Banco Santander, S.A. Q4 FY2024 Earnings Call

Thank you for joining Santander's 2024 Results Presentation. I'm Raul Sinha, Global Head of Investor Relations, and I’m happy to be here with our Executive Chair, Ana Botín; our CEO, Hector Grisi; and our CFO, José García Cantera. Today's presentation will follow the standard format for full-year presentations. Ana will start by discussing our results and achievements in relation to our strategy. Hector will then provide details on our financial performance. Finally, Ana will share our outlook for 2025 before we open the floor for questions. Ana, it's yours.

Thank you, Raul, and welcome, everyone, to our full year results presentation. 2024 was another record year, marking the third consecutive year of record results for Santander. This reflects the benefits of our strategy and the resilience of our business model. As mentioned in 2023, we have entered a new phase of value creation, enabling us to meet or exceed all our key financial targets. Profit reached a record €12.6 billion, driven by strong revenue growth and an increase of 8 million customers across all our global businesses in a balanced manner. We have continued to invest for the future and are making excellent progress toward a more streamlined and integrated model through ONE Transformation. This has played a key role in improving efficiency by over 2 percentage points and increasing our profitability RoTE to 16.3%. Our balance sheet remains robust, with a strong capital ratio ending the year at an all-time high of 12.8%, demonstrating our capacity to generate capital organically. Additionally, we once again provided strong shareholder value, with TNAV and dividend per share increasing by 14%. This is particularly notable given the pressure from currency devaluation in some markets, which was mitigated by our profitability and the appreciation of the U.S. dollar, with our U.S. business serving as a natural hedge against pressures on the Brazilian Real, for instance. Now, let me delve into our performance for the full year. We achieved high-quality results, with top-line revenue growth of 10% in constant euros, supported by customer engagement and strong performance across all our businesses. Fee income increased by 11% in constant euros, bolstered by significant customer growth, which reached 8 million, and the network benefits we are realizing throughout the Group, contributing approximately €20 billion, about a third of our revenues, due to our affiliation with Santander. Our expenses grew at a rate considerably lower than revenue, further underscoring the positive effects of our ONE Transformation. We recorded net operating income of €36 billion. We maintained a cautious approach to risk, with our cost of risk ending the year at 1.15%, better than our initial guidance. Over time, we have demonstrated that our results are sustainable and less volatile than most of our peers, thanks to our retail consumer focus and a business model that combines geographical and business diversification along with strong risk management. All five of our global businesses delivered revenue growth while improving profitability. The retail consumer sector showcased the advantages of our transformation, with ONE Transformation enhancing efficiency and customer growth. Wealth, CIB, and PagoNxt similarly improved profitability by leveraging our network strengths and capabilities. This combination of global businesses, along with geographical diversification, positions us advantageously for the coming year and beyond. We are enhancing our disclosures to enable the market and all of you to better forecast our global business performance, similar to our internal practices. It's important to highlight that while higher interest rates benefit our retail operations in Europe, other business segments, such as consumer and certain developing markets, will perform better with lower rates. This diversification allows us to produce consistent, strong results and value creation. Our performance this year and the execution of our strategy keep us on track for our 2025 financial targets. In retail, the core of our banking model, we are making significant strides. Our goal is to become the number one bank for our customers. ONE Transformation is yielding impressive results, and there’s much more to come, including the growth of around 4 million active customers to a total of 80 million, all while reducing transaction costs. We are enhancing our digital onboarding, with digital sales rising by 16%. We have streamlined our product offerings by almost 40%, focusing specifically on the front book, and you can expect to see benefits from this in the coming years. Furthermore, we are diligently deploying our global platform. For instance, in the UK, customers have transitioned to the new global app that is already operational in Spain, Portugal, and Poland. This global platform rollout, along with improvements in customer experience, will further boost customer growth while lowering absolute costs. In the consumer segment, our focus remains on delivering optimal solutions for our customers while enhancing our competitive cost advantage across our network. We saw operational leverage this year, as revenues increased by 6% while costs decreased by 1%. This year has been transformative, highlighted by our checkout lending platform, Zinia, which has allowed us to establish partnerships with both Apple and Amazon in Germany. This collaboration is significant, not just for today but for the future, as it positions us to meet our customers where they prefer to operate under our brand. We have also successfully launched Openbank in the U.S. and Mexico. Openbank U.S. has attracted €2 billion in deposits, double our initial expectations, and has improved our loan to deposit ratio by approximately 12 percentage points. This will enable us to optimize our U.S. funding structure from the outset. We're significantly reducing the cost to serve in the consumer segment. Looking to 2025, we anticipate that the consumer division will be among our highest performers, with the U.S. expected to positively influence our overall profitability. Our other three global businesses—Wealth, CIB, and Payments—are also driving fee growth, a trend we projected in 2023 due to robust network effects and technology leverage. In our corporate banking division, we're focusing on markets where we hold a strong presence and are delivering healthy profit growth while maintaining our usual risk profile. In 2024, corporate bank fees in the U.S. increased by 21%, with revenues rising by 14%. We are working to establish the best wealth and insurance management capabilities in our network, leading to a 15% increase in wealth revenues in 2024, with fees growing significantly across all three business lines. In Payments, we are establishing a backbone that connects the Group across various businesses and regions, which is crucial for our ONE Transformation. This represents a substantial and expanding market opportunity, with Payments volume increasing by 11% in 2024. We are on track to meet our EBITDA margin target of close to 30% for 2025, already approaching that goal. Moving forward, particularly in a lower rate environment in Europe, CIB, Wealth, and Payments will be critical in achieving our targets this year, especially in the area of fee income growth. Overall, our strong operational and financial performance is driving substantial capital generation, double-digit value creation, and returns for our shareholders. Our fully loaded CET1 ratio rose to 12.8% by the end of December, remaining stable at 12.8% on January 1, supported by record organic capital generation, investments in profitable growth, increased shareholder returns, and absorption of regulatory impacts. Given current prices, share buybacks have proven to be the most effective means of generating shareholder value since 2021, and with this new share buyback announcement for 2024 earnings, we will have repurchased 15% of our outstanding shares, yielding a return on investment of approximately 18% for our shareholders. And there are more initiatives on the horizon. Hector will provide additional insights into our financial performance, but let me remind you of our business model and strategy. This is a marathon, not a sprint. In every sprint, we are delivering on our commitments. We consistently present numbers and results in line with our guidance each year while building the Santander of tomorrow. Our mission is to become the best open financial services platform for all our customers. We are striving to enhance our competitiveness in a way that is difficult for others to replicate, based on a unique combination of our 173 million customer base, global scale with local leadership, and, importantly, the high visibility and predictability of our results through economic cycles. A major source of potential for Santander remains the network effect derived from our Group's global business. Our confidence in our forecasts is rooted in aspects within our control. This is particularly crucial in light of the anticipated more challenging and volatile macroeconomic conditions. To illustrate, this is not merely theoretical; we are already achieving results for our shareholders and customers. These are some of the global platforms that are operational and contributing to our financial performance, increasingly distinguishing us from our peers. These platforms are already delivering superior services and improved efficiency. Openbank is our digital bank now operating in the U.S. and Mexico, while Zinia saw 1.7 million new contracts this year, expanding our partnerships in new countries. We have Gravity, our core system with Google, which we are offering to third parties through our joint venture and has already enabled Santander to reduce transaction costs by 10%, while also facilitating numerous improvements in our front-end systems. We are confident that we will sustain growth across economic cycles, adding value for our shareholders. To conclude, this business model has consistently yielded strong results, as evidenced by our sustainable earnings growth year after year and enhancements in profitability. Over the past decade, we have doubled our profits and tripled them since the end of 2013, achieving another record in 2024. We have welcomed 56 million new customers to Santander, while our RoTE increased to 16.3% from 11% in 2014. Importantly, we have steadily bolstered our capital during this period. When I took over, our CET ratio was 8.3%. The methodology for calculating capital has changed, but it’s crucial to note that we have increased shareholder remuneration sixfold. We are now at 12.8%, nearing the upper limit of our target operating range. I want to emphasize that we are maintaining our target of over 12%, despite rising RWAs. Lastly, before I turn it over to Hector, remember this has been our North Star since 2023. We couldn't commit to TNAV and dividend per share benchmarks before 2023 for reasons well understood by all. Our progress towards the goal we set is ahead of schedule. We remain dedicated to maintaining profitability and being disciplined in capital allocation. Currently, we have 87% of RWAs above the cost of equity, further enhancing our profitability to exceed 16%. Now, I'll hand it over to Hector, who will provide a more detailed overview of our financial performance.

