Banco Santander, S.A. Q2 FY2024 Earnings Call

Good morning, everyone, and thank you for joining Banco Santander's Conference Call to discuss our financial results for the first half of 2024. Both the results report and the presentation we will be using today are available on our website. I'm here with our CEO, Mr. Hector Grisi, and our CFO, Mr. Jose Garcia-Cantera. After their presentations, we will have a Q&A session for any questions you may have. Now, I will turn it over to Mr. Grisi.

Thank you, Begona. Good morning, everyone, and thank you for joining us. Today's presentation will follow the usual structure. First, we will talk about our H1 results in the context of our strategy. Then Jose will review our financial performance in greater detail. And then I will conclude with some final messages. As Begona said, we will then open the floor for your questions. The main highlights of our results in the first half of 2024 are the following. Q2 was another record quarter for Santander, which shows the strength of our strategy and the resilience of our business model. Profit reached €3.2 billion, that's 20% above Q2 '23, even after the impact of €450 million of one-time charges, net of taxes and minorities. Excluding them, recurring profit was €3.7 billion in Q2. Profit in the first half reached €6.1 billion, also a record high of 16%, supported by the strong cost of revenue growth in all regions and global businesses. We continue to accelerate H1 transformation to become simpler, more automated, and more integrated. As a result, our efficiency ratio improved by 261 basis points to 41.6%, the best in 15 years. And our return on tangible equity rose 137 basis points to 15.9%, or 16.3% if we analyze the impact of the temporary levy in Spain. Finally, our solid balance sheet with a sound capital ratio, solid credit quality, and a strict capital discipline helped us reach strong profitable growth and shareholder value creation, with TNAV plus dividend per share increasing 12%. Let us stop for a moment in our income statement. As always, we represent growth rates in both current and constant euros. This quarter, there were no material differences between them. Since last quarter, we have reported variation in constant euros in all countries except Argentina, which is shown in current euros to mitigate the distortions from hyperinflation. In Q2, we have taken a prudent approach again and used an inflation-adjusted exchange rate for the Argentine peso, given the significant divergence between inflation and the official effects. Although it has little impact when comparing half-years, distortions are more significant when we compare with Q1. Let's look at the income charges. These were 210 additional Swiss mortgage provision in Poland, reaching coverage of 100%. €240 million from the write-down of our merchant platform in Germany and Superdigital in Latin America. I will explain in more detail later on. Additionally, we have positive and negative one-offs impacts in Brazil, which do not affect profit and have been netted in the underlying P&L. The increase, as you can see, is a strong first half of the year, with solid commercial and business dynamics that already puts us ahead of our plan for 2024. As a result, we have upgraded some of our targets for the year. We have increased our revenue growth target to high single-digit with better NII and fee income. We have improved our efficiency ratio target to around 42% as accelerating one transformation leads to higher operational leverage. And we have raised our RoTE target to above 16% versus the previous 16%. We are also confirming the rest of our targets for the year. Cost of risk is expected to remain stable at around 1.2% on active risk management and strong labor markets. As a reference, year-to-date cost of risk was 1.17%, even with additional provisions that I just described in Poland. In capital, our CET1 ratio ended June at 12.5%, with a strong organic capital generation in line with our target to be above 12%, even after the Basel III implementation. One key transformation and the operational leverage it brings are behind the record performance, structurally improving both revenue and cost performances. Simplifying and automating processes, plus our active spread management, have already contributed 266 basis points of efficiencies since we started. Our global businesses continue to push a group's profitability and have delivered 87 basis points in efficiency gains. Finally, our proprietary and global tech capabilities have generated 71 basis points in efficiencies so far. As we have often said, we are going back to basics, which supports value creation based on profitable growth. How? By focusing on offering customers the best products and user experience, and by obtaining the operational leverage from our global platforms and common tech. This is reflected in the performance of our global businesses. Our retail and consumer businesses' efficiency ratio improved by 480 basis points and 270 basis points, respectively. In CIB, we are building a world-class business, leveraging our expertise to grow in the U.S., maintaining a risk profile. Revenue grew 6%, another record, supported by strong performance and inclined flows in the U.S. Wealth continued its strong growth, improving efficiency and profitability and in payments, where we manage over 100 million cards in the group, we have significantly improved profitability. As a reminder, in Q1 of last year, we had a one-time fee from a commercial agreement in Brazil, excluding this impact, payments revenue would be 6% up and efficiency would have improved by 113 basis points, even after investing in the global platforms. In the coming five slides, I will review the advances on each of our global businesses. Let's start with retail, where we are working to become the number one bank for our customers. It is a great example of the benefits from one transformation. Innovation helps to offer the best customer experience. In Mexico, for example, our new digital processes helped onboarding time and led to a record 90,000 digital account openings just last month. A common operating model across our banks, automation and digitalization frees up the time of our people to focus on commercial activities. Dedication of resources to non-commercial activities has dropped 8% versus last year. Deployment of our global platform has continued. In the U.S., it has been successfully completed. Within the group, Gravity is already operational in Spain, the U.K., Mexico, Brazil, and Chile. And it is processing a number of transactions that is around 20% higher year-on-year. Financially, we are extracting the potential from today's favorable conditions in our footprint as we benefit from our diversification. We carefully managed margins in the higher-for-longer rate environment in Europe and keep capturing the benefits from our negative sensitivity to rates in South America while we achieve strong operational leverage across the group. As a result, our profit grew 35% year-on-year, RoTE up from 430 basis points to 18.1% on the back of revenue up double-digit on good performance of NII and fees with all regions growing, especially Europe and South America. Cost is well under control, down 4% in real terms, reflecting the structural benefits from our transformation and provision and cost of risk fairly stable at comfortable levels. In consumer, we strive to be the partner of choice for our customers. Our best-in-class