Banco Santander, S.A. Q1 FY2025 Earnings Call

Good morning all, and welcome to the Santander Q1 2025 Results Call. We are joined today by Hector Grisi, our CEO; and Jose Garcia-Cantera, our CFO. We will start with a brief presentation on our Q1 results and then open the floor for questions. Hector, over to you.

Thanks, Raul. Good morning, everyone, and thank you for joining Santander's results presentation. Today's presentation will follow the usual structure. First, I will discuss our results with a focus on the performance of our global businesses. Jose, our CFO, will provide an in-depth look at the financials, and I will finish with some closing remarks before we open up for questions. We have entered the last year of our strategic cycle ahead of schedule. Our capital allocation is enhancing our profitability to 15.8% post AT1, and our CET1 ratio is at 12.9%, with 87% of RWA generating returns above our cost of equity. Given our strong capital building progress, diversified earnings, and improving profitability, we will reiterate our target to distribute up to €10 billion to our shareholders through share buybacks for 2025/2026, pending regulatory approvals. We no longer set a maximum price for our buybacks, which reflects our confidence in the group's potential for profitability and value creation. Q1 was another record quarter for Santander, showcasing the strength of our strategy and the resilience of our business model. Profit reached a new record of €3.4 billion, 19% higher than Q1 2024, with growth across all our businesses. Backed by our solid base of 175 million customers, we are continuing to invest for the future through One Transformation and are making excellent progress towards a simpler and more integrated model. This has led to a 1-point improvement in our efficiency, and our ROTE rose nearly 2 points to 15.8%. Our balance sheet is robust, with a solid CET1 capital ratio and a 14.5% growth in dividend per share, despite depreciation across our footprint. Delving deeper, line growth saw revenue increase by 5% in constant euros, supported by a 4% rise in NII, excluding Argentina, which Jose will address later, and bolstered by record fees, which rose nearly double digits due to significant growth from our 9 million customers and the network advantages we are capturing through our global businesses. Additionally, expenses grew at a rate lower than revenue and inflation, highlighting the positive impacts of our transformation. We maintain our goal of achieving lower costs in current euros by 2025. Our net operating income has grown sustainably by 7%. Our cautious risk approach is clear in our strong credit quality trends, with cost of risk consistently improving quarter over quarter. Lastly, we need to address the different treatment of the Spanish banking tax, which we are now accruing quarterly through taxes this year. Even when excluding volumes, our results remain sustainable and less volatile than our peers because we primarily operate as a retail consumer bank, combining business and geographical diversification with a prudent approach in executing our transformation, which continues to enhance our operational leverage and structurally improve revenue and cost performance. The simplification and automation of processes, along with our active spread management, have already achieved 253 basis points of efficiencies since we began, exceeding our initial expectations. We're aiming for more than 70% of our revenue to achieve significant upside as we implement our platform improvements, targeting an additional 75 basis points of efficiency gains beyond our original goal of 100 to 150 basis points. The performance across our businesses has been strong, with all delivering revenue and profit growth. Retail's performance demonstrates our scale and the benefits of our transformation, which have notably enhanced efficiency. Our expertise allowed us to grow our U.S. franchise without altering the risk profile. Revenue increased by 8% to reach another quarterly record, driven by excellent performance in the U.S. and client flows, illustrating the advantages of our strategy. Wealth continues to grow robustly, improving both efficiency and profitability, while payment sectors are showing good activity trends reflected in double-digit revenue growth for both PagoNxt and cards. Higher interest rates benefit some retail franchises, while other segments like CIB, consumer, and some emerging markets performed better at lower rates. This diversification enables us to maintain consistently strong results and profitable growth across varying conditions. Overall, the year's late start, the execution of our strategy, and our business diversification position us to meet our profitability targets for the full year 2025. In retail, which is central to our banking operations, we are making strides toward becoming the leading bank. Process automation and enhancements in customer experience have seen us gain 3.5 million more active customers compared to a year ago. We have reduced our product count by 40% in the past year and by 51% focusing on the front book. Our digital sales have risen by 23% year on year, and our costs to serve have decreased by 5%. The rollout of our global