Yes. Thank you, Ana. We look at our performance in constant currency, including the impact of Argentina, where a conservative approach to FX was adjusted in Q4. This resulted in a positive impact on NII with a negative offset in other income and cost. Let me start by highlighting our strong top-line performance. We achieved double-digit revenue growth, exceeding the targets we provided at the start of the year and even the ones we upgraded during the year. This was underpinned by sound growth in customer activity across the businesses, while reflecting the benefits of our model. The strong increase was mainly supported by the next things. First, our retail business, which continues to grow at double-digits with good performance in both NII and fees. A record year in CIB up 14% on the back of our investments and good activity levels and 15% revenue growth in Wealth driven by solid commercial activity in private banking and a really good performance of Santander Asset Management and Insurance. Consumer and Payments are also showing very good revenue trends with consumers delivering double-digit growth in fees on both PagoNxt and cards growing. More than 80% of the Group's NII comes from our Retail and Consumer businesses. The Group NIIs grew double-digit in 2024 with NIM driven by asset repricing and controlled cost of deposits. Over the last few quarters, we have proactively managed our interest rate sensitivity to position our balance sheet for the new outlook on interest rates. In Spain, for example, our NII was flat quarter-over-quarter, partly due to our hedges. And in Brazil, our negative sensitivity to 100 basis points rise in rates is now lower at around €120 million. Going forward, our outlook for 2025, for the Group is similar to what we said in Q3. Excluding Argentina, we expect NII to be slightly up in constant euros and slightly down in current euros based on forward rates. In an environment of low credit demand in general, we generated another record performance in fee income through network effects from all our global businesses. Retail increased driven by the strong performance across our footprint on the back of good commercial dynamics and customer growth. In 2024, we put a greater focus on deploying targeted high value-added products and services, and this is expected to be a positive driver in 2025. In Consumer, we delivered double-digit growth fees across our core markets, driven by insurance and DCB in Europe, Brazil and now too in the U.S., and in 2025, we expect consumer fees to be slightly down due to the impact of the new regulation and insurance. CIB also grew strongly to record levels, supported by all CIB products with the U.S. the top contributor for fees nearly doubled. In Wealth, we delivered a very strong performance with double-digit fee growth backed by record assets under management. Excluding a one-time positive fee recorded in cards in 2023, payment fees were up slightly and are expected to grow strongly during 2025. ONE Transformation is key to why we can continue to get better in every single market, thanks to leveraging our global businesses. We expect sustainable improvements in operating leverage as this is a structural change in our model that will deliver benefits for years to come. Retail and Consumer are leading our transformation, which is delivering structural efficiency gains and operating leverage with cost growth of 1%, well below revenue growth of 9%. These two businesses represent 70% of our cost base and will continue to see lower costs going forward. CIB and Wealth costs increased by 13% year-on-year, showing positive jobs while driving higher fee income and payments operating performance reflects our strategic investments. As a result, our cost-to-income ratio improved from 41.8% for 2024, the best we have ever reported in 15 years and better than our original guidance. There is still more upside over the medium-term from our strategy, both revenue and cost. While we are ahead of our plan on execution of ONE Transformation and global tech capabilities, we have more to do capture network effects across our global businesses. This has delivered 66 basis points of improvements for our cost-to-income ratio with more upside to our original target of 100 basis points to 150 basis points. Retail and Consumer and more than 70% of our earnings have significant upside. The rest of our earnings come from Wealth, CIB and Payments, which are fee-driven and will play to our network strengths. Our balance sheet, as you can see is rock solid. Credit quality is stable across our footprint ahead of our expectations with low unemployment and easing monetary policies in most of the countries, except for Brazil. Credit quality improved year-on-year as reflected in both NPL ratio and lower coverage needs. NPL ratio was 3.05%, improving both year-on-year and Q-on-Q. The NPL portfolio has collateral warranties and provisions that account for around 90% of its total exposure. The cost of risk improved to 1.15% better than our target of around 1.2% for the year. In our retail business, 12-month cost of risk improved year-on-year to 0.92%, with sound underlying trends across all the countries. In Brazil, we have grown credit at a slower pace than our peers and have made improvements to our portfolio underwriting over the past few years. Meanwhile, in consumer, 12-month cost of risk finished at 2.16% in line with the normalization expected in 2024, supported by the good portfolio behavior in the U.S. auto as we had expected since the beginning. Moving on to capital, where we delivered an exceptional outcome in Q4. Our CET1 ratio grew by 30 basis points in the quarter, backed by a strong organic capital generation. We have been working on accelerating our capital generation for some time. This quarter, we generated 82 basis points organically in the back of the profit generation and RWA modification. We continue to deploy capital to the most profitable growth opportunities and expand our asset mobilization capabilities to maximize capital productivity. Our disciplined capital allocation is resulting in a new book return on risk-weighted assets of 2.9%, equivalent to an RoTE of 23%. We have reached 87% of RWAs with returns above the cost of equity, up from 40% in 2015 and well above our target of 85% in 2025. Our asset desk is achieving exceptional results during the year. We disposed of an amount of capital risk equivalent to €60 billion in RWAs. The combination of these actions explains expanding profitability and the good performance on capital. All in all, we are in a new phase of value creation driven by higher profitability. Looking back at the period since 2016, our value creation has clearly accelerated. And since 2022, we have been able to generate, on average, 15% value to our shareholders. This is driven mainly by the step-up in our profitability and helped by our diversification. Our exposure to the U.S. dollar through our U.S. businesses has acted as a natural hedge against depreciation of the LatAm currencies. Let me highlight the sensitivity of our equity to foreign currency, which clearly shows that currency depreciation in Brazil and Mexico is at least partly offset by our exposure to the stronger U.S. dollar working as a natural hedge. That's all from my side. Ana, over to you.

