Banco Santander, S.A. Q3 FY2024 Earnings Call

Good morning, everyone, and welcome to our third quarter earnings presentation. Like always, the presentation will start with our CEO, with Hector Grisi's comments, followed by my more detailed explanation of the P&L, he will have his concluding remarks, and then we will open it up for questions. Hector, please go ahead.

Thank you very much, Jose. Good morning to everyone, and thank you for joining us. In today's presentation, I will first discuss our results in the context of our strategy. Then, Jose will provide a detailed overview of our financial performance, after which I will conclude with some final messages. As Jose mentioned, we will open the floor for your questions afterward. The main highlights of our results for this quarter are as follows: Q3 was another record quarter for Santander, demonstrating the benefits of our strategy and the resilience of our business model. Profit reached €3.3 billion, which is 12% higher than Q3 of 2023, supported by a solid customer base of 171 million that continues to grow as we enhance customer experience through simplification, automation, and leveraging our global platforms. Profit for the first nine months reached €9.3 billion, also a record with a 14% increase, driven by strong customer revenue growth in all regions and global businesses. We achieved this while investing for the future and making excellent progress toward a simpler and more integrated model, which has improved our efficiency by 229 basis points and increased our return on tangible equity to 16.2%. Additionally, our balance sheet remains strong with a solid capital ratio and robust credit quality, contributing to our profitable growth, shareholder value creation, and attractive remuneration. The dividend per share increased by 14%, and in 2024, the cash dividend per share will be 39% higher. Delving into our income statement, we present growth rates in both current and constant euros. This quarter, there were no substantial differences in these rates year-on-year, although, as Jose will explain later, there were significant differences quarter-on-quarter. Our profit and loss statement is strong across the board. Firstly, we have a robust top-line supported by all our businesses and regions, with net interest income and fees at record levels, accounting for over 95% of total income, which drove most of our revenue growth. Secondly, expenses grew at a rate lower than revenue and inflation, highlighting the positive effects of our transformation. Thirdly, loan-loss provisions were in line with average lending, and credit quality performed excellently. Overall, our results are sustainable and less volatile than those of our peers due to our business and geographic diversification, the high quality of our revenues, and a prudent approach to risk. We are on track to surpass the targets we set in January and subsequently upgraded in July. Solid business dynamics reported high single-digit revenue growth. Our efficiency ratio improved as we accelerated our ONE Transformation and increased operational leverage. We anticipate that the cost of risk will remain in line with our 2024 target due to proactive risk management, strong labor markets, and declining interest rates in most of our countries. As a reference, our year-to-date cost of risk improved to 1.14%, despite additional provisions in Poland in Q2. Our CET1 ratio ended September at 12.5%, comfortably above our target of maintaining it over 12%, even after the full implementation of Basel III. Our return on tangible equity is already surpassing the target set for the end of the year. Our execution of ONE Transformation continues to boost our operational leverage, structurally improving both revenue and cost performances, simplifying and automating processes and our active spread management have already contributed 259 basis points of efficiencies since we started surpassing the levels which we expected to reach at the end of '25. Our global businesses continue to drive the group's profitability and have delivered 82 basis points in efficiency gains. Finally, our proprietary and global tech capabilities have generated 72 basis points inefficiencies so far. Remember that we are focused on going back to basics, offering the best products and user experience to our customers and boosting operational leverage through our global platforms to support value creation for our shareholders based on profitable growth with minimal volatility. This is already reflected in the great performance of our businesses. All of them showed solid revenue growth, retail and consumer and will strongly improve our efficiency ratio, leading to higher RoTE, while CIB and payments reflect our efforts to develop new products and global platforms which has started to deliver results. This is a fantastic example of how our model works. Higher interest rates benefit some of our retail franchises, while other parts of our business perform better under different circumstances. But overall our combination of highly diversified businesses allows us to deliver consistent profitable growth and value creation. The global businesses and cross collaboration are helping us to extract the full potential from our unique combination of local leadership and global capabilities with a cost of infrastructure that delivers efficiency and scalability. This allows us to reach our '25 profitability targets. In retail, which is at the heart of our banking business, we are working to become the number one bank for customers. Let's look at how ONE Transformation is delivering results. Innovation is key. We're enhancing our digital onboarding and promoting simpler customer journey and better experiences across the bank. For example, in Brazil, we have reduced onboarding time by 50%, which has contributed to a 3% customer growth only this quarter. We are progressing fast towards a common operating model across our banks, which together with automation and digitalization, free stop time of our people to focus on commercial activities on our branches. Dedication of resources to non-commercial activities has dropped by 11% since we started with ONE Transformation. Deployment of our global platform remains on track. And for example, in the U.K., customer has been migrated to our global app that already operates in Spain, Portugal, Poland and Openbank with great success. As a result, our profit grew 29% year-on-year, with RoTE up 400 basis points to 18.5% on the back of revenue up close to double-digit on good performance of NII and fees with all regions growing especially Europe and South America. Cost is well under control, down 5% in real term, reflecting structural benefits from our transformation and provisions improving and the cost of risk fairly stable at comfortable levels. Going forward, our improvements in customer experience, the implementation of a common operating model and the deployment of our global tech platform will drive additional customer growth, better efficiency and profitability. In consumer, our priority is to continue expanding our leadership across all our footprint. Our best-in-class global solutions are integrated into our partners' processes. For example, we have integrated our front