global solutions are integrated into our partners' processes. For example, last year, we launched a new digital onboarding to pure direct auto players, which allows them to offer their customers the completion of their auto finance online end to end in very little time. We are progressing well in deposit gathering to increase NII stability and autonomous funding across the interest rate cycle. Deposits were up 14% year-on-year, supported by our digital solutions. We expect positive trends to continue helped by the launch of our deposit gathering platforms. Deploying global platforms is key to scaling our business, reducing the cost to serve, and improving profitability. In check-out lending, we recently launched installment loans with Apple in Germany through Zinia, which we are looking to spend to other European countries. Consumer had a great quarter on its operational leverage, which resulted in double-digit growth in net operating income and a 4% profit increase in H1, with number one, strong revenue driven by positive commercial dynamics with higher volumes, mainly in Europe and Brazil, good NII performance and 27% fee growth from insurance. Number two, cost falling 3% in real terms on the execution of our strategy and efficiency plans executed last year. And third, higher provisions, mainly Swiss franc mortgages and expected cost of risk normalization in Europe and the U.S. Volumes and good profitability levels of the new business makes us confident then that consumer will end '24 with profit growth of around double-digit even after the normalization of provisions. We are building a world-class CIB business for our clients that leverages our strengths and global footprint to grow profit while maintaining the same low-risk profile. We are deepening our client relationships and increasing our capabilities in the U.S., building on our areas of expertise to accelerate growth across regions. Our collaboration in the U.S. with the rest of the group is starting to pay off with several firsts. For example, we made our first corporate share buyback for a U.S. company, and we were appointed global coordinator for a U.S. listed IPO for the first time ever. In Mexico, we are creating a significant partnership within the Mexico-U.S. corridor, leveraging our global markets and U.S. Pan built-out initiatives. And these are just a few examples from a long list. As a result, revenue in CIB in the U.S. rose 33% year-on-year. This strong growth reflects the benefits of our U.S. banking build-out initiative, which will become even more evident in the coming quarters. We continue to expand and strengthen our centers of expertise, including key industry groups such as chemicals, technology, and paper and packaging. Our CIB business is capital-light, very much linked to customers and with fees growing at a good pace year-on-year. Our active capital management continues to support greater origination and high profitability levels. In essence, CIB had great results, increasing revenue in H1 6% year-on-year, even after a record first half in '23, making H1 the best ever, with fees growing at double digits and the vast majority of our growth coming from customer flows. Moving on to wealth management and insurance, we continue to build the best private bank and insurance manager in Europe and the Americas. How? Number one, by improving customer relationships through the best service and right solutions, resulting in double-digit growth in private banking customers. Second, collaboration with other businesses, especially retail and CIB, which is a major driver for growth and allows us to capture network benefits. Collaboration fees increased by 12% year-on-year. Third, developing global platforms across all three businesses and digitalizing our distribution and advisory capabilities to improve customer experience and promote growth. A good example of this is Autocompara, our auto insurance comparison engine that operates in six countries and which we are expanding to new segments and businesses. In summary, we are accelerating growth and maintaining high profitability. Attributable profit rose double digits on strong private banking activity in a favorable interest rate environment, with total fees from all three businesses growing at double digits and costs topped slightly in real terms. Finally, efficiency improved 230 basis points year-on-year and RoTE rose 350 basis points to over 80%. Finally, payments, where we have unique positions on both sides of the value chain. One, issuing where we manage more than 100 million cards group-wide. And second, in merchant acquiring. In merchant, we are the second largest acquirer in Latin America and a market leader in Spain and Portugal, with the right balance between growth and profitability. We are gaining market share in most markets as we have strengthened Getnet's customer value proposition with new global solutions. An example is dynamic currency conversion in Mexico, which has helped Getnet to become second in Mexico with a 20% market share and a 47% EBITDA margin in Q2. We continue to migrate significant volumes of payments to PagoNxt global platform to leverage the group's scale. The transactions managed globally through PagoNxt payments surpassed $1 billion per year during the first half of this year, with 30% growth quarter-on-quarter. The rollout of Plard, our global cards platform, is on track. We continue to increase the number of debit cards managed in Plard at a good pace, and we are starting the migration of the debit portfolio. We plan to manage around 15 million cards through Plard in Brazil by year-end. As I mentioned earlier, we recorded one-off charges in PagoNxt from the write-down of investments. One is the discontinuation of our merchant platform in Germany we announced in June, as we are focusing on our current acquiring value proposition in our core markets, where we have a very competitive business. The other one is our decision to write down Superdigital, a natural step to promote the use of common platforms across the group and maximize operational leverage. These decisions will enable a more stable and profitable business, reducing fixed costs going forward. Excluding these impacts, underlying performance was very positive. Profit in payments was up 30% year-on-year, on good revenue performance, costs falling in real terms while we invest in our common platforms, and sound credit quality in cards. PagoNxt EBITDA margin improved to 20%, one of the best among competitors. We expect the consistent execution of our strategy, efficiency, and CapEx optimization will continue to drive profitability in the coming quarters. Today's results show that our strategy has enabled us to deliver outstanding profitability growth in H1, with double-digit shareholder value creation for the fifth consecutive quarter. RoTE was 16.3%, up 134 basis points year-on-year, reflecting the high levels of profitability at which we are originating new business. EPS rose to nearly €0.37, that's around 20% year-on-year, and we delivered 12% growth in shareholder value creation. Supported all by strong profit generation, our strict discipline in capital allocation, and share buybacks. We have repurchased around 11% of our outstanding shares in the last three years, returning around $6.5 billion through buybacks and providing a return on investment of 19% to our shareholders. I'll leave you now with Jose, to go into our financial performance in more detail. Please, Jose.