Thank you very much, Hector. Let me briefly summarize our performance in 2024, which reaffirms our commitment to executing our plans effectively. We consistently meet our commitments across all key financial metrics for the Group. We are on target to achieve or surpass the financial goals we set for 2023. This has been a record year for Santander, with our results demonstrating the advantages of our strategy and the resilience of our business model, allowing us to perform consistently despite market fluctuations. Looking ahead, we are confident in the effectiveness of our strategy, as evidenced by our numbers, and believe it will continue to generate sustainable higher returns. You can see our targets for 2025 on the slide, which have been set considering a more volatile environment. We anticipate volatility and challenges in the upcoming year, including a mild tariff dispute, lower euro rates, and a stronger dollar. Despite these factors, we expect to maintain resilient revenue around €62 billion, the same as this year, with growth supported by mid to high single-digit increases in fees in constant euros. Our goal this year is to reduce costs year-on-year in euros, achieving positive operating leverage in 2025 despite the lower rates, particularly in Europe. We foresee a stable cost of risk at the Group level, with improvements in some markets balancing out challenges in others. This will contribute to increased profitability, with returns exceeding 17% based on the same metrics we provided in 2023, reaching beyond the upper limit we set during our Investor Day. We will now report RoTE post AT1, as most of our peers do, targeting around 16.5% post AT1s. Given our strong capital outlook and profitability, we plan to distribute €10 billion in share buybacks to our shareholders for 2025 and 2026, sourced from our earnings in those years. This will follow our policy of distributing around 50% of our reported profit, split equally between cash dividends and share buybacks. We've announced a second buyback related to 2024 earnings totaling €1.6 billion. Additionally, we will consider excess capital generated in 2025 and 2026 following our annual results. As always, this is subject to regulatory approvals and our outlined performance. Importantly, we will not set a maximum price level for our share buybacks, reflecting our enhanced profitability and prospects. In conclusion, our primary objective remains achieving double-digit growth in TNAV and dividends per share throughout the economic cycle. We are now ready to address your questions, with Raul managing this segment.