in Hyundai systems, providing our customers the best digital experience, faster credit approval and time to pay. We are making great progress in our deposit strategy to increase NII stability and reduce the funding cost. Deposits increased 12% year-on-year on the back of our deposit gathering platforms. The deployment of global platforms is key to scale of business, reduce our cost to serve and improve profitability. Last Monday, we reached an important milestone in the U.S. with the nationwide launch of Openbank. In the last four weeks, we have already gathered around €200 million in deposits and welcomed over 7,000 clients. We also launched Zinia, a co-branded card with Amazon in Germany, and we are deploying a new operational functionality. Consumer continues to grow strong operational leverage with a 9% net operating income increase and some profit growth on the back of, number one, strong revenue with solid NII performance and 25% fee growth; number two, cost falling 2% in real terms, thanks to our transformation efforts, even as we continue to invest in growth; and third, LLP is normalizing in Europe and in the U.S. in line with expectations. Overall, we continue to see positive operating trends, and we expect them to improve on the back of lower rates and volume growth. 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. Number one, we are deepening our client relationships and increasing our capabilities in the U.S., building on our areas of expertise to accelerate growth across group. Revenue in CIB in the U.S. rose 41% year-on-year and is expected to boost cross-border revenue across the group as we continue to progress on our U.S. build-out initiative. We continue to execute our global markets plan, which is starting to pay off with institutional sales doubling in Europe and more than tripling in the U.S. Number two, we're expanding and sophisticating our centers of expertise, while strengthening our financial sponsor franchise, which is leading to business opportunities in M&A, capital markets and GTB across the group and continues to pay off with several first deals. This quarter, for example, for the first time, we were appointed sole bookrunner for an IPO of a SPAC, and we acted as the lead left underwriter in an LBO transaction with one of the largest industrial focused investment firms and these are just a few examples of a long list. Third, we are driving cross-border revenues on the back of enhanced client solutions and global collaboration. We had a great number of cross-border deals in Q3 such as also resulting from the collaboration of our teams in Mexico and Spain, France and Brazil, Peru and Mexico or Italy and France, among others. CIB reached solid results with revenue up 9% after a record '23 making the first nine months the best ever fees growing at double digits and the vast majority of our growth coming from client flows. And the best is still to come. Growth will accelerate going forward as we continue to execute our strategy on a global basis. Moving on to Wealth. We continue to build the best wealth and insurance manager in Europe and the Americas. How? Number one, by improving customer relationships through the best customer service and right solutions resulting in double-digit growth in private banking customers and fees. We are shifting our product offering towards value-added solutions, such as discretionary portfolio management, advisory and alternative investments, and this has also supported Spain double-digit increase in the number of private banking customers and a 22% total revenue growth. Number two is promoting collaboration with other businesses, especially with retail and CIB, which is a major driver for growth and allow us to capture network benefits. Collaboration fees increased by 13% year-on-year. Number three is developing global platforms across all the businesses and digitalizing our distribution and advisory capabilities to improve customer experience and really promote growth. Good examples of this are the recent implementation of a single operating platform from alternative products and the deployment of San Conecta in Mexico and Brazil, which boost the distribution network capabilities and provides real-time information about funds and markets. In summary, we are accelerating growth and maintaining high profitability. Attributable profit rose 15% on the back of a strong activity and fees growing at double-digit across the three businesses. Finally, payments. As I already advanced last quarter, we have a unique position on both sides of the value chain, issuing where we manage more than 100 million cards group-wide and merchant acquiring. In merchant, we are one of the largest acquirers in Latin America, Spain and Portugal, with the right balance between growth and profitability. Get the total payments volume and PagoNxt open market revenue keeps growing strongly, which is helping us to consolidate our presence in core market, such as Brazil and Mexico, where we maintain a leadership position. And at the same time, we build up market share in fast-growing markets, such as Chile, where we recently launched Getnet. Our payments hub already processes all type of payments, for example, credit transfers, direct debits or instant payments and international payments for several countries and businesses. We have already migrated 800 million transactions this year. This is 5x more than the same period last year. Also, we continue to deploy part our global cards platform. In Brazil, we currently manage more than 8 million debit cards through partnerships, and we are on track to full migration by Q2 '25 to manage around 17 million total cards. In a second phase, we will start with the credit card portfolio. At the same time, we continue to boost our cards proposition through our Risk Data Lab, our solution based on AI. Payments delivered strong results with good revenue trends in both businesses, cost under control and sound credit quality in cards, which drove a 10% profit growth, excluding the non-recurring items with cost in Q2. PagoNxt EBITDA margin improved to 23% backed by Getnet with one of the best ratios among our competitors. We expect cost efficiency and CapEx optimization to continue to drive profitability in the coming quarters. Our capital ratio has improved this year from 12.3% to 12.5% backed by strong organic capital generation after investing in profitable growth, absorbing regulatory impacts and shareholder remuneration. As a result, we continue to grow our value creation, which in terms of TNAV plus EPS increased 14%, which represents around €10 billion year-on-year, and we are increasing our shareholder remuneration. In September, the Board of Directors approved an interim distribution against H1 '24 results, which is being executed in two equal parts, a cash dividend of €0.10 per share, which will be paid from the 1st of November and a share buyback program up to €1.5 billion. This is currently underway. Cash dividend will be 39% higher in '24, and at the same time, since '21, if we include the full amount of the current share buyback program, Santander has repurchased 12.5% of its outstanding shares. I'll leave you now with Jose, who will go into our financial performance in more detail.