platform is progressing rapidly, having integrated Gravity in Chile, which significantly enhances our digital channel performance. Retail profits have shown strong year-on-year growth, driven by solid revenue from both NII and fees across most countries, along with improved costs resulting from our transformation efforts. Looking ahead, we expect that our global platform rollout and improvements in consumer and customer experience will lead to additional customer growth and reduced costs in euros. In Consumer, we continue to focus on becoming the preferred choice for our partners and customers by delivering top-tier solutions and enhancing our cost competitive advantage across our presence. This quarter, we launched Openbank in Mexico with a comprehensive value proposition and opened a branch in Germany. In the U.S., we announced a multi-year partnership with Verizon, providing their customers with savings accounts. These initiatives are part of our strategy to gather deposits to lower funding costs, evident in our 12% year-on-year deposit growth while continuously enhancing our customer experience. Furthermore, we are working to grow and solidify partnerships, providing global best-in-class solutions integrated within our partners' processes. We are promoting the network effect and aligning our businesses with the group's operational model, becoming more agile through simplification and process automation. Costs rose in line with inflation, even after our transformation efforts contributing to double-digit growth in customer deposits. In CIB, we are developing a world-class business to better serve our corporate and institutional clientele while retaining strong advisory capabilities in the U.S. Revenue in CIB in the U.S. grew by 23% year-on-year, which is expected to enhance both group cross-border revenue and vice versa. Strengthening our position in core markets by leveraging our expert centers is reflected in a record quarter in global markets, with revenue also up by 23% due to our investments and the cross-selling opportunities with global transactional banking and global banking. Collaboration with other business units is crucial; CIB delivers FX solutions to retail, product development to wealth, and a full suite of products, including capital markets and advisory, resulting in a record high ROTE of around 22%, showcasing our focus on profitability and capital management. In wealth, we are focused on becoming the leading wealth and insurance manager in Europe and the Americas. In Private Banking, we're keen on expanding our fee business by promoting value-added solutions leveraging our top-tier portfolio advisory capabilities. We have established a new global family office team and expanded our ultra-high-net-worth global team to provide world-class specialized wealth management services. In asset management, we are advancing the implementation of an advisory model for retail customers across regions, supported by a global investment platform that enhances customer experience. In insurance, we're crafting a retirement solution as part of our integrated value proposition while expanding into high-growth areas such as health and motor. Collaboration with other sectors is vital for growth in wealth, and collaboration fees have increased by 10% year-on-year. In summary, these efforts support growth and high profitability levels. Profit increased by double digits driven by robust activity and double-digit fee growth across all three businesses. Our efficiency ratio improved by close to 1.5 points year-on-year, and ROTE is nearing 70%, placing us in an advantageous position on both sides of the value chain. In merchant acquiring, we are one of the largest acquirers in Latin America, Spain, and Portugal, balancing growth with profitability. Our net total payments volume continues to grow, managing over 16 million debit cards with authorization for over 160 million transactions monthly. Payment services had a strong quarter with double-digit revenue growth year-on-year in both cards and PagoNxt, and cost management led to a 30% profit increase. Lastly, PagoNxt's EBITDA margin has improved to around 29%, driven by Getnet, showcasing one of the top ratios among our competitors. We anticipate that cost efficiency and CapEx optimization will continue driving profitability in the coming quarters. Our strong operational and financial performance is enhancing profitability and fostering double-digit value creation for the eighth consecutive quarter. ROTE reached approximately 15.8%, up nearly 2 points year-on-year, reflecting high new business profitability levels. Earnings per share rose above €0.21 due to strong profit generation and a reduced share count from ongoing buyback programs. Consequently, we continue to enhance our value creation. In cash, EPS increased by 14.5%, reflecting disciplined capital allocation and the effects of our buybacks. Buybacks remain one of the most effective methods to generate shareholder value. Since 2021 and including the current buyback program, we will have repurchased 14% of our outstanding shares, yielding approximately 20% return on investment for our shareholders. I will now pass it to Jose, who will dive deeper into our financial performance.