Thank you, Ana. Can we have the first question, please?

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

Thanks very much for the presentation, and thanks for taking my question. First of all, I just wanted to thank you very much for the improvement in the financial target disclosure and the fact that you are using this RoTE plus AT1s. Just going to the questions, I have two questions today. After the announcement on the extraordinary distributions, just wanted to get further color on the trade-offs that you see between organic and inorganic growth? How excess capital ranks in terms of management priorities in 2025 and 2026, especially in the context of the M&A that we are seeing in the European banking sector? Second thing is, when I just looked at the results of ONE Transformation that is also very good, I just wanted to see how much more the Group's cost to income can improve from here? Thank you very much.

Thank you, Ignacio. It's essential to reiterate how we are approaching capital allocation in light of expected higher profitability and excess capital. Our capital allocation framework has been a fundamental aspect of our strategy and the results we are achieving, and we have been very disciplined. Firstly, we prioritize profitable organic growth and investments across our businesses, seeing ourselves as a compounder. This organic growth leads to a compounding effect on earnings, returns, book value, and distributions. Secondly, we follow this with ordinary dividends and share buybacks for our shareholders. Regarding inorganic capital deployment, it must align with our strategic goals and generate financial returns that exceed those of any organic investments or share buybacks. Lastly, any additional capital that exceeds our target range will be returned to shareholders as added remuneration. I want to clarify that we are not changing our target for capital above 12%, and we anticipate reaching 13% by 2025. Any incremental capital will follow the hierarchy I've described. In terms of costs, it's crucial to note that our ONE Transformation initiative still has significant potential, particularly in retail and consumer areas, which account for 70% of our PAT and costs. ONE Transformation is already yielding results, as illustrated in Hector's slide showing flat costs in retail and consumer alongside top-line growth. Notably, we've grown our customer base by 8 million, and our strategy and model under ONE Transformation will scale without needing to increase costs for customer growth and revenue increase. As I mentioned, we've reduced our product offerings in retail by nearly 40%, and you'll see the impact on both the cost base and revenue in 2025 and 2026. It's critical that we align our business and operating model while deploying our tech platforms, which will provide significant benefits in the future. For instance, Gravity, our core system that enhances efficiencies and our customer tech platforms, currently operates in 30% of the Group, and we expect this to rise to 60% by the end of 2025. This is very important. Thus, moving into 2025, we are focused on reducing the absolute cost base compared to 2024, despite foreign exchange and inflation challenges, and we are confident in this direction. Hector, would you like to share some specific numbers on our various global divisions?

Thank you, Ana. It's important to recognize that ONE Transformation is just beginning. Let me provide more details on cost changes during the quarter by business area and our outlook for 2025. In 2024, costs increased by 4% year-on-year, but in real terms, they only grew by 1% due to the operating leverage in retail and the cost containment efforts we've implemented in the consumer sector, despite our investments and growth. Essentially, we're altering our operations while continuing to function. Retail and Consumer account for about 70% of the Group's costs, which remained stable while our revenue rose by 9%. In Corporate Investment Banking and Wealth, which makes up about 20% of the Group's costs, we saw an increase of 13%, as mentioned in the presentation, with promising job growth and a sustainable fee income rise of around 21%. The investments we are making are driving significant business growth. The remaining 10% comes from Payments, which experienced an 8% year-on-year increase reflecting our strategic investments. Looking ahead to retail in 2025, we anticipate costs will decrease compared to 2024 in current euros, and we expect to maintain or improve the guidance provided during our last Investor Day. Specifically, we are aiming for retail cost to income to be below the early target of less than 42% and flat excluding Argentina, which was approximately 39.7%. Consumer cost to income is expected to drop below 40%, while CIB is projected to be below 45%. Thank you.

Thanks, Hector. Next question, please.

Next question from Marta Sanchez from Citi. Please go ahead.

Good morning. Thank you very much. My first question is about the UK. When you refer to the market as core, does it also specifically relate to the retail bank and the ring-fenced entity? If so, where do you anticipate achieving sustainable returns in a competitive landscape with stronger deposit franchises and new entrants with substantial resources? My second question is regarding the U.S. You have reported a net profit of $1.2 billion this year, but you are still benefiting from EV tax credits. I believe you mentioned that you expect the U.S. to be the largest contributor to earnings growth in 2025. Can you provide more details on the expected contribution, the key factors involved, and the assumed tax rate? Lastly, I would like clarification on capital; the threshold for surplus capital distribution is now set at 13%. Thank you.