Thank you, Hector. Let me go into more detail on the P&L and the capital. As Hector has mentioned, we are yet again reporting record results as our transformation continues to drive operational leverage. Revenue grew 8% on the back of the highest NII and fees in our history and the best efficiency ratio in the last years, boosting the net operating income, which rose 13% year-on-year. Provisions grew only slightly even after the expected normalization in consumer and the Swiss franc provisions in Poland, we recorded in the second quarter, while cost of risk fell in the quarter. On the right-hand side of the slide, you can see the upward trend in profit, which grew 1% quarter-on-quarter in euros, 5% in constant euros, driven mainly by customer revenue and lower provisions. This quarter, there is an effect from the depreciation of some currencies affecting the quarter-on-quarter comparison, but as you can see in the P&L, the impact year-on-year is not material. Please remember that last quarter, we decided to take a more conservative approach to recognizing the value of the results obtained in Argentina. So we began to apply an inflation adjusted exchange rate for the Argentine peso, which in the quarter was 1,618 compared to the official exchange rate of 1,069 to the euro. And obviously, this is a much more conservative exchange rate than the one used by our peers. This approach caused some distortions in the quarter-on-quarter comparison that I will comment during the presentation only where relevant. Total revenue increased 8% with all businesses and regions growing driven by customer revenue growth, which made up more than 90% of total revenue. This strong growth was primarily supported by our retail business, which continues to grow close to double-digits with good performance in NII and fees, especially in the Americas and also by CIB growing across the three lines of business on the back of good activity levels, mainly in global banking and markets. Consumer revenue also rose supported in this case by volumes and active asset repricing and double-digit growth in fees across our geographies. We also delivered double-digit revenue growth in wealth, driven by solid commercial activity, both in private banking and in asset management. Payments is growing at good trends, showing relatively good underlying performance. As both PagoNxt and cards increased, even more so if we exclude the onetime positive fee recorded in Brazil in the first quarter of last year. Finally, the Corporate Centre's revenue improved on the back of less negative impact from FX hedging. Net interest income saw a year-on-year increase of 9%, driven by strong performance across our businesses and regions, largely due to effective pricing management, especially in European retail and consumer segments, as well as higher volumes and beneficial rate sensitivity in South America, particularly in Brazil and Chile. Our Global Banking business in CIB also demonstrated good activity levels. Quarter-on-quarter, net interest income was stable, rising 1% in constant euros in the new interest rate environment, with retail being the primary driver. Overall, it increased by 2%, with most of our countries contributing positively, particularly Brazil from higher average volumes, Poland from improved spreads and volumes, and the U.K. benefiting from effective pricing management. We improved our net interest margin year-on-year, attributed to higher asset yields as we focused on profitability rather than market share, which offset increased funding costs. We managed to control these costs through disciplined deposit remuneration in Europe and downward deposit repricing in South America. As noted last quarter, we anticipated a slight slowdown in net interest margin and income. The second quarter's decline in net interest margin was influenced by our cautious adjustment to the exchange rate in Argentina. This quarter, net interest margin was impacted by hyperinflation accounting in Argentina and currency depreciation in Brazil and Mexico, along with the start of a new interest rate cycle in Europe. Over the past few quarters, we've been adjusting our balance sheet sensitivity in preparation for this new monetary policy phase. We expect our consumer businesses to contribute positively, positioning us well to counteract the anticipated margin compression in Europe and North America moving forward. In an environment of low credit demand in general, we generated another record in fee income, reflecting our transformation efforts to promote connectivity across the group and provide the best customer service. Retail increased as more customers chose Santander as the primary financial service provider. We added 5 million new customers over the last 12 months to a total of 171 million customers. Outstanding performance in consumer, largely driven by increased insurance penetration in Europe. CIB also grew from record levels last year, especially in the U.S. on the bank of strong dynamics in Global Banking. We had a 16% increase in wealth, with all three businesses growing at double-digits, and payments was impacted, as I mentioned before, by the one-time positive fee recorded in the first quarter in 2023 in Brazil. Our transformation towards a simpler and more integrated model continued to deliver structural efficiency gains. Our cost-to-income ratio for the nine month period improved to 41.7%, the best level that we have reported in the last 15 years, one of the best in the sector and is already at better levels than the guidance we provided for 2024. Costs declined 1% year-on-year in real terms despite the lagged effects from higher inflation on salaries and other costs on our investments in transformation. By business, costs remain very well under control in retail and consumer, which represents 70% of our cost base. More than 90% of the nominal cost increase came from CIB as per our strategy to reinforce our CIB franchise. Costs remain contained in wealth, even with higher commercial activity, and were fairly flat in payments even as we invest in global platforms. As we look ahead, structural improvements from our new operating model, which help us achieve our target of maintaining cost to income at around 42% in 2024, while it should improve further next year. Credit quality remains robust around and across our footprint in line with our expectations with record low unemployment rates in most countries and easing monetary policies. Credit quality improved year-on-year as reflected both in the NPL ratio and lower coverage needs. The NPL portfolio has collateral guarantees and provisions that account for 90% of its total exposure. 12-month cost of risk improved to 1.18%. In our retail and consumer, 12-month cost of risk improved in the quarter. In retail, there were some underlying trends across the different countries. Cost of risk improved across Europe and remained at very low levels in the U.K. and Portugal. In Brazil, it fell for the second quarter in a row. And in Mexico, it also declined in the quarter following a year of expected normalization. Similarly, in consumer, 12-month cost of risk was impacted year-on-year by the normalization we expected, but it dropped in the quarter to 2.12%. The cost of risk in the first nine months of the year was 1.14%, putting us in good position to end the year comfortably within our target of 1.2%. Finally, turning to capital. Our fully loaded capital ratio remains at a comfortable level backed by strong organic capital generation and significant risk-weighted asset mobilization. This quarter, we generated 43 basis points organically on the back of 52 basis points from profit generation partially offset by risk-weighted asset growth and by minorities, we recorded a 26 basis point charge for shareholder remuneration in line with our 50% payout policy. We had 18 basis points of regulatory charges, mostly related to model updates in low default portfolios. And finally, we had positive impacts from the placement of Santander, Poland and ALCO portfolio valuations, which were offset by impacts on deductions, pensions for the most part. We continue to deploy capital to the most profitable growth opportunities and expand our asset mobilization capabilities to maximize capital profitability and productivity. Our disciplined capital allocation is resulting 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, which aims to optimize capital deployment is achieving outstanding results. In the first nine months of the year, we have disposed of an amount of capital equivalent to €40 billion in risk-weighted assets, the cost of capital of half of that of new originations. In addition, one-third of our balance sheet that matures every year is being substituted by more profitable new business. The combination of these actions explains the expanding profitability and resilient capital ratio. That's all from my side. Hector, back to you. Thank you.

