in retail, which represents 50% of the group's loan loss provisions, with some underlying trends across the different countries. Cost of risk improved in Spain, remained at very low levels in the U.K., while Mexico continued to normalize in line with expectations. In consumer, which represents around 36% of group's loan loss provisions, cost of risk normalized to 2.12%, also in line with our expectations, but still below the historical average, both in DCB Europe and in the U.S., and is still 5 percentage points below 2016 levels. Going forward, we are confident that our cost of risk will remain around 1.2% in 2024, with strength in consumer and Mexico towards more normalized levels expected to be offset by better performance in retail, especially in Brazil, improving mostly in the second half of the year; Spain will be stable; and in the U.K. that will also remain at very low levels. Closing with capital, our fully loaded capital ratio remained at a very comfortable level of 12.3%, backed by strong capital generation and significant risk-weighted asset mobilization. This quarter, we generated 32 basis points organically after having absorbed 5 basis points due to the temporary levy in Spain and an increase in risk-weighted asset density related to a change in mix. We recorded a 22 basis point charge for shareholder remuneration, in line with our 50% payout. There are also 24 basis points from regulatory charges related to the maturity measure of CIB models, which is expected to be temporary and revert next year with the implementation of Basel III. Finally, there was a 14 basis point positive impact mainly related to intangibles and the valuation of available-for-sale portfolios. We continue to deploy capital to the most profitable growth opportunities and expand our asset mobilization capabilities to maximize capital productivity. Our disciplined capital allocation is resulting in a new book, return on risk-weighted assets of 2.8% in the quarter, well above that of our back book and higher than last year's. We created a centralized asset management desk with the aim of optimizing capital deployment. Last year, we disposed of an amount of capital risk equivalent to €30 billion in risk-weighted assets at the cost of capital of around half of that of the new origination; our target this year is to do even more. That's all from my side, Héctor over to you.

Thank you, José. First of all, a quick reminder. We continue to make good progress towards the targets we set for 2025. Thanks to our unique business model and the execution of the strategy with, first, a strong and increasing organic capital generation and execution of our capital allocation plans. Second, we continued improving our profitability. Investor Day target, just to remind you, was 15% to 17% RoTE. And by growing both profit and profitability sustainably, we have been able to deliver 14% value creation. A summary to finish off. Q1 2024 was another strong quarter, supported by recurrent customer revenue growing high single digit, backed by a strong performance in all our businesses and regions. Our structural change to a simpler and more integrated model is driving efficient improvement and profitable growth, which is essentially evident in retail and consumer. Our rock solid balance sheet and robust credit quality are contributing to growth and double-digit shareholder value creation. This is a very strong Q1 2024, and we are confident that we will achieve our 2024 targets, as well as those we gave on our Investor Day in 2025. First of all, it's important to acknowledge that it's supported by our global businesses as we continue executing on one transformation. From a revenue perspective, we expect good NII performance in the year. This is based on, first, the positive momentum in Europe, which will continue at least in all of the quarter; second, enjoying the benefits from the interest rate cuts in South America; and third, the significant improvements in consumer boosted by the high new business profitability. The benefits of the operational leverage from our one transformation program are expected to become even more evident during the rest of the year and well into 2025. Cost of risk is expected to be contained and in line with our expectations in the context of strong labor markets. As we deploy capital to the most profitable growth opportunities, the group's RoTE improved from 16.2% in Q1 2024, and we expect it to remain at 16% in line with our targets for 2024. All in all, our TNAV plus cash dividend is growing double digit, well on track to meet our target through the cycle. And now we would be happy to take your questions. Thank you.

Thank you, Héctor, and thank you, José. We can start the Q&A session now.

Thank you. We have the first question from Francisco Riquel from Alantra. Please go ahead.