Thank you, Hector, and good morning, everyone. Like always, I will go into a bit more detail about the momentum both in Europe and in Latin America at the same time. Revenue grew 9%, with the highest NII and fee income in our history, and costs were down slightly in real terms. As a result, operating income was up 14%. Provisions increased even after including the 200 million increase in Swiss franc provisions that we took in the quarter. On the right-hand side, you can see the upward trend in profit quarter-on-quarter at 12%, which was driven by top-line growth with lower costs and provisions fairly flat, as I just mentioned. Let me now spend a couple of minutes on the reasons why we're starting to use a new inflation-adjusted exchange rate in Argentina rather than the official one. We have observed a significant divergence between the official exchange rate and inflation, and we have decided to follow a prudent accounting approach. The new exchange rate results from aligning the official exchange rate with the difference in inflation between Argentina and the U.S. This conservative method better reflects the actual value in euros of our results and investment in Argentina, which should help reduce potential currency volatility in the future, reminiscent of what we saw in 2023. Following these accounting standards, we recorded the full Q1 and Q2 impacts from this adjustment in Q2. While this does not substantially alter the year-on-year figures, it significantly affects the quarter-on-quarter comparisons, which I will illustrate in the upcoming slides. For example, net interest income decreased by 4% this quarter, but excluding Argentina, the group's net interest income would have increased by 2%. A similar pattern is seen with fees; instead of a quarter-on-quarter decrease, they would have shown a 3% increase rather than just 1%. Costs remained relatively stable. If this exchange rate does not materialize, we will reverse this adjustment and account for results we are currently not recognizing. However, we believe this is a prudent and conservative method to acknowledge our investment and results in Argentina. There was a strong total revenue growth driven by customer revenue again this quarter, which made up more than 95% of total revenue. This strong growth was primarily supported by retail. Retail accounts, as you know, for more than 50% of our businesses, and is growing at double digits, with very good performance in NII across regions, and fees also growing, especially in the Americas, and also consumer, which is reaching good profitability levels in new businesses, and strong loan growth in Europe and LatAm. Corporate investment banking also had a good quarter, as revenue reached an all-time high, both in the quarter and in the first half of the year, particularly in Spain, in the US, and in Mexico. Also double-digit growth in wealth, as Hector mentioned, driven by solid commercial activity in private banking and in asset management. Payments also performing very well, particularly we exclude the one-time positive impact recorded in Brazil in the first quarter of '23, you remember, which we explained, and Hector just mentioned, where we had a one-off from an agreement with Mastercard. The corporate center's increased liquidity buffer remuneration was counterbalanced by higher TLAC and MREL issuances, along with the negative effects of FX hedging. Most of our revenue growth was driven by net interest income, which continued to rise during the quarter when excluding Argentina, particularly due to retail, consumer, and corporate investment banking. On the slide, we highlight, in red, the figure that would have been recorded if we had used the official Argentina exchange rate. It's important to keep this in mind, as it demonstrates our prudent approach to accounting for profits from Argentina. Net interest income increased by 11% year-on-year, supported by all businesses and regions, bolstered by effective price management in retail Europe, especially in deposits, alongside higher volumes and the positive impact of negative sensitivity to interest rates in South America, particularly in Brazil and Chile, and strong activity levels in corporate investment banking. In terms of profitability, we have improved net interest margin year-on-year, explained by higher yield on assets as we continue repricing our books, but also very good management of deposit costs, which more than basically outweighed the pressures that we are seeing. It's true that the margin is expanding, as you can see, we exclude Argentina, or if we had used the official exchange rate, so overall the margin management, pricing management on both the asset side and liability side is really strong. We see a slight deterioration, though, if we use our official exchange rate or our adjusted exchange rate, although it's not very significant in the quarter. Going forward, we anticipate some margin pressure in Europe, which will be more than offset by positive contributions from the Americas and our consumer business. Despite low fee growth across the sector due to subdued loan demand, we achieved another record quarter in fee income at €6.5 billion, with solid growth in all five businesses. Retail increased by 3%, primarily driven by Brazil, North America, and Poland, along with an outstanding performance in consumer, buoyed by strong insurance businesses. Corporate Investment Banking also grew from already high levels in the first quarter and the first half of last year, particularly in the U.S. Wealth, which was supported by robust private banking activity, and Payments, which was impacted by a one-time fee recorded in Brazil last year. The structural efficiency gains from our transformation program are evident quarter after quarter. Our cost income ratio was 41.6%, marking the best level reported in the last 15 years and one of the top levels in the sector, already surpassing the targets we set for 2024. Cost declined quarter-on-quarter were very flattish if we exclude Argentina, after having been stable for the last three quarters with revenue growing steadily quarter after quarter, improving an increase in operational leverage that we obviously expect to continue to have in the second half of the year and into 2025. Average inflation continued its gradual decline, down from 12% a year ago to below 4% this quarter. In this context, costs fell 1% in real terms year-on-year. Despite that, as you all know, we have some lagged effects from higher inflation on salaries and other costs and our investments in transformation. By businesses, costs remain well under control in retail, consumer, and payments, which will represent 80% of our cost base. And 80% of the increase, as you can see on the bottom of the chart, came from CIB, reflecting our strategy to reinforce our corporate investment banking franchise. In fact, if we exclude these investment costs in the rest of the group, would have decreased 3% in real terms. Credit quality remained very much under control, obviously, supported by a stable economic environment and our active risk management all across the group. Cost of risk was 1.21%. Remember that we look at the last 12 months, if we look at the first half of the year, cost of risk was 1.17%, even including the increase in the provisions for the Swiss franc mortgage portfolio in Argentina. So we are very much on target to reach the 1.2% for the year and we reiterate that target. In the second half, we expect that trends in consumer and Mexico will be closer to more normalized levels, but this will be offset by a better performance in Retail Europe and South America. Turning to capital and closing my section here, our CET1 ratio remains at a very comfortable level, backed by a strong organic capital generation and significant risk-weighted asset rotation. This quarter, we generated 52 basis points organically, supported by our asset rotation initiatives to compensate organic risk-weighted asset growth. We recorded 25 basis points charge for shareholder remuneration in line with our 50% payout. And finally, there was a 7 basis point negative impact, mainly related to intangibles, the valuation of available-for-sale portfolios and others. There were no significant regulatory impacts in the quarter. 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 has resulted in a new book return on risk-weighted assets of 2.9% in the quarter, which is equivalent to a return on tangible equity of 23%, well above that of our back book at 16%. Our centralized asset management desk, we change at optimizing capital deployment is achieving outstanding results. In the first half, we disposed of an amount of capital equivalent of €30 billion in risk-weighted assets and the cost of capital of half of that of the new originations. In addition, the one-third of our balance sheet that matures every year is being substituted by the more profitable new businesses at this return on tangible equity of 23%. The combination of these actions explained the expanding profitability and the increasing capital ratio. Let me turn it now back to Hector for his conclusions.

