Banco Santander, S.A. Q3 FY2025 Earnings Call

Good morning, and welcome to Santander's Third Quarter 2025 Results Presentation. For the call today, we will be joined by Hector Grisi, our Group CEO; and Jose Garcia-Cantera, our CFO. Hector, over to you.

Thanks, Raul. Good morning and everyone, and thank you for joining Santander results presentation. We will follow the usual structure. First, I will go over our results with a special focus on the performance of our global businesses. Then Jose, our CFO, will then provide a detailed view of the financials, and then I will wrap up with some final remarks before we open for Q&A. Before we begin, a quick note that all figures in the presentation continue to include Poland until the disposal is completed. Q3 was another record quarter, reflecting the strength of our strategy and the resilience of our business model in a more demanding environment. Our quarterly profit hit a new record at EUR 3.5 billion, making 9 months '25 the best 9-month period ever, driven by strong revenue growth across the global businesses and our solid customer base, which increased by 7 million year-on-year to 178 million as we enhance customer experience by leveraging our global platforms. We achieved this while we continue to invest for the future through ONE Transformation, making excellent progress towards a simpler and more integrated model. This has enabled further efficiency gains and a 70 basis points increase to our RoTE to 16.1%. Our balance sheet remains also solid with a strong capital ratio, which ended the quarter with an all-time high of 13.1% and a robust credit quality. All of this drove a strong shareholder value creation with TNAV plus cash dividend per share growing 15% despite some currency headwinds. We are approaching the end of our '23-'25 strategic plan well on track to meet our targets. Thanks to our profitability and our disciplined capital allocation, which is further improving profitability. Remember that earlier this year, we raised our RoTE target to around 16.5% post-AT1, equivalent to above 17% pre-AT1 from our original Investor Day target range of 15% to 17%. At the same time, we're already operating with a CET1 ratio above 13%, clearly exceeding our original post-Basel III target of above 12% with 88% of RWAs generating returns above our cost of equity. Finally, after our latest inorganic transactions, we decided to accelerate the execution of our EUR 10 billion share buybacks and upgrade our target, so we announced that we expect to distribute at least EUR 10 billion to our shareholders through share buybacks for '25-'26, subject to regulatory approvals. Let's go now into our income statement. Our P&L remained very solid with profit growing double digits year-on-year, once again reflecting the strength and diversification of our model. We delivered strong top line growth with revenue up 4% in constant euros, supported by NII, which increased 2%, but especially by a new record quarter in fees, up 8%, supported by significant customer growth and the network benefits that we are capturing through our global businesses. At the same time, expenses grew below revenue, down 1% in euros, in line with our target, showing the positive effects from our transformation. This performance translated into solid growth in net operating income, again demonstrating the sustainability of our results. Our prudent approach to risk is also evident in our robust credit quality trends with a cost of risk that is consistently improving year-on-year. Overall, as we have shown over time, our results are sustainable and less volatile than peers even in a more challenging environment. We are ahead of our plan executing our transformation, boosting our operational leverage and structurally improving both revenue and cost. Simplification, automation and active spread management have already delivered 259 basis points of efficiencies. Our global businesses added 101 basis points and our in-house and global tech capabilities, another 88 basis points, exceeding the level expected by the end of '25. And there is still more to come. We see further upside as we stay focused on rolling out common platforms across Retail and Consumer while also capturing additional efficiencies from Wealth, CIB and Payments by leveraging our global network. And all this is something that is entirely under our control. All our global businesses delivered strong profit growth while we improved the group's profitability. Customer activity and diversification continue to drive revenue growth. In a less favorable interest rate environment, our CIB, Wealth and Payments businesses, which are more fee driven, are seeing increased revenue with fees up 7%, 19% and 16%, respectively. At the same time, some of our franchises and emerging markets performed better with lower rates. Our Consumer business is a great example with NII up 6% year-on-year. In addition, our customer focus and solid track record in active balance sheet management explained the resilient NII performance in Retail, which excluding Argentina, grew 1% year-on-year. At the same time, we're extracting the potential from our scale. Scale gives us efficiency and also the flexibility to allocate capital quickly, something very few others can replicate. Combined with our strict capital discipline and focus on profitability, this is driving higher RoTE which most of our businesses already above the targets we set for '25. It is this unique combination of customer focus, scale and diversification that enables us to deliver strong and recurring results, putting us in an excellent position to navigate the challenges ahead. In Retail, we are transforming the way we operate to become a digital bank with branches, combining cutting-edge technology with the expertise and proximity of our teams. We continue to digitalize and enhance customer journeys, driving double-digit growth in digital sales. A key milestone was the launch of the new app in Brazil that introduces conversational capabilities that we are now preparing to roll out across more countries. In cost, we are making the most of AI to speed up simplification and automation, which is reducing manual activities and allowing teams to focus more on customer interactions and value-added activities. As a result, dedication of teams to non-commercial activities has dropped by 17% during the last 12 months. We are progressing in the rollout of our global platform, Gravity. Our back-end technology is fully implemented in Spain and Chile, and we expect to deploy it in Mexico in Q4. Retail profit grew high single-digit year-on-year, driven by sound revenue performances across most countries. Costs declined in real terms and credit quality remained solid. In a more demanding environment, NII grew year-on-year, excluding Argentina, reflecting our focus on profitability and the disciplined margin management and fees rose 5%, supported by higher customer activity, our ongoing digitalization and improved customer