Yes. Thank you for taking my questions. First is on NII in Spain, which has surprised positively. We have seen local peers raising guidance. So I wonder if you can update on your guidance for 2024 and detail the main assumptions behind it? And then how big a lift shall we expect in 2025 with the current yield curve? Also connected to this, the NII in the corporate center because the Spanish liquidity, I understand is remunerated here. So you can provide any comment to better assess the combined NII performance of Spain and the corporate center? And my second question is on capital after the 20 bps front-loaded in the first quarter for Basel IV. You mentioned in the past 30 bps left for January 1, 2025. So, meaning that you're already in line with the 12% pro forma post Basel IV. I wonder if you can update on this Basel IV regulatory impacts and other headwinds that we should expect? And where do you see your CET1 target in the context also of potential countercyclical buffers? Thank you.

Thank you, Francisco. Let me explain exactly how we see NII basically going in Spain. First of all, we see really good trends as you can see in retail due to the fact that we had really good growth in clients. I basically talked about 630,000 net new clients in just one year. The trend continues basically very positive during the first quarter as well, which we can basically have been able to add 130,000 new clients. It's important to say, and as I commented, that we see this continued trend also on the interest rates towards the second quarter to continue to go. All the different businesses basically are doing quite well. As you can see, CIB is also performing quite well and the commercial business, too, and that will basically give you the idea that we expect to have a very strong 2024 all along in NII in Spain. In terms of the corporate center of what we see there on capital, I will ask basically Jose to give you the details.

Thank you, Héctor. I would like to add to those comments. Based on the current forward rates, as Héctor mentioned, we anticipate that Net Interest Income (NII) will increase in the second quarter, remain largely unchanged in the third, and decrease slightly in the fourth. This will result in a year-over-year increase in NII in Spain, in the low single digits. It's important to note that we initially expected NII in Spain to decline year-over-year in 2024 compared to 2023, but given the current interest rates and forward forecasts, we actually see an increase. In the Corporate Center, the first quarter appears atypical due to our hedging increase. We tend to hedge at the beginning of the year according to our currency expectations. Therefore, I anticipate that NII in the Corporate Center will improve gradually as future charges may be lower. Regarding Basel III, I want to make a general observation before discussing it further. There are several uncertainties pertaining to capital and capital requirements for European banks in the upcoming quarters. The U.S. has announced that it will delay implementing FRTB and will review the proposed Basel III rules to prevent unanticipated consequences. Consequently, it is likely that both the FRTB and Basel III rules in the U.S. will differ significantly from their initial proposals. Europe must respond to this situation as it may place European banks at a significant competitive disadvantage. It is plausible that the commission will utilize its delegated act to defer the implementation of FRTB beyond January 1, 2025. However, we do not foresee any changes to the CRR. Furthermore, the EBA is required to issue 140 technical papers to clarify the new capital directive. The EBA's mandate is for the overall impact of these papers to be neutral, but this does not guarantee that each paper will achieve neutrality. This is evident in the paper under consultation regarding advanced operational risk model calculation. Overall, with the information available today, we are sticking to our estimate for a minimal day one impact from Basel III. So on January 1, the impact will be very low, between zero to 20 basis points, while the fully realized impact will range from 30 to 50 basis points, as we previously indicated. Overall, we expect to maintain a fully loaded ratio above 12% once Basel III is in effect. Concerning countercyclical buffers, in Spain, we hold approximately 25% of our risk-weighted assets for the entire group. Therefore, any countercyclical buffer will proportionately affect capital for the group. For instance, a 50 basis point buffer would result in a 12 basis point impact, while a 100 basis point buffer would mean a 25 basis point impact. However, it's essential to remember that there is a one-year lag between the announcement of countercyclical buffers and their implementation, meaning any announcement will not influence capital requirements for a year. Consequently, it is unlikely to affect capital requirements for 2025, although it might influence year-end capital requirements that year, but not for 2024.