Thank you, Jose. It is important to say that our progress towards the targets we set for '25 in our last Investor Day is ahead of plan as we continue to leverage our unique competitive advantages and excellent execution of our strategy by our teams. Sound CET1 levels and strong execution of our capital allocation plans, further improving our profitability to about 16% and delivering 14% value creation and increased remuneration to our shareholders. In conclusion, the benefits from the execution of our strategy are evident. Q3 was another record quarter on the back of strong customer revenue with all regions and businesses contributing, which results in the best nine months profit ever with all-time high NII fees and net operating income at a 19% EPS growth. Sustained progress in our structural changes towards a simpler and more integrated model, leveraging the group's scale is driving both higher revenue and lower cost to achieve the vast efficiency ratio we have reported for 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 remain on track to exceed the '24 targets we set in January and upgraded last quarter, and we are in a great position to continue growing, increasing profitability and delivering shareholder value creation. The progress of 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 as we continue to execute our strategy, we will deliver on primary target of double-digit TNAV per share plus EPS growth through the cycle. And now we're very happy to take your questions. Thanks.

So thank you, Hector. Operator, please let's begin the Q&A session, please.

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

Thanks very much. Good morning everyone and thanks very much for the presentation and for taking the questions. We have two, if I may. The first one is on NII, just to get a bit of a better understanding of the moving parts of the NII during the quarter? And also, how should we expect about the group top line group NII in coming quarters? The second one will be on cost outlook. Given the solid performance that we have seen in the quarter, how should we think about cost performance going forward? And as per Jose's comments in the presentation, what kind of improvement should we expect in terms of cost to income for 2025? Thank you.

Let me give it a first keep and then Jose basically could give you a better idea. It's interesting to see that if you see NII in constant, you'll see that it's 1% up, okay? The effect of Argentina is the one that's hitting us in the current euros, okay? It is important to explain, first of all, that the sensitivity of our balance sheet to movements in rates is mostly concentrated in retail and commercial business. This is about 60% of the group balance sheet with some parts showing a really positive sensitivity in Europe and others negative ones like the one we have in Brazil, as we already know. Europe and Brazil concentrate about 80% to 90% of the rate exposure. Over the past few quarters, we have been very proactively managing and working to reduce the sensitivity of the different balance sheets and position them to lower its environments. For example, in the case of Europe, we have reduced the sensitivity to around 25%. That's one quarter of what was at the beginning of the rate cycle. In places like Brazil, for example, we are taking measures to reduce the sensitivity further by doing some things to the ALCO and also taking some hedges. As you have already seen this year, the retail business is operating leverage is 10 points. We are growing the top line, not just because of higher interest rates, but also because we're changing the operating model, which is the most important part that you guys need to concentrate. We're growing customers, for example, 2.6 million in the third quarter alone. And we are keeping costs flat, which is quite important because that's creating an operating leverage and improving our margins. And this basically think that we will continue improving thanks to, first of all, the geographical and business diversification, the strong focus on capital allocation and the strong focus on profitability that we have up to this point. I don't know, Jose, if you would like to complement on the margins and then we'll take on cost.

Yes, definitely. Thanks, Hector. Let me explain Argentina in more detail. In June, we used an exchange rate of 1,499 and stated that we are devaluing the exchange rate with inflation, independent of the official rate. The official rate is now 1,069. At the end of the quarter, we used 1,618. When using 1,618 for inflation accounting, we adjust all accounts to that rate. This results in two impacts on our P&L. First, there is an over €100 million negative increase in the monetary position quarter-on-quarter that appears in other income. As interest rates in Argentina decline, we have a very liquid balance sheet mainly invested in bonds, which resulted in a drop of over €200 million in local currency yield from these investments. Thus, Argentina accounts for most of the drop in net interest income quarter-on-quarter, impacting total revenue by over €300 million. As Hector mentioned, we have been reducing our sensitivity to rates in both euros and Brazil, with Brazil having the highest sensitivity outside Europe. In Europe, we have been increasing our ALCO portfolio. Our total euro ALCO portfolio across Spain, Portugal, and consumer finance includes €50 billion in euro government bonds with an average maturity of over six years and yields of 3.2% to 3.3%. The second action we took was to float the market liabilities and hedge the repricing of our mortgages in Spain through forward stocks, significantly reducing our sensitivity of net interest income in euros to about a quarter of what it was before the current cycle of higher rates. Conversely, in Brazil, we are changing the liability mix and also floating the assets. Looking ahead to 2025, we anticipate a slight decrease in net interest income in current euros for 2024, but an increase in constant euros, thanks to the measures we've discussed. These estimates are based on forward rate curves.