Thank you, Hector, and good morning, everyone. Starting with the income statement as we normally do, we present growth rates. This quarter, there was a difference of around 4 to 5 percentage points between both mainly due to the depreciation of the profit of last year. As Hector said, our transformation continues to drive operational leverage. We had a strong top line performance with sound underlying trends as revenue grew 5% and reached a new record high for the fourth quarter in a row. Performance in costs is on track towards our objective for 2025. As you can see, Argentina introduces some distortions between different lines of the net interest income which is affected by a sharp decrease in interest rates, for around €600 million year-on-year. In other income, there is a benefit from lower hyperinflation adjustments for a similar amount. Cost of risk remained fairly stable in the quarter supported by robust labor markets and prudent risk management. Last year, we charged the temporary levy on revenue earned in Spain in full in the first quarter through other results. This year, it is charged in the tax line on an accrual basis, improving double digits, not only at the group level but also in almost all the global businesses. Finally, on the right-hand side of the slide, you can see the upward trend in profit, which grew 4% this quarter, on the back of positive customer activity. Please also remember that the last quarter, we had a full positive impact from the FX accounting of the Argentine peso. This also produces some distortions quarter-on-quarter that I will comment on during the presentation. This puts us on track to meet the target for the year we provided last quarter. This was underpinned by growth in several areas. All of our global businesses concluded with another record quarter in CIB, up 8% driven especially by global markets and our growth initiatives in the U.S. We grew 14% in wealth, with record assets under management and strong commercial trends. Payments was up 15% with double-digit growth in net interest income and fees, both in PagoNxt and cards on the back of higher activity. Retail and Consumer also showed very good figures. In retail, particularly due to strong net fee income across most countries and in consumer on the back of net interest income growth mainly in the U.S. favorable interest rate environment. More than 80% of the interest income comes from retail and consumer business, particularly evident in the U.K. and Mexico. This performance is slightly better than our guidance, however, as forward rate curves remain very volatile in all jurisdictions. We reiterate our guidance. We generated another record period of net fee income, reflecting our transformation efforts to promote services of strong activity with a higher share of more value-added services. Retail showed good performance across the footprint. CIB grew even further, up from record levels last year as we continue executing our growth initiatives, particularly in Global Banking in the U.S. and GTB globally. We had a 16% increase in wealth with strong growth in all business lines, backed by record assets under management. We had double-digit growth in payments, both in PagoNxt and cards, supported by high activity levels as net total payments volume increased 14% and card spending rose 7% year-on-year. As we guided in last quarter results presentation, this year, consumer is affected by the impact of a new insurance regulation in Germany, which has been offset by strong fee growth in other areas. This mention is key to understanding why we can continue to improve in every single market, leveraging our global businesses as we further implement the structural changes to our model. Retail and Consumer are leading our transformation, delivering structural efficiency gains with revenue improving and costs flat. These two businesses represent 70% further benefits of our One Transformation going forward. CIB, wealth, and payments are more fee-driven. Costs grew 6%, showing positive operating jaws with double-digit fee increases, as I have just explained. As a result, our efficiency ratio closed at 14.8% in the quarter, among the best we have reported in the past 15 years. The risk profile of our balance sheet remains low with robust credit quality across our footprint on the back of low employment and easing monetary policies in general. Loan loss provisions increased year-on-year, mainly due to our efforts to reduce NPLs and some deterioration in Brazil in the context of higher rates and inflation. Credit quality continued to improve year-on-year as reflected both in the P&L ratio being lower than 14%. So much of our portfolio has collateral guarantees and provisions that account for more than 80% of total exposure. Cost of risk dropped year-on-year to 1.14% and was fairly stable in the quarter. Retail and consumer represent 80% of the group's loan loss provisions. In retail, it improved year-on-year across all our main countries and was flat in the quarter, with significant improvement in Mexico compensating the weaker performance in Brazil. In general, we are seeing stable conduct both year-on-year and quarter-on-quarter with notable improvements in the U.S., where we are seeing favorable payment rates, higher car prices, and an improved labor market year-on-year. As of today, we are not seeing any significant deterioration in employment rates and our credit quality remains stable. Nevertheless, it is too early to make conclusions regarding the new geopolitical events, but as long as labor markets remain stable, our cost of risk target looks achievable. Moving on to capital. As you know, we have been working on improving our capital productivity and accelerating our capital generation for some time. This quarter, we delivered exceptional growth again, generating 10 basis points to 12.9% at the top end of the operating range we disclosed during last results presentation and already very close to our 13% guidance for 2025. We generated 33 basis points of net organic capital after having absorbed 24 basis points of profitable risk-weighted asset growth, while we had a positive impact from securities portfolios to compensate shareholder remuneration accrual, some regulatory charges, as well as to accumulate capital. Our disciplined capital allocation produced a new book return on risk-weighted assets of 2.8% in the quarter, equivalent to a return on tangible equity of 22%, well above that of our back book. All these actions explain the increasing profitability and great capital performance. That's all from my side. Hector, over to you.