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

Hi, good morning. Good morning, everyone. Thanks for taking my questions. I have two, if I may. The first one is on fees and fee generation in the quarter was quite good when looking to the coming quarters, what should we expect? Should we expect an acceleration of growth, driven by the good performance of CIB and Wealth Management insurance? Linked to this, I just wanted to see if there was any kind of one-off in the fees reported in the US, which jumped out quarter-on-quarter? The second question is a bit linked to the capital debate. And I just wanted to better understand what is the organic generation that you expect, I mean, as profitability improves, I feel that 10 to 15 bps is to be a bit low and you could probably generate a bit more or you would be able to that to additional growth of our revenue base? Thank you.

Thank you, Ignacio. Okay. In terms of fee generation, okay, we have, as you can see, a strong Q1, 14% quarter-on-quarter. That's an 18% quarter-on-quarter growth in retail. Retail represents basically half of the quarterly growth, and it's basically solid commercial activity in all the regions and it's continued to do so, okay? You talk about the outstanding performance in CIB, that's 39% quarter-on-quarter. That's record revenue. This is basically what we've been doing in global transactional banking, and there are no one-offs whatsoever in all the bank and in the U.S. It's basically business as usual and client flow from all accounts, okay? In wealth, we have also a very strong recurring activity in private banking. Also, we have higher volumes in asset management. And as well in the insurance business, we have seen a very good trend and probably we see a very good trend coming from Brazil towards the end of the year that could help us out, okay? Consumer growth came mainly from Europe, okay? Volumes grew, and also the insurance fees recovered in Europe, and that shall help us as well. For 2024, we expect that trying to continue, as I told you, the fees are growing to reach mid- to high single-digit. This is not an official target, but I can tell you that this is a trend that we see. This is mostly driven by the increase in CIB with the connectivity we have on wealth and payments and the growth in customer and transactionality. Most of the global businesses, we experienced double-digit fee growth in 2024 as we changed the business model and we concentrate on the principality of the account. It's very important that you understand what the model change is about. The model change is exactly about that. When I was talking about to become the number one bank to our clients, this goes more to transactionality and fees than RWA consumption as we used to do in the past, okay? So, this is the basic change that we're executing today. You're going to see a much better trend towards that and the most disciplined part on the allocation of RWAs. With that, then I'll leave on the capital question to José. Thank you.

Hello Ignacio. Our organic capital generation post dividends is around 15 basis points per quarter. We think we can keep risk-weighted assets fairly flat throughout the year, very, very low risk-weighted asset consumption due to the asset rotation initiatives that I mentioned. So, we should be able to have available for capital growth or regulatory headwinds 15 basis points per quarter over the next three quarters. We still expect 20 to 30 basis points of additional regulatory requirements and some positive contributions for intangible management. So, net-net, with all of that, we still see a 12.40 to 12.50 capital ratio by year-end.

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

Hi, good morning. I have a couple of follow-up questions. Héctor, you provided details on the fee performance. I want to revisit the U.S. and Brazil. In the U.S., you mentioned there are no one-offs, but is this the run rate we should anticipate moving forward? How does the pipeline look? I understand there are no one-offs, but might there be seasonality? Also, you mentioned a renegotiation in Brazil. I assume that’s why the fees have been lower; could you clarify that? For my second question regarding NII, reflecting on your comments about Spain, could you also share your thoughts on Brazil and the U.K.? Brazil seems to be performing very well, likely above the sensitivity you indicated. What are your expectations for the full year? Will this strong performance continue? And regarding the U.K., when do you anticipate it might bottom out? Thank you.