Let me address the last question first. We are not setting a threshold. We have stated that we will reach 13% by the end of this year. The buybacks will occur in 2025 and 2026. I have outlined the hierarchy. This will depend on our organic growth, and we will be careful regarding our priorities, focusing on buybacks for shareholders, organic growth, and supporting our franchise. It's difficult to be precise; we don’t have a crystal ball. However, we do have a track record that demonstrates we perform better than our peers during challenging times. We are confident in meeting the Group targets we just discussed. Regarding the UK, our business outlook remains strong, as 88% of it is retail. We are committed to the UK market, where retail accounts for 9% of the Group, and we anticipate better performance there. The UK net interest income has hit its lowest point in the second half of 2024, and we expect a slight increase next year. The mortgage segment is vital to our results in the UK, and we continue to maintain resilient asset quality. Our approach to stress testing is very cautious; I believe we stress around 8%, which Hector or José can confirm. We uphold rigorous underwriting standards, which are crucial for our returns. Additionally, as Hector has explained regarding ONE Transformation, we can leverage our global platforms to enhance performance in the UK. We have successfully migrated the UK operations to Gravity, which will improve customer experience and reduce costs, presenting further opportunities for profitability. The UK remains a core market for us. In terms of the U.S., we are dedicated to strict capital allocation, which has been essential for us. The UK has historically ranked top among our countries and geographies and continues to be our priority for capital allocation and returns in euros to shareholders. The strong dollar serves as a natural hedge, particularly as earnings are increasing. We revamped our strategy in the U.S. a few years ago, focusing on profitable growth without trying to cater to everyone. Our strategy is anchored on four pillars: first, our consumer bank, which represents 70% of our U.S. operations and continues to improve. Consumer banking is expected to be one of our top-performing divisions, not just in the U.S. but also in Consumer Europe, and we anticipate significant increases in profitability driven by our performance in the U.S. While we won't provide specific figures, it could amount to hundreds of millions more when calculated. The launch of Openbank will enhance our funding optimization, especially in the current context of potentially lower dollar rates. Our corporate bank has made substantial contributions to our network, with more than half of its returns originating from Brazil and Spain. The U.S. helps us leverage this network. We have stated that we will not significantly increase capital allocation, but it has been a major driver of fee growth, with corporate investment banking up 81% year-on-year. Lastly, we have a highly profitable wealth management business focused on our Latin America franchise, and we will continue to invest organic capital in the United States and the Americas.

In terms of guidance, we expect revenue to increase in the high single-digit range. The accounting Return on Tangible Equity (RoTE) will be around 10%. If we adjust for the excess capital we have, the RoTE figure rises to about 14%, which is quite promising. Regarding taxes, I appreciate your understanding of our situation. As it pertains to leasing, we won’t have the exact numbers until we determine how to allocate them throughout the year.

Regarding capital, I want to provide a brief overview, and then José or Hector can elaborate further. To reiterate, we plan to distribute excess capital, following our established capital hierarchy, which prioritizes organic growth, distributions, and a disciplined approach to inorganic investments during exceptional periods. We have significant profitable organic opportunities, although it's uncertain how much will materialize. As for our capital target, it remains above 12%, with an operating range of 12% to 13%. Excess buybacks beyond the regular buyback and cash distributions will occur in 2025 and 2026. We won't provide more specific details than that. It's essential to return to our hierarchy to ensure we maximize shareholder value creation, currently exceeding our previous expectations. Now, let me pass it to you to respond.

Yes, in terms of the regulatory charges, it's a combination of several small factors related to model reviews, updates, inspections, and the potential impacts from the RTS published by the EBA. Regarding the 10% to 15% per quarter, we are maintaining that target. We see significant growth opportunities, as I mentioned. However, it's important to note that growth is not evenly distributed throughout the year. This year, for instance, the growth in capital tends to concentrate toward the end of the year, particularly in the second and fourth quarters.

Thank you, Andrea. I want to add to what Ana mentioned. There are three key points I want to highlight briefly. First, we're becoming the top bank for our customers, which is the most significant change in our model. This is why you observe an increase in fees. If you look at it by country, particularly in Retail, this represents the largest transformation, which is why we are guiding mid-high single-digit growth for fees. This change in our model involves more than just a platform; it also includes simplification that is reducing the number of products we offer. We currently provide over 50 products to our customers and are working through a backlog by enhancing automation. Automation is crucial to this process. Additionally, we have completed the deployment of OneApp across all of Europe. You can see the positive results in NPS in the UK. We are now moving to Brazil, followed by Mexico mid-year, and then to Chile and Argentina. The results will reflect our goal of being the top bank for our customers and increasing fee generation. Thank you.

Thanks very much, Hector. We have the next question, please.

Next question from Cecilia Romero from Barclays. Please go ahead.