Thank you, Jose. Ignacio, in terms of cost, it's very important that you understand the following. This is not about a cost cutting exercise. This is about changing the model and the go-to model. We're basically introducing in the whole group. He's talking about, I mean, take a look at the amount of the catalog of products that we have in the group. We have diminished them by almost a third from 10,000 products were down to less than 7,500, for example. We are changing completely the model we're doing a strong simplification. We're doing a lot of automation, but most importantly, by deploying the global platforms we are working together and spending less money on what we do every single day. So ONE Transformation is driving structural efficiency gains and operating leverage. Just a piece of that, the costs grew less than half of the revenue growth. We're delivering positive jobs that are helping to reduce the efficiency to 41.7%, which is 229 basis points lower than a year ago. This is placing us on track to meet the target being at 42% in '24. So we're going to be much better, and we believe that we're going to continue that. The new paradigm is focusing on absolute cost, okay? Our ambition is not to lower cost, it's exactly to lower cost in absolute euro million terms, which is quite important given all the different countries that we operate. It is true that costs are up 2.5%, but we look at the cost performance in real terms. In real terms, costs are down minus 1% year-on-year. That's a remarkable performance although the operating leverage with the strong declines that I described in retail, reflecting the transformation effort and the cost containment in consumer and payments, while we invest in the global platforms and continue to grow, all right? So the higher cost, as Jose explained, reflect also the currency depreciation and the seasonal effects, the salary agreements bonus accrual and CIB is the bulk because we're investing in the business to basically get out of it more revenue and is actually getting there. So in 2024, efficiency ratio is around 42%. We acknowledge this ratio is already at the level we committed for the '25 ID target and all the investments we have been doing will not only help maintain costs flat, but grew the revenue faster. So our ambition is, therefore, to do better than initially planned next year in '25 in the cost to income, as we described.

Thank you. We can take the next question, please?

The next question comes from the line from Francisco Riquel from Alantra. Please go ahead.

Yes, hello. So thank you for the presentation and taking the questions. First one is on Motor Finance business in the U.K. I know that need time to analyze the recent ruling, but I wondered if you can give an indication of how big the provision needs, whether we are talking about hundreds, billions or and also the impact on the business? And my second question is on capital. If you can update on the regulatory impact spending for this year and next and also on the Basel III impact of up to 50 basis points on a fully loaded basis. Other banks have reduced the impact of the recent regulatory updates. So if you can also comment on this. Thank you.

Thank you, Francisco. Okay. First of all, let me tell you that as you correctly said, it's not possible this time to reliably predict the financial impact of the ruling other elements that affect the financial impact on our accounts. This said, in any event, the potential impact is not expected to be material for the group's financial position, okay? It's very important, nor will affect the achievement of the group financial targets for '24. So if you make the numbers, and we are reiterating the guidance of above 16% that basically tells you where do we believe the number is, okay? So it's very important, and I will reiterate that again, that it will not change our '24 guidance. So that basically gives you a ballpark idea of what do we believe the number should be. I don't know, Jose, I left something out or I think it's quite clear know?

Yes, I think that's perfect.

And in terms of why don't you go to the capital thing is?

We estimated supervisory charges to be between 20 to 30 basis points in the second half of the year, with 18 recorded in the third quarter. We maintain our belief in this range, which does not alter our target. Our target for year-end capital has consistently been between 1,240 to 1,250, and we are currently at 1,250, at the higher end of that range, and we expect to finish the year around this level. For next year, the day one Basel III impact will be close to zero, with only minor fluctuations, so it won't significantly affect our figures. The day one capital ratio for Santander under Basel III will be roughly the same as what we expect to end 2024 with, fully loaded. This includes all charges anticipated until 2033, encompassing the 2029 to 2033 charges. We project the fully loaded impact to be 40 basis points, meaning we will start above the 12% target we set, fully loaded capital over 12% on day one. Thank you. What is the next question?

The next question comes from the line of Alvaro Serrano from Morgan Stanley. Please go ahead.

So, can you hear me okay?

Yes, go ahead.

Can you hear me? Yes, sorry. I have two follow-up questions. First, regarding capital generation, you've indicated there will be a limited impact over the next decade, and you're currently at 12.5%. With the mobilization efforts on your balance sheet, it appears you will generate capital exceeding that 12.5%. As we look ahead to 2025 and 2026, are you open to operating within a range of 12.5% to 13%? Do you anticipate growing into that 12.5%, or would you consider increasing distributions or payout of any excess? I'm interested in your perspective on capital generation if there is an excess. Secondly, I’d like to follow up on the Santander U.K. situation as I believe that's the reason for the share price decline this morning. You've mentioned that it's less than €600 million. Although I understand it's not going to affect 2024, it could have implications beyond that. Any details you can provide on the book—such as whether it's new cars, the size of the book, or anything that reassures us it’s a manageable figure—would be appreciated. Thank you.

Thank you, Alvaro. Let me share something important. As you know, Jose detailed our approach to restructuring the balance sheet. It's crucial to recognize that we're completely transforming the bank's model. Previously, the bank relied heavily on risk-weighted assets to generate profits. We're shifting the model, and the key to this shift is becoming the top bank for our clients. In doing so, we are generating substantial revenue through means other than just utilizing risk-weighted assets. This explains the positive momentum we’re seeing in fees, and you can expect this trend to continue in the future. By continuing to evolve this model and using less capital, we believe we can achieve much higher profitability, which will allow us to accumulate more capital than we currently are. We feel confident in managing the bank effectively at these capital levels and believe we will be accumulating capital. Additionally, we have a strong capability to generate assets. With the asset desk in place, we can also effectively manage those assets and move them off the books. Importantly, as Jose mentioned, we are also making profits from these transactions. We are generating fees from servicing the assets we sell, indicating our model is evolving in a profitable and less capital-dependent way. Thus, I believe capital generation will improve significantly, and we expect to accumulate more capital organically in the future. On the U.K. front, Jose, would you like to add anything regarding capital?