Thank you, Alvaro. As I mentioned, the performance in the US is quite good, and we have a very strong pipeline. If the markets are favorable and we execute our plans effectively, I believe we will see a positive trend. However, this will depend on market conditions. The market is currently supportive, and if that continues, we can maintain our progress. Regarding Brazil, we experienced a one-time payment of €195 million in the first quarter last year that won't recur, which temporarily impacted us. Despite that, I see a healthy trend in payments and retail contributing to our growth. If we maintain this momentum, it should benefit us in insurance and retail as well. I observe promising trends ahead. Concerning net interest income in Spain, Brazil, and the UK, the initial indications show that if rates remain stable, we will benefit from the volume growth we are seeing in Brazil, primarily from payments and retail. José already provided a solid overview of Spain, and I will let him elaborate further. Quickly about the UK, it is performing similarly to our competitors. Our main focus remains on retail, and we are enhancing our offerings and user experience. We are also progressively investing in the corporate segment and wealth management to diversify from retail. Net interest income in the UK has declined by 4.4% this quarter, akin to the trends we see at other major banks. However, we are implementing strategies to improve it, including changes in pricing for deposits and lending. We are also managing betas more effectively, and mortgage spreads in the UK market are improving, which should benefit us in the coming quarter. It may not be as negative as we initially anticipated. Additionally, we are executing cost control measures to support our efforts, and we expect our cost of risk to remain well managed. With that, I’ll hand it over to José for more details on net interest income in Spain and Brazil.

In Brazil, net interest income is expected to gradually increase during the second half of the year, leading to mid- to high double-digit growth year-on-year. In the UK, performance for the remainder of the year should mirror what we experienced in the first quarter. We have observed an increase in volumes, though customer margins remained stable compared to the previous quarter. Year-on-year, we anticipate a slight decline in net interest income for the full year, around mid-single digits. Based on these projections, we expect net interest income for the group to grow each quarter this year. Additionally, customer revenue is expected to reach close to double digits in 2024 compared to 2023, driven by strong performance in fees.

Thank you.

Hi, good morning. Thank you for taking my questions. There are two, both on the US. I don't think I have seen the slide you used to have in last quarter around the aspirational 15% RoTE target in the US. So if you can kind of update us basically on how quickly you think you can get to that number and what are the main drivers and initiatives? I've seen Openbank being launched in the US recently, so just a little bit of color basically on how quickly you can get to that? And the second one is on the asset quality in the US. I mean, you used to give some information around PV's charge-offs in the past as well. I don't think I've seen those, actually. So forgive me if I missed them, but if you can give us a little bit of underlying color of how the US asset quality, delinquencies on the auto businesses are developing from here? Thank you.

Thank you, Ignacio. Regarding the US market, we have been making substantial investments to focus on our key sectors, particularly the consumer segment where we have a strong presence. We have also made some investments in the CIB sector to enhance our footprint there. Additionally, we are working to develop our private banking and wealth management capabilities domestically, as our current operations are mainly through non-US partnerships. Our goal is to reach a 15% return on tangible equity by the end of 2025, and we are committed to achieving that. On asset quality in the US, the labor market remains robust, and our portfolio performance is strong. Delinquencies over 90 days have improved significantly from pre-COVID levels of about 90% down to approximately 59%, and are currently hovering around the mid-60s. Our cost of risk remains stable at about 2%, and we do not anticipate any surprises in portfolio behavior as we approach year-end. We have also emphasized profitability and effective capital allocation, seeing positive results in origination. Our focus on credit quality has kept the portfolio steady, with around 40% classified as prime and near-prime. Overall, the portfolio remains stable at these levels.

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

Good morning. My first question is about the U.S. outlook for net interest income. How do you anticipate it will change throughout the year? Should we expect continued pressure, or is there a chance for a recovery? My second question is about the cost of risk in the U.K., which is currently low. Do you expect this to rise over the year, or will the first quarter levels remain consistent? Thank you.

Sorry. Thank you, Carlos. First of all, on the outlook of NII in the U.S., I see it flattish, okay? Let's see how volumes basically turn out. And as I explained before, since we are very much focused on profitability and also on capital allocation, I see that it's going to be flattish around there, okay? And in terms of cost of risk in the U.K., sorry. The cost of risk in the U.K., as I told you before, when I was explaining Alvaro, I see it very flattish. I mean the guidance is going to be at around 11 basis points to 14 basis points at the most, so below 20 basis points.

So if I may add, we see no asset quality pressures anywhere. Labor markets are very strong, new employment, and new job creation is also very strong everywhere. So we see really no pressure; there are no signs of asset quality deterioration. So we could extrapolate what we've seen in recent quarters in the U.K. We could extrapolate for the rest of the year.