Thanks, Jose. This year is off to a strong start, and we are on course to meet our 2025 targets, which we are reaffirming. Our business dynamics are solid, with revenue growth driven by all our divisions and fees increasing in the high single digits, while we also aim to reduce costs in euro terms. The cost of risk has improved and aligns with our target, as we grow our business profitably through organic means, manage shareholder distributions, and address some regulatory impacts. In the first quarter, which typically sees lower performance due to day count and seasonal factors in consumer activity and South America, our return on tangible equity grew year-on-year to 15.8%, positioning us to reach our target of about 16.5% by 2025. Overall, we see very positive trends that we expect to strengthen in the upcoming quarters, even amidst a highly uncertain environment. As Jose noted, our diversification becomes particularly valuable in times of instability, serving as a stabilizing force. This aspect is crucial and sets us apart from our competitors.

Thanks, Hector. Operator, could we have the first question, please?

We already have the first question from Sofie Peterzens at JPMorgan.

We think about net interest income going forward. We had across your core market. So if you could talk about the NII outlook going forward. And my second question would be, if you could just discuss how you got to think about it more organically and equally, how do you think about kind of your business areas? Anything that want to reduce your exposure to clearly lay around asset disposals and M&A.

First of all, I want to express our strong confidence in achieving our ROTE target of 16.5% even under the new economic conditions. Our business model demonstrates a high degree of earnings predictability, despite the recent macro volatility we’ve experienced. I want to reaffirm our net interest income guidance, even though the rate outlook is less favorable than we had previously expected. We anticipate a normalized rate of 16.3%. Therefore, we are optimistic about maintaining our trajectory. Excluding Argentina, we expect a slight increase in net interest income in constant euros and year-on-year in current euros, with end rates projected around 1.5% by the end of 2025. The current outlook stands at approximately €0.169, and I believe we can achieve this. It's also worth noting that our ALCO portfolio has grown to €152 billion, reflecting an increase of around €7.5 billion quarter-on-quarter. Most of our sensitivity to rates is concentrated in retail, which makes up 60% of our loan book, but we have balancing drivers. Consequently, I believe we have effective control in this area. Retail net interest income remains positive, despite a decline in the net interest margin, thanks to our hedging strategy. In Brazil, our outlook is improving, and we expected a peak of around €60 million, resulting in €120 million. We are continuing to manage proactively and are confident in delivering on our commitments. As for the speculation surrounding a potential transaction involving Santander Polska, I can inform you that it’s an excellent bank with a strong 22% return, and there is interest from various parties. We are currently in discussions with Erste regarding the possible sale of our 49% stake, and these discussions may lead to an agreement. Any transaction would ultimately be subject to closing conditions and regulatory approvals. If necessary, we will provide further announcements, but I would prefer not to elaborate further on asset disposals at this time. We have a fiduciary duty to evaluate all opportunities, and this is exactly what we’re doing. Jose, do you want to add anything?

Nothing. You explained very well. We've reduced net interest income sensitivity. We've continued with the strategy that we started last year. So right now, we have less than half the NII sensitivity we have in euros and in the Brazilian trade in our NII guidance even if rates in Europe go as low as 1.5% by year-end.

The next question comes from the line of Ignacio Ulargui from BNP Paribas.