Thank you very much for taking my question and congratulations on the results. My first one is in your growth strategy. Where do you see the most significant opportunities for expansion and growth over the next two years geographically, you talked about the U.S., but is there any other countries where you see the bank gaining in scale for example, Mexico? Also, I wanted to ask you on the quarter in regards to the very different dynamics that we're seeing in Portugal and Spain NII. Spain was flat and Portugal at minus 11%. Could you explain why such a divergent trend? And is this what we're going to see in 2025, a resilient NII in Spain and NII in Portugal following double-digit. And could you please let us know what your rate assumption is in this guidance? Thank you.

In terms of growth over the next few years, we are analyzing this by our global businesses and I will provide details by country later. Retail is not expected to see significant growth in the coming year. We will assess the growth and revenue situation in 2026. For now, our focus is more on profitability. We have gained 8 million customers. Our top-line growth is not solely due to favorable euro rates this year; gaining 8 million customers is a significant achievement. However, our top-line in Retail may not see considerable growth in 2025. There will be variations within Retail as mentioned earlier. Countries within the euro area are likely to have slower growth due to certain impacts, but fees will help offset some of this. Additionally, 50% of our businesses outside of Retail are expected to grow both top-line and bottom-line, including in the U.S. and Europe. This is why I believe the U.S. will benefit significantly from lower rates, though it may not be as low as the market anticipates. I will let José elaborate on the assumptions underpinning these numbers. Regarding net interest income in Spain and Portugal, I’ll return to our global business and provide insights there. In Retail, the European countries are not expected to grow top-line, though profitability might remain stable or slightly lower in some cases and higher in others. Overall, the four main countries account for about 70% of Retail, while the remaining 50% is less sensitive to higher rates. That segment should perform at least as well, if not better, considering the investments in a lower rate environment. I can share guidance for Spain, which will be part of the information we provide.

Let me quickly outline the steps we've taken to reduce interest rate sensitivity in the eurozone. We have implemented three key measures. First, we established an ALCO portfolio over the past year and a half, which now holds €67 billion in government bonds in the eurozone. Second, we have introduced hedges on the asset side of our balance sheet, particularly for mortgages, through forward starts lasting up to two years. Additionally, we increased the share of our liabilities that are at variable rates. As a result, in the fourth quarter, the net interest income (NII) in Spain, which is mainly from the retail sector, experienced a negative effect of about 2% from volumes, with margins declining by approximately 17%. However, these declines were offset by the positive effects of the measures I mentioned, with hedges contributing around €100 million to NII and the ALCO portfolio adding about €180 million. This is why NII for the quarter remained flat. Looking ahead, we anticipate that NII in Spain, which is predominantly focused on the retail sector, could decrease by 5% to 6% next year if rates stabilize around 2%. This highlights our sensitivity, but I want to emphasize that we have reduced the proportion of assets and liabilities exposed to rates in Spain. In December 2022, 76% of our assets were floating, while 46% of our liabilities were floating. By December 2024, only 64% of assets and 51% of liabilities will be floating. Thus, we have lowered our sensitivity on the asset side while increasing it on the liability side, leaving us better positioned for lower rates.

Thanks very much, José. We have the next question, please.

Next question from the line of Carlos Peixoto from CaixaBank. Please go ahead.

Good morning. Thank you for my questions. I want to shift my focus to Mexico. You had a strong performance in the quarter, and I would like to know your expectations for loan volumes and net interest income as we approach 2025. Additionally, do you have any insights into how potential tariffs might influence overall activity in the country, especially regarding your various corporate investment banking operations in Mexico? If possible, could you also share how much these operations contribute to Mexico's overall performance? Lastly, regarding the capital organic generation you mentioned earlier, specifically the 10 to 15 basis points per quarter, I would like to clarify whether this figure accounts for the regulatory impact you discussed regarding the 60 basis points or if it's before that impact. Thank you very much.

So again, let me just reiterate, and I'll get to Mexico in a minute, but we have significant business and geographic diversification. Mexico, like other countries is roughly 50%, I think probably between 45% to 55% is Retail and the percentage of revenue and roughly also bottom line of Mexico when Retail is 12% and Mexico is around 15% of the total. So again, not a huge contribution on Retail, which is going to be the one most sensitive to volumes. Half of our business, and I'll let Hector go into that in more detail is with Corporates and Affluent. We have a lot of high-quality business in Mexico. Actually, the biggest opportunity is in the Retail, i.e., in the mass market. We have also launched Openbank there to take advantage of that. And we have been very prudent in terms of our lending much more than other peers we have focused over the last few months actually on a higher quality segment. So clearly, the Mexican economy could be more affected than others, but it should not have a significant impact on our expected delivery. So maybe you want to give a bit more color on Mexico?

I think you explained it very well, Ana. I mean, the fact of the matter is that we have been, I would say, prudent given the environment in Mexico, we've been growing a lot less than our competitors because we believe that it was important to be conservative. We are very much concentrated on going towards the part of the portfolio that has collateral. We've been concentrated a lot more on auto loans on mortgages and will be decreasing. Even though we have been growing in Consumer, not as much as the rest of the market. So I basically very comfortable with what we are doing there. And I believe that the guidance that I can give you, given that we are including a mild trade war, we're talking about Mexico in terms of revenue, up high-single digits, okay? And in terms of RoTE between around 20% to 22%, again, is in constant no view on FX, okay? Thank you.

It's pre-regulatory charges.

Thanks very much, José. Can we have the next question, please?