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

Thank you very much. Good morning. My first question is on capital. So the Bank of Spain were to introduce the CCI of 100 bps, that is 25 bps for you, but that would leave your 12% fully loaded core equity Tier 1 ratio, leaving or implying an MBDA buffer of just about 177 basis points, which is pretty low for European standards. So do you think that 12% fully loaded Tier 1 ratio target is still the right one in that event? And the second question is on the U.K. So the bottom line is now 25% smaller than last year. Is the shrinking going to continue? Or do you think you can stabilize earnings at current levels? And just quickly, a clarification on a previous question. The revenue growth that you are foreseeing, is that just reported revenues? And is that in constant or current euros? Thank you.

Let me answer your final question. We are estimating almost or around double-digit revenue growth in constant euros with Argentina in current euros. Obviously, in current euros or in euros with Argentina in constant might be higher than that. But as I explained, we believe this is the best reflection of our underlying performance, eliminating the distortions of hyperinflation in Argentina.

In terms of capital, I want to emphasize that we expect to finish the year at approximately 12.40 to 12.50. I truly believe we will be above 12% after Basel III. Those are the key points.

Yes. And again, the countercyclical buffer will be implemented in a year's time. So again, the capital target is being decided by the Board. The Board might review that capital target once the variables that led to that capital target might change, but we are going to be comfortably above 200 basis points MDA with our actual capital buffer.

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

Yes. Hi there. Thanks for taking my questions. I've got two questions. You sound more optimistic on net interest income in Spain, UK and Brazil. But yes, there has been no change to the official group targets for 2024. What is the delta here? And what do you think is the biggest delta to consensus? And then, secondly, you guided to double-digit customer revenue growth and the group revenue target is mid-single digits. What's the delta here for 2024? Thanks.

As we saw in the first quarter, just the monetary adjustment in Argentina, in the first quarter was €600 million. We have €1.2 billion monetary position in Argentina, and inflation was 51% in the first quarter. So just that in the first quarter was €600 million. That's what we are trying to avoid by looking at constant. So there are charges to the P&L that obviously we don't control. So that's the reason why we haven't changed the revenue target for, I mean, the total revenue target for the group, mid-single digits, but we believe that customer revenue growth can approach can be close to double-digits.

Britta, in terms of the revenue overall, as you were saying in NII, Yes, I sound optimistic because I'm very optimistic about the trends that we have in front of us. And I reiterate that we're going to meet the 16% RoTE that we basically have announced onwards, I believe that looks good and it looks promising, but I reiterate the guidance that we have gave you.

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

Hi, here is Sofie from JPMorgan. Thanks very much for taking my question. So I was just wondering about the net cost guidance for 2024. Does it still hold your costs were up 5% in constant euros, 7% in current euros, so how should we think about that as cost guidance that you previously gave? And then, my second question would be on rates sensitivity to a 100 basis point change in rates, if you could just remind us what that means for Spain, Brazil, the U.K., U.S., all the core markets? And also, if you have any hedging in place to reduce that rate sensitivity? And then my final question would be on Slide 5, you say that your- you only got 5 million new customers year-on-year. But at the Investor Day a year ago, you targeted, I think, 75 million new customers. Just like a strategic question; maybe it doesn't make a difference if you only have 5 million new customers or does it make a difference? And how do you plan to get the 75 million new customers that you guided for at the Investor Day a year ago? Thank you.