Thank you, Jose. As our results clearly show, we continue to make good progress towards the targets we set for 2025 in our last Investor Day, thanks to our unique business model and execution of our strategy. With a strong and increasing organic capital generation and execution of our capital allocation plans, further improving our profitability to above 16% and by growing both profit and profitability sustainably, we have been able to deliver 12% value creation to our shareholders. We said it in our Investor Day, and I want to remind you again, we have entered a new phase of value creation for our shareholders. In conclusion, the benefits from the execution of our strategy are very evident. The strong growth in revenue with flattish cost and around 20% growth in EPS and the best ever H1 profit with all-time high NII, fees and net operating income backed by strong performance in all our businesses and regions. Sustained progress in our structural change to a simpler and more integrated model, leveraging the group's scale is driving both higher revenue and lower cost to achieve the best efficiency ratio we have ever reported in the last 15 years. Our rock-solid balance sheet and robust credit quality are contributing to growth and double-digit shareholder value creation. As a result, we expect to exceed some of our targets for '24. We are upgrading our revenue growth target to high single digits, efficiency to run 42%. And as we deploy capital to the most profitable growth opportunities, we are improving our profitability target to above 16%. Our focus at Santander is to be reliable in providing returns that compound on an always increasing quantum of tangible book value consistently and through the cycle based on both business and geographic diversification. The progress over the last 10 years to simplify and align our model in all our businesses and now deploy our own tech stack is already evident and now depends on execution to continue to deliver on our primary target of double-digit TNF plus EPS growth through the cycle. And now we will be happy to take all your questions. Thank you.

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

We already have our first question from Sofie Peterzens from JPMorgan. Please go ahead.

This is Sofie from JPMorgan. Thank you for taking my question. My first question is about the risk transfers. Did I understand correctly that you experienced €30 billion of risk-weighted asset disposals in the quarter? Could you also discuss the decrease in risk credit assets? I noticed that risk-weighted assets are down around 2% quarter-over-quarter, and digital consumer buying is down 1% quarter-over-quarter. However, in both entities, the loan book increased by 3% quarter-over-quarter. How should we interpret these SRTs or securitizations? What will the revenue impact be from securitizing some of the loans? Additionally, could you remind us about the regulatory capital challenges expected in the second half? My second question is regarding Ebury. There have been several news articles suggesting that you might consider an IPO for Ebury. Could you remind us of the tangible book value per share or the tangible book value for these businesses? How much revenue does Ebury generate, and what are your plans for Ebury? Thank you.