Next question from the line of Sofie Peterzens from JPMorgan. Please go ahead.

Yes, hi, this is Sofie from JPMorgan. Thanks for taking my questions. So just going back to the guidance, I know you have now given guidance for net interest income in Spain, but it will be down 5% to 6% if rates are 2%. You also gave guidance for the UK and Mexico. But with the third quarter results, you gave guidance kind of on a country-by-country level for net interest income. Would that be possible to also get now for 2025? And then, my second question would be, I know you've mentioned that UK is the core part of Santander, but and you focus on organic growth. But if you could kind of talk about M&A how you view your peers that are heavily involved in M&A? Do you think that will change the European banking landscape and how do you see Santander better positioned in a landscape where you have more M&A and how will you kind of evaluate any opportunities that arise potentially in Portugal, potentially elsewhere in Europe. So if you could comment on this. Thank you.

Thank you for your first question. We will not provide detailed net interest income by country, but we will give an overview of most countries, which José can elaborate on. I want to go back to our commitments highlighted in the last slide of the presentation. We expect revenues in euros to be around €62 billion, which is approximately the same as this year, with mid to high single-digit growth in fees. Regarding our divisions, as Hector mentioned, retail represents 50% of our group with flat revenues and stable returns. Consumer revenues, primarily in Europe and the U.S., are up by mid-single digits, and profitability has improved significantly, particularly in the U.S. Our Corporate Bank accounts for about 20% of our profits and 14% of our revenues, with revenue rising and profitability improving to 20%, aligning with our expectations for this year. Wealth is at 10%, and payments have seen significant changes due to restructuring. I believe this provides a detailed overview, and I don't have much more to add. Regarding the UK and M&A, I want to emphasize that we do not need to acquire companies to allocate capital to more attractive opportunities for Santander shareholders, where we can combine profitability and growth, which we are actively pursuing across our markets. In terms of capital allocation, as I mentioned earlier, we anticipate excess capital due to our higher profitability, and we maintain a strict and disciplined approach. Our first priority is profitable organic growth and investments in our current markets. Santander should be seen as a compounder of earnings, returns, book value, and distributions. Our second priority is ordinary dividends and distributions, including share buybacks. Thirdly, any inorganic growth must align with our strategic goals and deliver financial returns that surpass organic investments or buybacks. For the first time in ten years, we expect excess capital based on our projections. I want to reiterate that we have been proficient at predicting within a 2% to 3% range for the past decade. In reality, we experience very little earnings volatility. Any perception of volatility is not based on fact but rather on misunderstanding. Incremental capital that exceeds our target range will be returned to shareholders as additional remuneration. Lastly, I want to highlight that the framework in Europe is not conducive to cross-border M&A, which is why some of our competitors, lacking alternative profitable growth avenues, are focusing on in-market acquisitions, but that is not our strategy.

Can we have the next question, please?

Next question from the line of Antonio Reale from Bank of America. Please go ahead.

Hi, good morning. It’s Antonio from Bank of America. Just two questions for me, please. So you’ve introduced this new commitment to pay €10 billion buybacks over 2025 and 2026. You talked about shifting capital within the group rather than asset sales, and this has been an important part of your strategy. Maybe can you talk a little bit more about that point to give us a sense of the flexibility that you retain to shift capital across the group, meet your profit guidance and still achieve the buyback commitment should the macro picture worsen just to get a sense of the flexibility that you retain there on the capital optimization. And the second point, you’ve mentioned the group is highly diversified. You’ve given, I think, a very good overview of your expectations for 2025 across products. Can I just go back to Brazil? And could you share the same for the region. It’s a relatively large share of your group and it’s a market focus region, particularly dig more into the link between net interest margins, loan origination and affordability, ultimately reflecting cost of risk for Brazil and maybe the measures that you’ve put in place at your local unit to go through the cycling cycle, please. Thank you.

So I mean, just to give you some color on organic capital across the group. So we started working on this 10 years ago. We didn’t have the tools to manage regulatory capital. We’re always very good at managing economic capital. Today, we have a very dynamic capital allocation strategy. So we shift on a weekly basis where we put more or less capital, depending on the opportunities. Of course there’s a franchise consideration. I mean, why would we write lots of mortgages in Spain below 2% when I can get much better value in mortgages in Mexico. This is one of the reasons that giving guidance very specifically on countries is not something that we’re very keen on because we will deliver at the group level, and we’re making more and more profits, an increasing profitability because we are managing in a dynamic way. We do not have a crystal ball, right? We don’t know what the peers are going to. We don’t know exactly what the rates are going to be. So we managed this it reports to the Chief Investment Officer to the CFO and to the CEO who have topped down managing this with the global business in the countries. This is really the huge advantage you have with Santander, 87%, and we are prioritizing profitability ahead of growth. But as I said, 8 million customers, new customers in the context of focusing on profitability. Can you imagine, once we are at the levels and our operating platform is more competitive, which it will be, we can have organic growth for many years to go. So yes, that is what we do every day. That’s I don’t want to exaggerate, but every week. So going back to that, and I defer to Hector or Jose, but on Brazil, I think we’ve said. So Brazil as a country, I think Hector has said it, but if not, let me reiterate, we expect revenue to go up and more or less stable returns. That is where we see Brazil. But let me just be very clear that, as I said before, if you look at the retail business and how much of the retail business, which is 50% and the most sensitive one, to what rates might do or not, Retail Brazil is about 23%.