No, I think capital, you answered perfectly. Alvaro, the issue is complex. I think just let me remind you some of the things that we need to clarify in the next few months. We need to clarify the perimeter of commissions. We need to clarify the vintages because the ruling talks up between 2005 to 2024. The FCA focus is between 2014 to 2021, the percentage of redress, the claim rate, the compensatory interest. So there are many moving parts. The ruling has been taken to the Supreme Court. We expect the FCA report in May. So there are many moving parts. We are analyzing this. And obviously, we will make a very conservative assumption once we are able to come to a conclusion on all these variables that need to be put into the estimation. However, we are very confident that, as Hector explained the impact, and I'm talking about what we will charge in the next few weeks with this conservative approach, will not be material for the group, and we will still meet our objectives, our return on tangible equity target for the year, which is 16% or slightly above 16%. And that's all we can say. What happens with the FCA report in May, that's basically speculation. So obviously, we will make a decision based on the actual ruling based on if we have time to take into consideration the Supreme Court guidance on this, and in any case, obviously, the provisioning that we will take will be a conservative provision.

Thank you, Alvaro. Next question please.

The next question comes from the line of Antonio Reale from Bank of America. Please go ahead.

Hi, good morning. It's Antonio from Bank of America. Two questions from me, please. The first one is on the outlook for loan growth in Brazil. If I look at loans were flat quarter-on-quarter in local currency, which is perhaps not particularly encouraging for the NII outlook in the context of rate tax in the region. Can you talk about your expectations for loan growth here? And what this means for NII in Brazil? And maybe could you also please remind us what the time lag is with respect to repricing between assets and liabilities in Brazil, I understand your liability were price is much faster than assets. If you could remind us how many months in lag that is? And my second question is with respect to the U.S. profitability. I mean this is a part of your business that's negatively correlated to rates. You've been adding at least a number of investments or corporate bankers in the region, which is showing good momentum in fees. Could you maybe just talk us through the key P&L line items and if you see these numbers as sustainable going forward, please. Thank you.

Thank you, Antonio. I would like to provide an update on the situation in Brazil. It's crucial for you to understand that we are making some adjustments to our current business model. Previously, we heavily relied on risk-weighted assets and issued numerous loans. Now, we are shifting our focus towards profitability. This means we're adjusting our mix and managing our loan portfolio by division. In the past, we aimed for growth across all segments, but now we are concentrating on those segments that offer the best profitability and lowest cost of risk. We are selective in our management approach across the group. Additionally, we are focused on increasing our client base and attracting transactional clients who offer deposits and payrolls, which will enhance our margins as we boost the funding of our franchise in Brazil. Our net interest income (NII) showed a solid performance this quarter, up over 3% and more than 22% year-on-year, driven by healthy volume growth, a change in our mix, and lower rates due to an increase in clients. As mentioned in my presentation, our competitive onboarding process has been effective in attracting more clients. Although the rate outlook has changed with recent market hikes, which may slightly dampen our NII growth expectations, we anticipate that the Brazilian real will grow in the mid-teens by the end of 2024, with further growth in 2025. By continuing our strategy of acquiring clients and increasing deposits, I believe we will be in a favorable position. Furthermore, Brazil has achieved almost a 17% return on tangible equity (RoTE), reflecting strong profitability, not solely reliant on NII growth but also driven by improved fee generation as we become the primary bank for our clients, selling various products like insurance. We have also effectively managed costs and maintained a stable cost of risk this year. I remain very optimistic about Brazil's capacity to continue enhancing its profitability through 2025. Jose, would you like to go into detail regarding the liabilities?

Liabilities in Brazil automatically adjust with interbank rates, with nearly all of them linked to these rates. Additionally, 60% of the assets will mature in 12 months. This creates a negative sensitivity we must consider in Brazil.

Thank you. Let me go into the U.S., Antonio. So it's very important to understand, first of all, that we are not a full-fledged commercial bank in the U.S. We are focused on the businesses we are focused, okay? We are focused mainly in our consumer business. The consumer business, as you say has negative sensitivity to rates. That's exactly why we launched Openbank there. And we're also using SBNA, our commercial bank to fund that all right? We've been also changing the mix in a very strong way. I was looking at the numbers in terms of the new mix we have. And as you're talking about a mix that is 42% with FICOs really on the prime and near prime level, okay? And we're decreasing the amount of risk that we have to deep so prime and subprime. So that basically makes combination and it's going to give you a pretty good idea of what we're doing there. In terms of consumer, it's very important that you understand that, I mean, as you know, we are at scale player. We are also leveraging the relationship we have with the OEMs and we were able to capture very good agreements with INEOS, Lotus, Tesla and Mitsubishi. It's very important for you to understand that some of these changes in the P&L, you're not going to see them at the revenue level due to the fact that a lot of this is basically done, for example, on the electrical vehicles. And electrical vehicles, we're buying them because it's mostly leasing. So that basically tells you that it's not going to appear on the revenue line, but you see it on the page back we have on the tax that we get back for the electric vehicles. So that basically changes a little bit the outlook. But all in all, I really see that the U.S. will continue to thrive over the next year or so, okay? Also in the commercial side, the business is doing well. We have this expertise. We also you know that we have the JV with the FDIC, which has been tremendously successful and I think will continue so. I have had a solid performance. And then you talk about the CIB advisory services. CIB just grew 41% year-on-year in terms of the fees that we are collecting on that business. But also, you don't see how the U.S. is helping the rest of the business to thrive. If you take a look at the fees and CIB Europe also are being pushed up by all the businesses we are doing by using the U.S. teams to help us out, getting some of our new business that we didn't use to get. Also in Latin America, if you take a look at, for example, not just cross-border M&A, but if you take a look at what we've been doing in DCM, you will see that we have become one of the three most important players in DCM in that market just because of the expertise we got into the table. So when the Mexican UMS did a €7 billion transaction at the beginning of the year, we're one of the four banks, and we're the only non-American bank in the game. So those are the particular things that are happening to us given that now we have with the local strength that we have, we're combining the global expertise that we're bringing on to the table. And wealth or also, we have a leading brand in Latin America. That business is basically working as a Swiss clock. So I really do believe that the U.S. will continue to thrive very good outlook for '25 and really good numbers coming up in terms of the P&L we see there.