Could you provide more details on how we should consider group cost evolution throughout the GRS? Should we expect this to be the run rate, or are there potential efficiencies that could lead to further declines in costs? Also, regarding DCB Europe, performance in the quarter has been somewhat challenging; how should we view the unit's performance for the year? How much of the current results should be seen as a one-off in the net profit for Q1?

In terms of cost, it's very important to understand what we're doing. Cost is a result of the strategy we have and the change of the model that we are executing right now, okay? It's important to tell you that we reiterate our guidance to deliver lower costs in current euros versus '25 versus '24 despite the potential inflation headwinds and the FX pressure in the current macro environment. Costs were 2% higher year-on-year in Q1 in constant euros, where they declined 1% in current euros. You have lower costs in retail, as I said, lower by One Transformation. It's very important for you to understand the operating leverage that we're generating in which the model is allowing us to generate actually more revenue while we maintain costs. It is also important to note that we are a consumer and a retail bank. And in that regard, that's exactly what we're working on to lower the cost of the operation. We're investing a lot in the platforms, and that also will allow us to basically have lower costs in the future. And you are only seeing the beginning of what we're doing. If you look in detail, our retail and consumer, as I was saying, 70% of the group cost is flattish and revenue grew in terms of the operational leverage that we're getting. CIB, wealth, and payments make up around 30% of the group cost in terms of everything that we're doing. We see sustainable fee income of around 13% year-on-year, and we continue to achieve positive operating leverage across the group. I do believe that we will continue to increment efficiencies in years to come, especially while the model is being implemented and where we are basically deploying all the platforms, which right now, I could tell you is probably what I would call a transition year because we're actually changing the engine at the same time we're flying the plane due to the fact that we have still some of our platforms working, and this is going to take probably the next 18 to 24 months. On DCB Europe, okay, it's important to tell you the facts. It's important to say, first of all, that NII continues to do very well and is on track to benefit from lower rates in the future. It's also important to say that market share is growing with the current OEMs that we represent. Fee income was impacted because of regulatory change in Germany, which we indicated last quarter if you remember. This has now been rebased by the regulatory changes. Impairments were higher, driven by a mix of items, including Germany, but we are not concerned about the credit quality remaining stable; however, returns will improve with lower rates. Remember that in the past, part of the stock is at lower rates that we are originating today. So that basically is helping us out. The cost of risk normalization and the potential macro model adjustments, especially in Germany, should peak in '25, all right? So I don't know if you want anything else or if Jose wants to add anything.

No. I think the NII was up year-on-year, which I think is a great performance. Our brands are doing very well relative to others. We're gaining market share. So I think the impact on fees from Germany is a one-off and it's a rebase of the fee line going forward. The return on tangible equity in the year was double digits, and we feel comfortable that we can keep improving the returns going forward.

Operator, could we have the next question, please?

Next question comes from Andrea Filtri from Mediobanca.

You confirmed you are negotiating the sale of the stake in your Polish bank. Can you tell us how you would intend to deploy the proceeds? By selling only 49% could the buyer eventually receive exemption from a mandatory bid on minorities? Second question on your digital transformation, which is proceeding ahead of targets. At what percentage of full delivery do you feel you are right now? And when will you be able to rightsize staff for the new business model? And finally, can you elaborate on the high other provisions in the U.K. and on the outlook for Brazilian cost of risk?