Thank you, Sofie. First of all, our policy has been to rotate the balance sheet as much as we can, as Jose explained in detail. This change is very important for us due to our strong ability to originate assets. This helps us rotate our capital and acts as a turbocharger because each time we sell something, we reduce that capital and redeploy it within the organization at a more favorable price. That's our approach to managing the capital more effectively. As Jose mentioned, we rotate a third of the balance sheet each year, and given our focus on profitability, we're reinvesting increasingly better, marking a new way of managing the bank's balance sheet. Jose can provide more details on that topic. Regarding regulatory capital, we aim to maintain a level above 12% after regulatory charges, and we remain committed to that target. As Jose reiterated, we expect to stay above 12% even after Basel III. As for the IPO of Ebury, Jose will share further details on that. Thank you, Jose.

Hi, Sofie. First of all, the €30 billion was risk-weighted assets in the first half. So more or less 40% of this is SRTs, but the rest is other types of transactions like asset sales, hedges, et cetera. The cost of mobilizing this €30 billion was around RoTE equivalent, okay? We always look at RoTE, but just to use the same currency everywhere in RoTE equivalent, the cost of mobilizing this €30 billion was slightly below 10%. And we reinvested the capital, as I said, at 23%. So there was at least 13 percentage points difference on this €30 billion in risk-weighted assets. €30 billion in risk-weighted assets is close to €4 billion in capital times this 13%. So on an annualized basis, we generated increased profits with the same capital of around €500 million. We expect to continue doing this. The demand for private credit is significant that we have a very busy second half of the year. It's difficult to replicate the same figure in the second half of the year because of holidays, et cetera, but we expect to mobilize much more than last year. And as you can see from the figures I gave you, this is very profitable. Capital headwinds this year, we still expect 20 to 30 basis points in the second half of the year. Basel III, as Hector mentioned, fully loaded. And when we mentioned fully loaded, is fully loaded, even taking into account those impacts that come in 2029, we will be comfortably above 12%. And the day one impacts will be very relatively small, as we mentioned before. And in the case of Ebury, we're always looking at ways of managing the capital and maximizing capital usage. So there were some news that we are contemplating an IPO in Ebury. Again, we are looking at all types of alternatives to maximize the capital. This is one of them. That doesn't necessarily mean that this will be executed. And again, this will be put as one of our several capital management initiatives that we have across the group.

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

Good morning. Thank you for taking my questions. I have two inquiries. First, regarding revenue performance, we have observed strong performance in Europe, possibly exceeding our initial expectations from the beginning of the year. However, Latin America has been underperforming, particularly Brazil has shown some weakness. How should we approach the revenue performance moving forward into the second half? With the revenue guidance upgraded to high single digits from the current 9%, we anticipate the second half to align with these levels. I'm curious if Latin America is expected to balance out the weakness in Europe that you highlighted, especially concerning margins. My second question pertains to the U.K. Can you provide more details about the expectations for Net Interest Income in the U.K. and your outlook for that market? Thank you.

Thank you, Ignacio. First of all, let me say that, as Jose mentioned, our revenue has been exceptionally strong, exceeding our initial expectations. The positive rates have contributed, along with the strong performance of our various businesses. We are focused on improving profitability through our restructuring efforts, which is proving effective. I believe our revenue will continue to perform well. I don't perceive any weakness in Latin America; in fact, I expect it to perform strongly in the second half. Retail in Brazil is showing promising results, and Chile is also performing well. In Mexico, we are adjusting our retail mix which is reflected in a stable net interest income, but we anticipate strong results moving forward. We look forward to a robust second half of the year in terms of revenue. Regarding the UK, we expect an improved second half as the market becomes more rational and competition stabilizes compared to the first quarter. Additionally, some strategies focusing on betas are showing positive impact. Overall, I believe the UK will experience a much better second half than what we've seen so far. In terms of detail, the behavior is becoming more rational. Fees are not expected to perform well due to the switcher campaign we implemented, but benefits will emerge in the third and fourth quarters, surpassing our previous expectations. Additionally, we are implementing strong cost control measures in the U.K., which will enhance business performance significantly compared to what we have experienced. I believe Jose can add some insights on the revenue aspect.

I'm sure you'll ask about the revenue in Europe, which is performing better than we anticipated. At the start of the year, we projected a decline in net interest income in the Eurozone. However, we now see net interest income in the Eurozone, especially in Spain and Portugal, increasing in the mid-single digits. With rates remaining high for a longer period, the performance of net interest income has improved significantly. We have hedged a large portion of our balance sheet in the Eurozone, primarily through the ALCO portfolio, which involves hedging assets, particularly mortgages, and converting our fixed liabilities into variable ones. This means that the sensitivity of our net interest income in Europe moving forward will be considerably lower than it was before. As Hector mentioned, we expect net interest income in Spain to remain relatively stable, possibly decreasing slightly in the second half of this year and into next year. At the same time, we continue to see strong momentum from South America, particularly in Brazil and Chile. Therefore, we are optimistic about the future trends in net interest income and revenue in the second half of the year.