journeys. We will keep scaling our transformation to boost efficiency and contribute to group's growth. By improving customer experience and simplifying operations, we expect to continue growing our customer base while reducing costs in euros. In Consumer, we continue to advance in our priority to become the preferred choice for our partners and customers by delivering the best solutions and strengthening our cost-competitive advantage across our footprint. Deploying global platforms is key to scale our business and reduce costs to serve. We recently announced the integration of Santander Consumer Finance and Openbank in Europe, a natural step that simplifies our business, reduces costs and improves our product offering. We keep enhancing our value proposition and Openbank is again a great example. In Germany, it now offers a new AI-powered investment broker. In the U.S. and Mexico, Openbank has attracted EUR 6.2 billion in deposits as part of our broader deposit gathering strategy. We continue to expand and consolidate partnerships, offering global best-in-class solutions with top OEMs. Zinia continued to grow, reaching record volumes during Amazon Prime Days and introducing installment payments for Amazon customers in Spain. Profit grew 6% year-on-year in a challenging context of weaker car registrations in Europe, driven by NII growth and solid cost of risk performance, especially in the U.S. We continue to prioritize profitability over volumes, lower funding costs and accelerating transformation while actively managing capital to maximize returns. We expect Consumer to be one of the drivers of the group's profit, supported by NII growth as the business benefits from lower rates and progresses in our strategy to lower funding costs, solid fee income performance as insurance penetration improves and further cost efficiencies as we accelerate our transformation. In CIB, we are building a world-class business to better serve our corporate and institutional clients across our footprint while maintaining our low-risk profile. Number one, we continue to deepen our client relationships and strengthen our position in our core markets, leveraging our centers of expertise and expanded coverage. This is translating into market share gains in the U.S. as we achieve greater relevance in the investment banking space. Number two, our enhanced capabilities are enabling us to capture significant opportunities across CIB, improving our cross-business value proposition and driving solid growth in our institutional franchise in Global Markets, where revenue rose 27% year-on-year. Even in a more challenging environment, CIB keeps on delivering solid results with profit up 10% year-on-year, supported by solid fee growth across business lines and exceptional performance of Global Markets early in the year. All of this, while we maintain one of the best efficiency ratios in the sector and a RoTE of around 20%, reflecting our strict focus on profitability and capital discipline. We will build on the capabilities developed in recent years to drive revenue growth in CIB across the group, driven by stronger connectivity across countries, products and businesses. In Wealth, we are building the best wealth and insurance manager in Europe and the Americas. Number one, in Private Banking, we remain focused on expanding our fee businesses and consolidating our global position through value-added solutions. We continue developing our new Global Family Office service, which after just 3 months of activity is bringing advisory services to our first clients in Spain who represent a total wealth of more than EUR 500 million. Number two, in asset management, we keep reinforcing distribution and investment capabilities in alternatives and streamlining our liquid product platform. Number three, in Insurance, we are focused on 2 new verticals: Life & Pensions with new products for senior customers in Brazil and annuities from Private Banking and affluent clients in Spain; and P&C, where we expanded our value offering to SMEs with new protection business products in collaboration with Getnet. Number four, collaboration with other businesses is a major growth driver for Wealth. Collaboration revenues have been a strong growth lever with PB and CIB working hand-in-hand from tailored capital market structures for ultra-high net worth individuals to new joint opportunities. In summary, all of this is supporting strong growth and high profitability levels. Profit rose 21% off the back of strong commercial activity and double-digit fee growth across the 3 businesses. Efficiency improved 1.3 percentage points year-on-year and RoTE is close to 70%, confirming wealth position as one of the most efficient and profitable businesses in the group. Finally, Payments, where we hold a unique positions on both sides of the value chain. In merchant acquiring, we're expanding our global platform with a single API to serve all our customers across our footprint and is now live across our 5 countries in Latin America, reinforcing Getnet's positioning in the region. PagoNxt Payments is leveraging the best proprietary technology to deliver account-to-account processing, FX, fraud detection and other value-added services. Volumes processed by our Payments Hub were more than 5x higher than last year. In Cards, where we are among the largest issuers globally with 107 million active cards, we continue to expand the business and deliver best-in-class products. As part of our debit to credit strategy to promote the benefits of using credit cards, this quarter, we launched Pay Smarter in 5 of our countries. We also kept strengthening the integration between Cards and Merchant Solutions, expanding our bundling proposition with Getnet in Brazil, which now joins Spain, Chile, Portugal and Argentina. Payments delivered a strong quarter, resulting in double-digit revenue increase year-on-year, both in Cards and PagoNxt with controlled costs, driving profit growth of more than 60% and improving PagoNxt EBITDA margin to 32%, already above our '25 Investor Day target with Getnet being one of the best among peers. Our strong operational and financial performance is driving higher profitability and double-digit value creation for the 10th consecutive quarter. Post-AT1 RoTE reached 16.1%, up nearly 1 percentage point year-on-year, reflecting our disciplined capital allocation strategy. Earnings per share rose 16%, supported by solid profit generation and fewer shares following buybacks. As a result, TNAV plus cash dividend per share increased 15%. We maintain our upgraded target to distribute at least EUR 10 billion to our own shareholders through share buybacks for '25 and '26, subject to regulatory approvals. Since '21 and including the program that is underway, we will have repurchased more than 15% of our outstanding shares, providing a return on investment of approximately 20% to our shareholders. I will leave you now with Jose, who will go into our financial performance in more detail.