Thank you, Antonio. The next question please.

The next question comes from the line of Marta Sanchez Romero from Citi. Please go ahead.

Good morning. Thank you. My first question is about the strong market share in loans to deposits over the past year. We have made necessary changes within the segment. Do you anticipate a shift in strategy, perhaps focusing more on specific topics? How do you envision loan repositioning in the future? My second question concerns U.S. deposits. The costs and volumes remained stable this quarter. We have just launched Openbank in the country. Your website mentions that you're offering 11 times the national average for deposits. What are your expectations for volume growth from your Openbank franchise, and where do you see the costs? Also, could you provide insight into the effective corporate tax rate for 2025? I understand there are updates regarding the tax study. Thank you.

We couldn't hear you the first question at all. So could you repeat that one. Sorry about that. And the second question was about the U.S., but we lost part of it.

Regarding Spain, you've maintained market share on deposits over the past year and made changes in management. Do you anticipate adjusting your strategy with a greater risk appetite? What are your expectations for loans and deposits in Spain moving forward? In the U.S., you've launched Openbank, and your volumes and deposit costs have remained flat this quarter. What deposit levels do you aim to achieve with the platform, and what do you project for future costs? Additionally, what is your effective tax rate in the U.S.? Thank you.

Thank you, Martha. Let me go ahead. Regarding the management changes we've made in Spain, our previous plan remains unchanged, as we will continue to focus heavily on profitability. Additionally, we are transforming our model. Spain is a key area where we see significant potential for our ONE Transformation initiative, particularly in terms of simplification and automation. For instance, if you compare our branches in Portugal to those in Spain, 90% of our activities in Portugal involve client care, while 50% of what we do in Spain addresses various incident-related issues. Therefore, it's essential that we implement the necessary simplification, transformation, and automation in Spain to enhance the reliability and efficiency of our business and improve our cost structure. Furthermore, as you know, we are rolling out global platforms, with Spain being a primary focus in the near term. It’s crucial to note that we will keep managing the deposit betas effectively, concentrating on acquiring new clients. It's also worth highlighting that for the seventh consecutive month, we have seen an increase in clients in Spain, which is significant for a mature market. This indicates that our model is effective and that we are executing our strategy appropriately. We will maintain our efforts to transform Spain while leveraging global platforms to become increasingly competitive and efficient, ultimately benefiting our clients. Additionally, being the number one bank for our clients is vital in Spain, as it positions us to offer them more products. One area where we have considerable room for growth is insurance, where we currently lag behind some of our competitors. Moreover, in Corporate and Investment Banking (CIB), we have leveraged our U.S. teams to support our operations in Spain, which has proven beneficial and has kept us as the market leader throughout the year. Spain will continue to develop as we planned. In terms of the tax rate in the U.S...

Yes, please.

No, no. I wanted to talk a little bit, I mean, I believe that '24 in all in all, is going to be a strong year for Spain. We remain optimistic of NII. We see growing in high-single-digit, together with customer growth, as I told you, and higher transactionality. And will drive our revenue up about double-digit. The efficiency ratio will continue improving, and we see the cost of risk below 50 basis points by year-end, okay, and also strong improvements in RoTE to a level well above 20%. So Jose, if you would like to come into the U.S.

Just quickly, Marta. This year, the tax rate is going to be more or less close to zero. Actually, we're going to actually have a slight credit from the sale of EVs and from here, it should gradually normalize as we do less EVs and more contribution from other businesses. So we could think of like around 10% next year maybe 15% the next year. So gradually normalizing at that pace at more or less 10% next year, 15% in the following year.

Okay, thanks. Next question, please.

The next question comes from the line of Carlos Peixoto from CaixaBank BPI. Please proceed.

Yes. Hi, good morning. A couple of questions from my side as well. Firstly, on the U.K. NII outlook. We saw a good recovery in the third Q. We actually saw improvements in loan yields and also lower deposit costs. I was wondering if you see this trend prevailing into the fourth Q and into 2025. Should we expect margin expansion to prevail? Or should we expect it to stabilize the customer spread to stabilize more or less around these levels, just basically how do you see the outlook for NII in the U.K.? Then if I may pick up a bit on the interest rate sensitivity questions that were raised before. You mentioned that you lowered the NII sensitivity in 20% to 25% of what it was prior to the change in rate cycle. I was just wondering if you could update us on exactly where the sensitivity lies now particularly for Spain, but also for some of the larger geographies, that would be much appreciated. Thank you very much.

Thank you, Carlos. Okay. On the U.K., I would like to tell you, I mean, I think it's one of the countries that we have one of the greatest opportunities in terms of ONE Transformation. We have a very good advantage of simplifying. That's something that we are very concentrated on also the automation of what we're doing there, we are actually lowering the amount of people that we have. We started the year with 20,000 people. We're going to end up with 18,000. So simplification and automation is well underway. And then as I said on the presentation, it's quite important that we already start deploying the global platforms. OneApp came in U.K. just about. We did the big bank and change all our clients there, and it's becoming really helpful in order to gain new clients helping us in the deposit base and also helping us in terms of NPS, okay? It is important to say that we believe that we have much better market economic dynamics, okay, lending activity, we see it picking up. We are very much also focused on profitability in that market as well. We see more rational behavior of the U.K. banks, better pricing on the new loans, plus better pricing of deposits. We are proactively managing deposits as I told you, first of all, with the new clients coming in with the new H account that we launched, that's been helping us. So we reiterate our view that NII will improve in the H2 versus H1, okay, as you have said. We're going to finish '24 with NII down only mid-single-digit instead of the minus 9% that we have reported in the first nine months, and we expect further rate cut in the remaining of '24. But the outlook of '25 is positive in the sense of what we have seen so far.