So I will take number 1, and then I will ask Jose to help me with the percentage of the full delivery and then we'll comment also on the U.K. and Brazil, okay? So in Poland, there is not much I can say at this point. As you know, we have a fiduciary duty as I said to review any offer that comes and we're exactly doing that. So as of today, there is not much I can tell you about what's going on. Once the transaction, if it evolves or not, we will basically give you all the details on banking system that we are developing everywhere. We are increasing the speed at which we are globally deploying, and it's important what I said just before, Andreas. We are not at the end yet. We are running the old platforms together with deploying the new platforms, and that does not help a lot in the cost, or in some cases, that is also because we are gaining market share and customers. We gained 9 million customers in a year. So that basically tells you that the model is working and clients are liking what we're doing. In terms of what we're doing in Brazil regarding cost of risk, I will be very brief, first of all. It is important to understand that we are taking actions to strengthen the balance sheet. As I explained last quarter, we're changing the mix towards lower-risk portfolios. It's less payroll and unsecured lending is down 10% year-on-year, and we're also increasing collateralized products, which are much better in terms of cost of risk but do not have those high margins that we have. We've also tightened our underwriting criteria. In a scale of 1 to 10, we moved from 6 or 7 up to 8 and higher. So it's exactly what I was telling you about. So what you're going to see is that over time, the Brazilian cost of risk is going to get better. Today, I would say that if you look at the rates, they went all the way from 2%, and we're almost going to get to 15%. So that affects a little bit of the portfolio in that sense. The calendar effect in DCB and the lower working days in the quarter impacted the loan renegotiations. However, in the end, we see better performance in retail, so we remain optimistic. All right? So in that sense, I believe that we have seen okay performance, and I believe the fee outlook in the next quarter looks promising as well. The U.K. is performing quite well, and we already mentioned what we're doing there, and we have seen a very good behavior in terms of all in all, the operations of the bank and the portfolio.

So about your second question on the percentage of full delivery on digital transformation, we estimate we are roughly halfway through the full rollout of our strategy, with significant improvements expected during the next 12 to 18 months as we continue to refine our processes and platforms. This will be an ongoing effort where we focus on the right sizing and efficiency.

Operator, could we have the next question, please?

Next question from Francisco Riquel from Alantra.

I would like to inquire about the U.S. performance, which has exceeded expectations in the first quarter. I have several questions to better understand the situation. The cost of funding is decreasing; how much of this is attributed to Openbank's deposit growth? The loan yield is increasing even with the lower rates, but I thought there was a move away from subprime rates. The cost of risk is decreasing, yet economic forecasts in the U.S. have deteriorated. Should we anticipate any model updates concerning IFRS 9 in the upcoming quarters? Additionally, can we project the first quarter's tax rate for the entire year? The net profit contribution of approximately €400 million represents a significant difference from the consensus forecast. How sustainable is this quarterly performance for the remainder of the year?

Okay. First of all, it's important to understand there is always seasonality in the U.S., and we have always a much better first part of the year towards the second part of the year. And that's mainly all the details of what you have asked. Firstly, I could tell you that we have set an adjusted ROTE target of 81 of 15%, okay? We believe the outlook of the U.S. business has not fundamentally changed. This is a 4% year-on-year performance in terms of the particular specifics, with regards to the funding cost being managed well. Just to tell you that we have €3.5 billion more in the past; also, it's important to tell you that the behavior has been much better than expected at around 60%, which is much better than we expected. It was all the way to 90%. It's still at around 60% to 65%. It's important to tell you that CIB build-out continues to be a significant driver for fee growth; we're talking about a 47% growth outlook for the U.S. and to get to the numbers that we have discussed.

Sorry, Paco, very quickly. The increase in the yield of loans, which year-on-year is 21 basis points, is coming because of the drop in low-yield loans in commercial banking and in corporate investment banking. In fact, our strategy is focused on positioning ourselves better in profitable segments.

Operator, could we have the next question, please?

Next question from Alvaro Serrano from Morgan Stanley.

I've got two questions, one on strategic growth priorities and the second on capital. You just discussed U.S., and I wonder if that's a strategic growth priority market for you. What I'm asking is, obviously, I realize Poland is up in the air, but if it does go ahead, you're going to be well above 13% CET1. From a strategic point of view, I just want to understand what the growth priorities are by market considering the discussions we're having. The second question points toward capital headwinds in the quarter. I guess this might be for Jose; is the 60 basis points still what you expect for the full year, and how many SRT or capital efficiencies have you achieved?

In terms of SRT, the market has not really been very much in a private credit market at prices which are a little bit better than the prices we had in the first quarter of last year. Total asset mobilization was around €2.8 billion, so significantly lower than before; we expect to see a substantial acceleration of asset mobilization in the second quarter already and towards the end of the year.