22%.

Retail Brazil constitutes 23% of the group's retail. Approximately half of Brazil's business revenue comes from non-retail sources, which are not influenced by interest rates. While cost of risk is important, we've been working on diversifying that aspect. Therefore, we expect Brazil to achieve similar profitability to this year, with increased revenues, and the 50% of the business that is not retail will be a key contributor to Brazil's performance this year.

To build on what Ana mentioned, it’s crucial to highlight that Brazil is where we are transforming our model. In terms of net interest income, it’s not the main driver anymore; instead, fees have taken the lead. We are focusing on deposits and fees. We have adjusted our portfolio mix, particularly in Mexico, which has made us more resilient to interest rate changes and reduced our sensitivity to higher rates through hedging. We are fully hedged for 2025 in Brazil. It’s essential for you to understand this. Additionally, the current yield curve adjustments have a smaller impact than we initially anticipated. As of December, a 100 basis point increase on the selling side would impact net interest income by about €120 million. We are well hedged, and our structure is in place. Regarding credit quality, while we remain cautious, our lending growth has been slower than our peers, and we have tightened our underwriting standards. We expect GDP growth to slow, but we maintain a positive outlook for the year. In an adverse scenario due to portfolio changes, we foresee a slight increase in the cost of risk compared to 2024, but this does not alter our overall risk outlook. This aligns with Ana’s previous comments; the impact is minimal and does not change the overall picture. Diversification is key for our group.

Thanks very much, Hector. Since we’re running out of time, can we take the last two questions, please? And the next question, please?

Last question from the line of Britta Schmidt from Autonomous. Please go ahead.

Yes. Thank you very much for taking my questions. Just to make sure that we interpret the payout guidance correctly in timing, I guess, is relevant here. You guide to a 13% CET1 ratio after 50% ordinary payouts and 60 basis points of regulatory headwinds. And you would consider dropping below that with excess distribution in 2025, but not to go below 12.5% pro forma. And then the second question is just on Brazil again, on the DTA or DTCs rather, why has the ECB now changed its view on this? Has anything been recorded in the Q4 CET1? And what is the maximum remaining risk here in an outpost decision? Or is the decisions maintained? Thank you.

Okay. Let me clarify that we will not go below 13% this year. Our goal is to operate at 13%, but we are allowing some flexibility based on the capital structure I mentioned, along with organic profitable growth, which we are eager to leverage for distributions. We are not relying on any inorganic growth for these distributions; everything we discuss pertains to organic growth and distributions, which will exceed our buybacks. Again, we aim to maintain a level around 13% while having some flexibility between 12% and 13%, but we will always be above 12%, which is our current position. Regarding the DTAs, I'll let Jose address that. We are contesting this because we believe in a level playing field. In Brazil, the assets are valid and represent a full claim against the government, while other banks in the country, whether U.S. or local, are treated differently. We believe this is not justified, and it is a matter of principle. The impact on our numbers will not be significant either way. Jose?

The deduction of Brazilian monetizable DTAs from capital was already taken in the fourth quarter. So if this ruling is not in favor, basically maintains ECB’s interpretation, there will not be impact. There will be no impact on capital.

Thanks very much, José. Very clear. Can we have the last question, please?

Next question from the line of Ignacio Cerezo from UBS. Please go ahead.

Hey, good morning, and thank you for taking my question. I’ve got two on the asset mobilization efforts. The first one is if you can give us some detail on the breakdown of those measures, both from a geographical point of view in terms of the loan books, basically, you’re using to accelerate capital optimization. And the second question is, if you have any internal limits in terms of how much you can do per annum? And if you can see any regulatory constraints in terms of amounts actually you can do at some point in the future? Thank you.

Around a third of our activities involve hedges, another third focuses on asset disposals, and the remaining third primarily consists of synthetic securitizations. We engage in these strategies across all regions, although synthetic securitizations are mainly found in developed economies with hard currency. As long as we are not the top holders or best tenors for some of the assets we originate, and there are buyers willing to purchase these assets below our cost of capital, we will continue mobilizing them. Last year, the average cost of equity for mobilizing assets was about 8%, compared to our cost of capital of around 14% or 15%. As this situation persists, we will keep mobilizing the assets. Moving forward, as we optimize our existing portfolio, the majority of our mobilization will be focused on new assets, which means you can expect a gradual decrease in the overall amount, shifting from the previous focus on the existing portfolio.

Thanks very much, Jose. With that, we are at the end of the Q&A session. I will hand back to Ana to conclude.

Thank you very much, Raul. Thank you, everyone. I want to emphasize that we are just beginning to tap into our potential as a group. We anticipate that 2025 will bring challenges and volatility. We are preparing for an exciting year, which may be rocky at times. We are very confident that our strategy is effective and that our model will enable us to perform better than our peers this year, even in what we expect to be a difficult year. Thank you again, and see you soon.

This completes our call. We look forward to catching up with all of you in our usual road shows, and we will reach out to anybody who didn’t answer, managed to ask a question separately offline as well. Thanks very much.