In terms of interest rate sensitivity for the main countries in our group, we anticipate a 2% to 3% increase in net interest income next year when measured in constant euros. In Spain, with a projected 2.5% interest rate by mid-2025, we expect a slight decrease in net interest income. The U.K. is expected to see a slight increase, while the U.S. should experience a high-single-digit increase. In Mexico, we predict a mid- to high-single-digit increase. Brazil's outlook is particularly significant, as we estimate average interest rates to be around 11% to 11.5% next year. With these rates, net interest income in Brazil is expected to rise by mid-single digits. Additionally, in DCB, we also foresee a high-single-digit increase. It's important to note that compared to the sensitivity we experienced with rising interest rates in European countries and DCB, the sensitivity during a rate decline is considerably lower.

Thank you, Carlos. Next question, please.

The next question comes from the line of Andrea Filtri from Mediobanca. Please go ahead.

Hi, thank you for taking my question. First of all, a question of extrapolation. Consensus is forecasting no growth of profits in 2025 versus 2024. You are currently growing profits at 14% year-on-year in the nine months. And I know you usually give guidance in February, but do you think 2025 profits will actually be above 2024 in your view? And the second is a follow-up on the capital aberration we've done before. I'm looking at Slide 23. With our regulatory headwinds, you would have built 35 basis points of capital in one quarter after distribution. Can you confirm with Q4, we should exhaust the bulk of the expected regulatory headwinds? And is the higher profitability yielding to higher capital buildup versus the 10 basis points per quarter guidance that you have given us? Final thing is a clarification on Basel IV. Before you said that on day 1, CET1 should be flattish. If I remember correctly, there were 20 basis points of impacts this year that should have reversed with Basel IV adoption. Can you clarify that? Thank you.

Thank you, Andrea. Let me give you a little of what we believe. First of all, I must tell you that I have great confidence that we'll deliver. And in some metrics like cost to income over deliver on the financial targets that we set on the Investor Day for the period of '23 to '25, okay. '25 will be better than '24. For '25, we expect to continue to grow revenues, especially fees, as I explained with the new mobile deployment that we're doing. We're going to further improve the operating leverage and we're going to deliver higher profitability. And we will do this how by leveraging further the global and network businesses, okay? We're putting a lot of focus on increasing the network effect. We're doing more with less. First of all, leveraging also our products and global factories, like, for example, from our corporate bank into our commercial banks, what we're doing between CIB and the commercial business on the midsized companies and SMEs. Also ONE Transformation is leveraging platforms that help reduce the cost to serve in retail. We're talking about minus 4% on year-to-year cost per active customer and 6% year-on-year revenue per active customer. So since the start of the program, the number of products, as I said before is down almost 36%, okay. 60% of the products are now digitally available to our customers. That's 9% points up since we started the program, right? In summary, the strategy and business model diversification, disciplined approach to capital allocation, we will, we believe deliver a consistent compound effect that will continue yielding positive results for the years to come. So all in all, yes. Jose, I don't know if you like to comment into the capital markets.

Let me outline the components of the capital ratio for you, and you can draw your own conclusions. On Page 23, we report 43 basis points of organic capital generation after factoring in the costs related to AT1 hedges. This includes a negative contribution of 19 basis points from organic risk-weighted asset growth, which increased by €8 billion, though this was partially offset by risk transfer initiatives amounting to around 11 basis points or €5 billion. So far this year, we have mobilized between €35 billion and €40 billion in risk-weighted assets. Additionally, we recorded 7 basis points from the sale of our Poland operations. Based on this information, you can deduce our expected recurring capital generation moving forward. Another crucial aspect is net risk-weighted asset growth, which is the gross risk-weighted assets adjusted for asset mobilization initiatives. The excess capital we've utilized has been reinvested with a return of 2.9% on risk-weighted assets. Regarding Basel IV, you're correct that the negative impact of 21 or 22 basis points we observed in the first quarter of this year will reverse in the first quarter of next year. This reversal will help mitigate the other negative effects we have largely related to technical adjustments in low-default and corporate portfolios. Overall, the net effect is neutral, balancing some positives and negatives. Among the positives is the 20 basis points gained from the maturity we utilized in derivative transactions.

Thank you, Ignacio. Next question, please.

The next question comes from the line of Hugo Cruz from KBW. Please go ahead.

Hi, thanks so much for the time. Three quick clarifications, if I may. So first, trading income in Brazil has been quite weak now for a couple of quarters to be negative. Can you give any guidance there? Second, the corporate center NII, should we expect a positive number in Q4? Or again, any guidance you could give? Third, I heard you on the tax rate for the U.S. What does that mean for the group? So can you give guidance on the group tax rate? Thank you.

Thank you, Hugo. Regarding trading income, it remains quite small in Brazil and will not overshadow the strong operating performance and profitability improvement we've seen this quarter. Client-related trading income performed well in Q3, but recent market volatility with the Brazilian real and the yield curve caused a significant decline in local assets during Q2 and following into Q3. However, we've stabilized the situation, and I believe the outlook is much more positive. This is a tough market, but we've managed to offset these challenges in Q3, and I expect Q4 to be much better. The net interest income for the Corporate Center is expected to gradually decrease due to the cost of liquidity management at the corporate level, so anticipate NII reflecting the lower rates we are now experiencing. Regarding the group tax rate, it should remain fairly stable next year, potentially slightly lower than this year, but just marginally. For modeling, we will use the same tax rate in 2025 as we will have in 2024. I believe we've addressed all your questions. Thank you all for your time. Investor Relations, Hector, and I are available for any follow-up questions. I look forward to meeting with you in the coming weeks for one-on-ones, and we'll speak again for the fourth quarter earnings in January. Thank you, everyone.

Thank you very much. Bye-bye.