So Alvaro, going back to your questions in terms of capital deployment, first, it's very important to understand that the U.S. is a significant growth market for us. We are still very much concentrated on delivering that 15% ROTE. We will continue to deploy capital into the U.S. as long as it's profitable. It is very important, and I'm going to give you the hierarchy in terms of where we deploy capital. First, we will concentrate on organic growth, okay? Because the organic growth we've been having is above 20%. We will focus on our businesses and continue with the transformation. That is the best way to deploy our capital and achieve the best returns to our shareholders, which I believe we're delivering in a strong way.

Operator, could we have the next question, please?

Next question from Marta Sanchez Romero from Citi.

My first question is on the U.K. What is the rationale behind a potential spin-off of your motor finance business? We read something, but what is happening with that business? You've been rolling out Openbank. So how many deposits have you been gaining under that franchise? Just what you're seeing generally in terms of loan detection, etc. And if you were to do so, do you think you have the political clout and just the right size to buy anything without obstacles?

What we're implementing in the motor finance sector mirrors our approach in other regions. We are handling this in each of our units independently, which is essential for their unique funding. This is why we refer to it as the consumer bank, and Openbank is aligned with the consumer bank due to a widespread trend across various markets where we operate. You will see us persist with this strategy, as it is integral to our plans in Europe. DCB Europe has maintained its independence and has experienced considerable growth. Notably, we've discovered that this business can thrive without a retail bank. We have been successfully managing this combination in Colombia as well. We believe that operating independently is beneficial and enables us to expand into more countries. Currently, we are involved in 28 countries with our auto business and continue to be a significant auto lender, which we are committed to furthering.

In terms of Mexico, the Mexican business is impacted, not by the tariffs, but by what happens to the U.S. Mexico is very dependent on the U.S. economy. If the U.S. has a hard time, Mexico faces a harder time because a third of its GDP is U.S. exports. You're talking about above €500 billion in exports to the U.S. with a GDP of €1.8 trillion. However, the Mexican economy is doing quite well; it has a very good level of employment, and we have seen a very good behavior for our credit portfolio. The cost of risk is behaving much better than we expected. We have not seen a downturn in the local economy. The opposite, we have seen consumption doing very well. We are positive on Mexico, on growth, and on the long-term outlook.

Operator, could we have the next question, please?

Next question from Carlos Peixoto from CaixaBank.

Hi. Good morning, some of them have already been answered, but I would probably focus the discussion on when you throughout the year? And if I might extrapolate everything to the rest of the auto bank, whether ongoing uncertainties caused by tariffs and the potential downgrades of macroeconomic expectations could lead to a revision of provisioning model inputs? And could that trigger some sort of additional provisioning over the coming quarters?

I'll address both questions. In Spain, we previously indicated that net interest income might decrease by mid-single digits, around 6% to 7%. At that time, we anticipated the terminal rate in 2025 to be close to 2%. We've been actively working to reduce interest rate sensitivity by lengthening the duration of the ALCO portfolio, which consists of €34 billion in government bonds yielding 3.3% with an average maturity of 7 years. Additionally, we hold €61 billion in government securities across the eurozone. Even in the event of falling rates, we expect the impact to be minimal compared to the broader business environment. Regarding the cost of risk in Spain, we anticipate it will stay below 50 basis points as mentioned in my presentation. The primary factor to watch is unemployment and labor markets. While GDP figures need to be updated in our models, the influence of a downgrade or slower GDP growth is minor compared to the impact of unemployment. Therefore, as long as the labor markets remain robust, we do not foresee significant changes.

Could we please have the next question, operator?

Next question from Britta Schmidt from Autonomous.

In Brazil, I'd be quite interested in your thoughts on what you think about the new product payable initiative throughout which has received some pickup. Are you intending to participate in this? And how do you think this will impact competition and margins for personal lending business overall? And then secondly, could you give us the quotas for FX mortgage charges and also whether you've got any updates on the U.K. motor finance case or the numbers that you indicated in previous calls?

In terms of the U.K. motor, we believe we are in the right place. We haven't seen any reason basically to increase it, and we believe that around the number that we need to have fits us well. We don’t have any plans to modify it at this point.