Thank you, Sofie. I'll address your last question first. We are essentially refining our customer base. Despite experiencing strong growth, we are focusing on this cleanup, which will ultimately influence our ability to take on more customers. We plan to work diligently on this. The customer growth has been robust across various areas and businesses. Regarding costs, as I mentioned, they have remained relatively stable for the third consecutive quarter, showing approximately 1% quarter-on-quarter increase. If we exclude Argentina, the figure decreases by 3% due to its impact on our numbers. In real terms, there has been a 2% year-on-year increase, resulting in a cost-to-income ratio of around 42.6%. We are on track to meet our 2024 target of keeping this ratio below 43%, and I am confident we will achieve it. Our cost efficiencies are derived from operating leverage through product simplification. We have significantly reduced our product offerings from 10,000 to 7,500. Automation plays a crucial role as we transition non-commercial full-time equivalents to commercial ones. Over time, this shift will enable us to manage costs more effectively. In summary, I want to emphasize that we will remain below the 43% cost-to-income target for the rest of the year.

In terms of rate sensitivity, there has not been any change in most countries, except for Europe. In the U.S., the sensitivity is approximately €150 million; in Brazil, it's also around €150 million. In the U.K., it’s about €200 million; however, we have significantly reduced sensitivity in euros, especially in Spain. Specifically for the U.K., our structural hedge stands at £113 billion with an average duration of 2.4 years, an increase from £106 billion in December. In Spain, we are hedging our balance sheet through various actions, primarily adjusting our origination buying ALCO portfolio. We currently have €30 billion ALCO in Spain with an average duration of six to seven years at a yield of 3.25%. We have also been implementing some hedges. Consequently, out of the €240 billion in risk-weighted assets and €250 billion in average earning assets we hold in Spain, 60% is floating and 40% is fixed. This is a notably higher fixed portion than previously, resulting in lower sensitivity to rates in Europe.

Let me finish. The sensitivity of net interest income compared to the average of our major competitors in Spain has decreased to 7.5%, while their sensitivity stands at 5%. We plan to keep hedging the balance sheet moving forward. This decision has proven beneficial as interest rate curves have increased slightly, allowing us to earn higher net interest income and providing more time to hedge our positions. We are gradually hedging our interest rate sensitivity in euros, reducing duration through a combination of actions we have taken.

Thank you. Can we have the next question please?

Thank you for taking my question. The first is on your profitability targets. You're above 16% RoTE guidance for 2024 implies more than €12.4 billion net profit this year with Q1 on track to hit that with tailwinds in H2 that you indicated in Brazil, in the UK reticketing portfolio in consumer with lower rates. Can you be more specific about your profit target for this year and give us an insight on the 2025 RoTE outlook? Second question, if you could give us a target for 2024, group costs in absolute million? And where do you see them going in 2025? Finally, a quick one on the insurance business, the new banking package improved the treatment of insurance activities inside banks. Could you consider internalizing this business? Thank you.

Thank you, Andrea. I agree with you. We are confident that we will meet the 16% RoTE target we established for the year. As we mentioned at our Investor Day, we aim for a range of 15% to 17% by 2025. We are making significant efforts to achieve this goal. I want to emphasize again that we will hit the 16% target we set. Regarding costs, we expect our cost-to-income ratio to be under 43%. We have been disciplined in managing our costs, maintaining an approximately 1% quarter-on-quarter growth, and we plan to stay disciplined moving forward. The operational leverage in our retail operations is functioning well, and our goal is to maintain our current cost structure. I am confident in our cost management efforts and believe we can keep costs relatively flat. On the topic of our insurance business, we are enthusiastic about it and see significant growth potential, especially in markets like Spain and Brazil, as well as in Mexico where insurance penetration is low. We recognize the vast opportunities available and are actively improving our systems. For instance, we currently have an average of 222 different products per market, and we aim to streamline this to 25 basic products to better meet client expectations and enhance sales. This presents a substantial opportunity. Additionally, we have long-term joint ventures in Latin America, Spain, and Portugal that we intend to maintain. While I would like to internalize this business, we must work within the framework of these joint ventures. Nevertheless, there are significant opportunities in this area, not only due to regulatory changes but also because of our large customer base and the low penetration rates in various markets.

Thank you.