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

Hi, good morning. I would like to follow up on your comment about mid-single digit NII in Spain. This suggests nearly 9% production half-on-half, which seems quite significant. Can you clarify that? Additionally, regarding the strong performance in the U.S., could you provide some insight into the split between ECM and DCM and share your views on how sustainable this performance is moving forward? Lastly, you mentioned over 12% capital, but I thought the target was 12.5% by the end of the year. Can you confirm that we should still anticipate the 20 to 30 basis points regulatory headwinds? Thank you.

Thank you, Alvaro. First, I want to discuss capital. We have consistently stated that we would maintain a rate above 12%, which has remained our guidance. Currently, we are at 12.5%. As Jose reiterated, we expect to stay above 12% even after fully accommodating Basel III. Regarding our performance in U.S. fees, the Corporate and Investment Banking (CIB) sector is the primary contributor, with some positive results also coming from retail. CIB is driving growth, showing a year-on-year increase of 38% and a quarter-on-quarter rise of 1.3%. As you know, the CIB business is cyclical, and we currently have strong mandates in place. The business is performing well, and we are effectively connecting our U.S. operations with those in Latin America and Europe. Specifically, we've begun to capture business in the Debt Capital Markets (DCM) where we previously struggled because we weren't perceived as a strong dollar house. We are now ranked among the top three in the league tables for dollar transactions in Latin America, including transactions with both corporations and governments. For instance, during UMS's transaction earlier this year of €7.5 billion, we played a key role as one of the principal book runners. This progress is a result of enhancements we've made in the U.S. and should continue to boost our fees, although we will need to monitor the business's cyclicality moving forward. Retail is also performing well in fees, and we believe that this trend will continue throughout the year. In Spain, loans are beginning to reprice at lower rates, and deposit betas are behaving favorably, which helps manage the cost of deposits. Additionally, as Jose detailed, ALCO volumes are increasing and the cost of hedging, which was not previously in place, is now beneficial. This is expected to assist us. NII is reaching targets, and I anticipate NII to grow in the mid-single digits in 2024, which is better than we forecasted at the start of the year.

It's also due to the higher for longer rates environment that we're experiencing. I don't know if Jose would like to add something.

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

Thank you very much. I've got a couple of follow-ups on the U.S. So you're still struggling to deliver positive jaws. When do you think things will turn around there? Do you think that we will see positive jaws in the second half of the year? In the U.S. as well, your P&L still remains pretty supported by tax credit. Can you help us understand how the tax line will look like in the next few quarters? And then if I may ask, do you think the new reporting is helping investors understand Santander better because judging by your low PE, I think not. So I would like to hear your thoughts there. Thank you.

Thank you, Marta. Okay. Let me explain you a little bit what's going on in the U.S. If you look at by business, you're going to see that retail is actually having lower cost than you used to have because of the transformation even with the strong investment we're doing in transformation. But we have done a really good cost reduction, and we believe we're going to perform better. Their jaws are negative due to the fact that we're investing in CIB. And CIB, as you understand, I mean, cost a lot to do it. So if we're going to have a second half that is better, it's going to start looking better, but it's going to depend on the cyclicality of the CIB business and some of the still people that are coming into the team that will start to come in, in the next few months. As you know, there is a period of garden leave, et cetera. But the main reason is the investment we're doing in CIB, which by in any way is not creating a big investment bank or anything like that. This is basically, as we said, complementing the rest of the business that we have. Our size is not going to be huge. It's the size of a really small boutique, but it's helping us out to beef up and to help us in the remainder of the business. And you can see fees are starting to basically be up due to that fact, okay? In terms of the P&L, it's easy to understand. The DTAs are basically what we said last year when we started doing the electric vehicles. I mean we signed contracts with some OEMs that are generating the DTAs. And that's why you see that the P&L is affected by that, and it's going to continue due to the fact that we will continue to be absorbing, I mean, that volume. So we have now three things, and this is basically leases on electric vehicles that are creating the DTAs in the U.S., all right? And you're going to see that throughout the year.

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

Yes, thank you. So two questions for me. The first one is on NII in Brazil. You still maintain the guidance of growth in the high teens for the year. Mid-teens would imply a quarter-on-quarter fall during the second half, if you think this could be the case or not? I mean, because selling rates have been expectations of cuts have been pushed out. So if you can comment on the main drivers of the NII in the coming quarters and also update on the sensitivity of the NII to select rates in Brazil? And the second question is about NII in the U.S. We have seen this is bottoming out in this second quarter, but they have also seen the deposits falling for a couple of quarters now. So you would need to pay up for deposit gathering in the second half of the year or not. In this context, if you can also comment on the plans to launch Openbank, shall we expect there? Because when I look, for example, at the digital consumer bank, the deposits are growing there by 20%, but net interest margin is still falling, despite the shift to retail deposits? So you can comment also on these NII trends here.