I'll take the other two questions. In the U.K., we've seen volumes up 3% year-on-year and actually a substantial increase in net interest margin in the country. The yield on loans, in our case, which is mostly mortgages, was 3.83% in the first quarter of last year and is 4.19% in the first quarter of this year, indicating a substantial improvement in pricing and also better outlook for volumes. We are quite constructive on the outlook for activity in the U.K. On the liability side, the yield on deposits is down from 2.23% last year to 1.99% this year, explaining the very good evolution of the net interest margin in the U.K. Regarding Brazil, the new legislation on payroll lending will clearly widen the possibilities and make the market more attractive. It's extending the possibility to many other segments; however, we still don’t have all the details to fully assess its impact.

Operator, could we get the next question, please?

Next question from Cecilia Romero from Barclays.

Just a follow-up on Marta's question on Mexico. You gained approval for a banking license in Mexico this past month. Do you see any impact on the competitive landscape from this, especially for your digital bank in the country?

What I would say is, I think it's pretty good news for us that these players basically turn themselves into a fully licensed bank because they then have to comply with the same regulations we do. So in that regard, we are happy with their transition to becoming a fully-fledged bank. The competition right now in the market is very tough, and we believe that we have all the tools needed to be able to compete head-to-head against any competitor.

The next question, please, operator.

Next question from Ignacio Cerezo from UBS.

The first one is if you can give us some information on when we should be expecting you to make a decision on extraordinary capital distribution between '25 and '26, how that extraordinary distribution is going to be split between both years? Second one is if you can share the fully loaded capital number in the quarter, not just the Phase 1. And third if you can provide an update in terms of the hedging per unit you do in terms of FX for the P&L?

In terms of the extraordinary capital distributions, we will do as we see fit. We seem to be much more towards the year '26. The important fact we are focusing on now is primarily delivering the capital numbers. As Jose explained to you last quarter, once we absorb the regulatory items, we will continue to build up, and we will tell you exactly when the extraordinary capital distributions will occur.

About the fully loaded number. Again, I have to give you a range because the technical notes that the EBA will publish can have a substantial long-term impact. We're talking about 2030 to 2033. However, I would say that the fully loaded could range somewhere between 25 to 40 or 45 basis points. Today, we see moving towards the low end of that range, around 25 to 30 basis points refining our approach. Most of that impact will come in the next 3 to 5 years at most.

Sorry, Ignacio. I think we missed your hedging question. Would you mind repeating that?

Give us an update on how much the different units P&L are hedging for next year?

No, right now for 2025, everything is hedged. The expected profits from all countries, with the exception of Argentina, we cannot hedge Argentina, but for most for all other countries, the P&L is hedged. As you know, we always fully hedge the capital ratio, ensuring the excess capital using European capital rules in each country above the group's capital level, in this case, 12.9%.

Operator, could we have the last question, I believe.

Last question from Pablo de la Torre from RBC.

I had two more questions on the U.K. I think the first one was that Santander U.K. was a signatory to a letter to the Chancellor requesting the abolition of the ring-fencing regime here in the U.K. Could you please provide more color on what the actual financial impact you would expect from the ring-fencing regime being discontinued? And then more on the trends in the U.K. in the quarter and I guess could you just update us on the structural hedge and the shape of NII for the rest of the year that you see in the U.K.?

Okay. So let me take the second question first. The structural hedge is almost €110 billion at a yield of 2.47%, 2.5% to round it up. We expect NII to go up in the U.K. low single digits, in line with volumes also up low single digits. So generally, we maintain guidance that we gave at the end of the first quarter. The ring-fencing. We are convinced, not only in the U.K. but in Europe, that banks can contribute a lot more to improving competitiveness in Europe and the U.K. contributing to growth. We think that having a simpler framework to operate will help but applies both to the U.K. and to Europe. In terms of the impact this could have on us, it is negligible. So this is not a question of an impact in the near term. It's just that a simpler operating framework should help banks contribute more to improving productivity and growth in the U.K. and in Europe.

Thanks very much, Jose, for that. Thank you, everybody, for all your questions. The whole IR team is available ops. We thank you for your time, and wish you a very good day.