Thank you for taking my questions. At the full year results, you noted that you do not expect any material impact from the FCA's review of motor finance in the UK. Since then, one of the large banks in the UK has made a significant provision in respect to that issue, do you still expect no material impact here? And are there any numbers you can provide us to help frame the issue? And then secondly, we've seen consolidation in the space in the UK from banks looking to improve their return profiles. Your ROTE in the UK is slightly below that of your major peers despite a favorable asset mix. Do you believe you can improve returns in this geography using organic methods? Thank you.

Thank you. Regarding the UK motor finance issue, predicting the resolution of such matters is challenging due to significant uncertainties about the existence, scope, and timing of any possible outcome. Therefore, we are not yet able to disclose the potential impact. I understand that there is an expert analyzing the situation, so we cannot provide clarity at this moment. However, I can say that we have been performing well with the settlements we currently have, exceeding our expectations so far. As for consolidation in the UK, I don't think we should pursue consolidation at this time. I believe it is not the right moment to increase our investment in that market. That is my perspective.

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

Yes, good morning, everybody. So two for me. So first on Basel IV and then on Argentina. So hope thanks for the color earlier on Basel IV. I mean, I suppose it sounds very possible that FRTB gets pushed to align with a revised US time frame, let's say, towards July 1, 2026. You mentioned the delegated act provision for FRTB here in Europe. So just within your day one and fully loaded guidance, how much is FRTB and how much is all the rest of it, i.e., if we only get parts of Basel IV in January 1, 2025, and then FRTB follows on July 1, 2026, how much would that change the phasing of the capital headwinds you talked about earlier? And then second, on Argentina. So clearly, it has quite a distortive effect on the group figures. Then there's the associated cost of hedging, and it's below 5% of group earnings. So I just wondered whether you've reassessed your footprint plans in Argentina, I guess, especially in light of the announcement that one of your peers is exiting that market? Or are there any sort of interconnectivity with other parts of the group that would make such an exit unfeasible?

The answer to your third question is yes. We have consistently referenced Basel III, and when we discussed its impacts, we included the Fundamental Review of the Trading Book. You are correct in pointing that out. When we mentioned the initial impact of Basel III, it was actually Basel III combined with the FRTB. The FRTB alone represents a 10 basis point impact. Therefore, if the FRTB is delayed, we will not experience this 10 basis point impact on day one that we had previously included in our forecasts. I hope this clarifies things.

Thank you. In terms of Argentina, I think that we need to leave our options open given what's going on in Argentina, basically can sustain what's going, and we're trying to be positive about what could happen, I don't believe that we have any downside or upside given the situation. So there are no plans to do anything at this point, and we'll just wait and we will continue operating our business. Our business is doing well. It's very well structured, is one of the best banks that we have in terms of client penetration, in terms of the transactionality that we have from our clients, fee generation. So we will continue to be there and see what our options are later on.

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

Yes, thank you. Just having a second go. Asking for absolute numbers on your net profit guidance for 2024, the 16% rate implies over €12.3 billion; can you be more specific about what number you're actually targeting? And then your own cost, the same story. I'm asking for a nominal euro-denominated group cost target for 2024? Thank you.

The current figures and growth rates in the P&L do not provide enough insight to accurately predict our likely net income and cost. For net income, a 16% return on tangible equity aligns with your estimate of around €12 billion, possibly slightly more. We agree with this conclusion. Regarding costs, we anticipate a growth rate of about 2% to 2.5% this year. Moving forward, our goal is to maintain flat costs in absolute terms, which will be challenging, especially given the high inflation environment. This is our ambitious internal target. While we have not provided guidance for 2025, our long-term objective is to keep costs flat or even reduced in absolute terms. We are not quite at this point for 2024 but believe we could be closer in 2025. It's still early in 2024, and we will provide guidance when appropriate. Our medium- to long-term goal remains to hold costs steady or lower in absolute terms.

Thank you very much. Thank you, Héctor, and thank you, José. I believe there are no more questions. Thank you all analysts and investors for your attendance. Our Investor Relations team is, as always, at your disposal for any further questions you may have. Goodbye.