Thank you, Francisco. Let me start with Brazil. First of all, as you have seen, I mean, very strong and solid numbers coming from Brazil. NII, once again, a very strong quarter, up more than 3% and it's up more than 22% in the year, okay? What's behind the performance is the combination of the healthy volume growth, the change in mix and lower rates, okay? It is true. First of all, rates outlook has changed. The market is expecting a smaller than initially anticipated rate cut by the year, by year-end, and this ultimately means that NII growth will be a bit less intense than what we thought at the beginning of the year. That's a fact, okay. Having said that, we still expect Brazil NII to grow in the mid-teens mark by the end '24, okay? It's a good performance that should continue in '25. And let me tell you that to take the opportunity that Brazil has delivered a 16% RoTE. We believe that the end of the year should end up between 16% and 17%. A strong profitability improvement is not just relying on NII growth, but on the good delivery on fees also, the cost contention that we have had and expected cost of risk is stable during the year. So I remember very optimistic in Brazil and the ability to continue funding the profitability, as you have seen. Openbank is set to launch its deposit gathering service in the U.S. around September or October. We anticipate a successful start with a solid plan in place for the first phase focused on gathering deposits. We will also enhance the platform as necessary. Regarding deposits, the transactional deposits managed by SG&A have remained stable throughout the year. The fluctuations in U.S. deposits are mainly influenced by the deposits in CIB, which we evaluate based on profitability. At times, we decide to reduce these deposits for better profitability. This approach poses no issues, and we will keep aiming for profitable outcomes across all our business operations.

One quick comment on DCB Europe margins and profitability. The new business we wrote in 2021 was highly profitable. This was post-COVID, and we have reached historically high profitability levels. This year, this production will remain on our books for three years. So it will still be on our books in 2024 and will gradually decrease between '24 and '25. The new business we are writing in 2024 has a return on tangible equity of around 20%, compared to 2.3% and 2.4% from '22 and '23 annual production, which is much higher. Therefore, you should expect a significant increase in profitability and margins in Consumer Europe in 2025 due to the variations in production and the exceptionally high profitability in the year following COVID.

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

Hello, good morning. And thanks for taking my questions, I have two. First, we assume you're aiming for the upper end of your RoTE target for next year. So that is 17%, which implies a meaningful profit increase in '25 versus '24. So my question is, geographically, where is that earnings growth going to come from? And second, related to previous questions, we have seen revenues improving in the U.S. over the last couple of quarters, with volumes up, customer spread expanding and fees coming quite strong. So basically, how sustainable is this revenue pick up going forward? Thanks.

Thank you, Alvaro. Let me start with the U.S. To tell you, I believe, I mean, the U.S. revenue is going to continue to do pretty well, but the profitability is always the most difficult in the second part because of seasonality in terms of what happens to us in provisions. So what you're going to see is revenue continue to go up quietly fairly strong. Let's see how we do in fees, as I said, due to the cyclicality of the CIB business, but revenues will be doing fine. In terms of the seasonality, let's see how we do in terms of the provisions, but we believe and the indication that we have had in terms of provisions show us that are coming better. The LTM numbers that we have in provisions for the U.S. are much better than last year. So it's looking well. And so the U.S. shall have a much better year than last year.

Yes, we expect our profitability to continue to increase due to higher operational leverage. Our transformation program is yielding positive results, especially in consumer and retail, which we anticipate will persist into 2025. We've seen a significant reduction in sensitivity to rates in Europe, and we expect positive support from net interest income in South America, particularly in Brazil and Chile. Operational leverage will keep driving increased profitability. Regarding our cost of risk, there are no signs of deterioration, and we do not anticipate needing to increase our provisions in the upcoming quarters. Overall, this indicates that our profits should continue to rise moving forward.

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

Good morning. Thank you both for taking my questions. The first one is on Brazil. You used a €350 million gain to top up your provisioning. I think that's one strategy you've adopted before, but how comfortable are you that you will not need to do further top-ups in Brazilian cost of risk going forward? And are the top-ups a catch-up? Or can we assume that the top-ups will mean a structurally lower cost of risk in Brazil in the coming years? And then secondly, in the U.K., in the deck, you mentioned that 100% of your hedge income is already locked in for 2024. This suggests that either you do not have any maturities this year or you pre-hedged some of your maturities. If you have been pre-hedging, what proportion of the 2025 structural hedge maturities have you pre-hedged and what rate did you look into given the swap rates have been volatile? And do you expect the tailwind from the structural hedge will overwhelm the headwinds on NII in the U.K. in 2025? Thank you.

Thank you. Okay. Let me go to Brazil, okay? First of all, it's very important to tell you that increase in provision is exclusively linked to the loan growth that we have in the country, okay? Cost of risk, as you have seen, is flat quarter-on-quarter, 4.77% and credit quality in Brazil remains sound and solid. It's very important to understand that the recent vintages that we have are performing very well and no signs of deterioration. So it's performing than we expected. It's very important to understand that we're also changing the mix a little bit on the portfolio. Just to explain you a little bit, for example, credit cards where in '21, we were making around 800,000 to 900,000 credit cards per month. Today, we're just growing by 400,000 credit cards a month and just to our client base. So the important thing and the big change is exactly that we're not going to the open market, which was the 1 that hurt us quite a lot during '22 and '23. So that's exactly the change of mix that is helping us. Also, it's very important to understand that we're very focused on profitability, and we have been very opportunistic, and we used the proceeds of a corporate transaction to further reinforce the balance sheet at this point. And we reiterate that the '24 guidance of delivering is a flattish cost of risk versus '23, okay, excluding the one-offs. So that's what I see in terms of Brazil.

In terms of the U.K., Jose, please? Yes. As you know, our strategy is to maintain the structural hedge position in alignment with core deposits to safeguard the balance sheet in anticipation of decreasing interest rates. In light of the recent rise in market rates and to protect net interest income, we have expedited our planned investments for 2024 along with other measures. Currently, our sensitivity to a hypothetical 100% parallel decrease in rates in the U.K. stands at minus GBP 120 million, down from minus GBP 220 million a year ago. This indicates we have approximately half the sensitivity today compared to a year ago. The current structural hedge is GBP 114 billion, an increase from GBP 106 billion in December. This relates to my earlier comment. The duration is 2.5 years now, compared to 2.4 years in December, and the yield is slightly over 2%.

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

Hi, good morning. My first question is a follow-up regarding Spain. If I understood correctly, the indication was that in 2025, net interest income should be approximately in line with the second half of this year, where you anticipate a slight decline towards mid-single-digit growth for the full year you mentioned. My second question pertains to the U.S. tax rebates you have been recording. Could you provide some clarification on how the rebate operates? Specifically, how long is it in effect? Should we expect to see this next year as well? Is it a federal level rebate or a state level one? Additionally, how might potential political changes in the U.S. affect the existence of this rebate? I would like to understand the timeframe for which this is currently valid. Thank you.

Thank you, Carlos. I believe Jose provided a solid overview of our current situation. It's crucial to grasp what Jose detailed regarding our hedges and the ALCO position, which will provide us support throughout the year. Even if rates decline, I believe we are in a strong position. As we mentioned, net interest income may decrease slightly in the latter half of the year, but we anticipate a positive trajectory depending on how interest rates evolve.

It's exactly what you mentioned. We anticipate that net interest income will decrease slightly in the second half of this year. The growth year-over-year, comparing 2024 to 2023, will be around 5% to 7%. For next year, net interest income is expected to remain relatively flat compared to the second half of this year, indicating a slight decline in low single digits. This estimate is based on the current forward rate curves. If those rates change, we would need to revise these projections. Based on today's rates, this is our best estimate for net interest income in Spain next year.

And as Hector mentioned, this is thanks to the substantial reduction in NII sensitivity that we have conducted in the Eurozone in the last year, 1.5 years.

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

Good morning, Hector. Good morning, Jose. Thank you for taking my questions. I just have a couple of follow-ups, please, on point we touched on before. Firstly, in the UK, your NII was slightly up quarter-on-quarter in Q2. So just wondering how you see it progressing from here? And is it fair to say that Q1 was probably the low point on NII and it should start building from here supported by the hedge and what is the shape of this into H2 and also into next year? Secondly, just a clarification on your U.S. business. You were talking about some seasonality into the second half of the year in provisions. Could you please explain what is driving this seasonality? And then lastly for Brazil. Also taking into consideration your comments about changing the mix of your business. When do you expect to see a full normalization in cost of risk and around what level would this normalization be? Thank you.

Thank you. So as I said in the UK, we see that we're going to have a second half better than the first half, okay? Market is more, more rational, both in the margins and in the betas. And on top of that, cost, as I said, is going to be slightly better than the first half of the year. Q2 in NII is showing signs of improvement, okay? And as I basically explained, and we see that betas are not going to go up so that basically will help us. In terms of revenue, we see mid-to single-digit decrease in NII down mid-single digits versus last year and fees down low double digits due to the fact that I was explaining about what we're doing with the switcher campaign and the higher cash back. You're going to see that it's going to be much better in '25 because exactly we're preparing the bank towards that.

And then provisions in the U.S. are normalizing. Cost of risk this year should be somehow around 2% or slightly below 2%.

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

Yes. Thanks for taking my questions. I have just a few follow-ups. So the first one is on U.K. If you can give us more color on the contribution of the U.K. structure hedge in the second half of this year and in next year? And the second one is, again, on Brazil following your comment on the change of the loan mix. Should we expect normalization of the cost of risk in the next year and see an absolute decline of total provision next year? Thank you.

In Brazil, we are adjusting the loan mix and are very adaptable in how we make those changes based on market conditions and the performance of different vintages. We are beginning to observe positive indicators from the mass market, such as decreasing inflation and falling interest rates. If these trends continue, we might alter our approach and take a more aggressive stance. At this moment, I can't specify what changes we will implement, as we review our strategy and pricing monthly. Therefore, I can't predict the loan mix for Brazil in 2025, but I can assure you we're operating in a very responsive manner. It's crucial to stay vigilant in this dynamic market. We do adjust the mix to maintain the cost of risk at acceptable levels, which is our objective for effective management.

So U.K. NII, I think I gave you all the details to calculate that. I gave you the maturity, the rates, the amount and everything else. In terms of cost of risk in Brazil, rates this year are expected to stay at 10.5% by year-end, but to drop significantly next year and that should help. In addition to the structure of the balance sheet, lower rates next year in Brazil will help not only in terms of NII, but also cost of risk. It will be a gradual improvement. We need to see exactly how we will build the business in 2025 in Brazil, but definitely lower rates should help.

Thank you, Jose. Thank you, Hector, and thank you all for your attendance. And if there are any further questions, Santander Investor Relations team, is always at your disposal for anything that you may need.