Thank you, Hector, and good morning, everyone. I will go into more detail on the group's P&L and capital performance. Let me first remind you that as we always do, we are presenting growth rates in both current and constant euros. The difference was around 5 percentage points as of September, mainly due to the depreciation of the Brazilian real and the Mexican peso towards the end of last year. As the CEO explained, we are yet again reporting record results this quarter for the sixth consecutive quarter. Revenue grew 4% with a good cost performance in line with our objectives for 2025. Cost of risk improved in the quarter, supported by robust labor markets and our prudent risk management. There are several positives and negatives in the other results line, but the concepts that explain most of the significant drop in this line year-on-year are the write-downs in PagoNxt in the second quarter of last year and the temporary levy on revenue earned in Spain, which this year is being recorded under the tax line. For the last 2 years, we have reported a continuous upward trend in profit, which grew 3% this quarter in constant euros on the back of a resilient NII performance, cost under control and lower loan loss provisions. Total revenue increased 4% to EUR 46 billion, on track to meet our 2025 target, even with less favorable interest rates than initially anticipated. This growth was underpinned by customer activity and more than 7 million new customers. All global businesses contributed to revenue growth. Payments accelerated with revenue up 19% as both PagoNxt and Cards delivered double-digit growth in NII and fees, driven by higher activity. Wealth also maintained the positive trends from the first half with revenue rising 13%, supported by record assets under management and a strong commercial momentum. CIB grew 6% year-on-year, driven especially by Global Markets and our growth initiatives in the U.S. Consumer also had a strong performance, supported by strong net interest income growth across most of our footprint. And finally, in Retail, revenue rose even in a less favorable interest rate context, thanks to our active margin management and our increased focus on fees. The group's net interest income increased 3% year-on-year, excluding Argentina. Although the majority of the group's NII comes from Retail and Consumer, this quarter, most of our businesses contributed to the overall growth year-on-year, which was supported by active asset and liability pricing management. This is most evident in Consumer, both in Europe and the U.S. with improving loan yields and a funding structure with a larger share of customer deposits. Also in Retail, especially in the U.K., Chile and Mexico. Strong activity in Cards, particularly in Brazil, higher volumes and lower funding costs related to market activities and CIB on our efforts to adapt the sensitivity of our balance sheet to protect NII on the new cycle of interest rates. A good example of this is Retail, where net interest income increased across most countries in a less favorable context of interest rates. In the quarter, net interest income was impacted by the Argentine peso. Excluding Argentina, NII was flat and net interest margin declined only 4 basis points for similar reasons I just mentioned. This performance is in line with our guidance of NII going slightly up in 2025 in constant euros, excluding Argentina and slightly down in current euros. We believe net interest income is approaching its trough as we move into a more balanced environment with rates in Brazil expected to ease and lower rates in Europe likely to support consumer volumes and funding costs. Net fee income achieved yet another record period as the number of active customers continue to increase and our transformation promotes connectivity across the group, deploys high value-added products and services and delivers the best customer experience. Fees grew high single-digits, above our target for the year and well above inflation and cost. This was supported by positive activity trends, customer growth and a product mix that is shifting towards more value-added products and services. This shift is evident across all global businesses. Retail fees rose 5%, increases across most of our footprint. CIB increased 7%, up from record levels last year, boosted by an excellent first quarter and year-on-year growth across all business lines, particularly in Global Banking in the U.S. Wealth maintained strong momentum across business lines, backed by record assets under management. Double-digit growth in Payments, both in PagoNxt and Cards, supported by higher activity levels. As discussed in previous quarters, this year, Consumer is affected by new insurance regulation in Germany. Nevertheless, we saw a recovery this quarter, supported by our strategic focus on Insurance with rising penetration expected to translate into higher fee generation as activity accelerates. As we advance our transformation, enhancing customer experience and connectivity and continue to attract more customers, we expect a strong and sustainable fee performance. ONE Transformation is key to understanding why we are improving profitability in most of our markets, leveraging the connectivity that our global businesses provide. The improvements are already very evident. Our costs dropped 1% year-on-year in current euros, which translates into better efficiency levels already amongst the best in the industry. In Retail and Consumer, which are leading our transformation, costs are evolving very positively, down 1% in real terms, even with pressure on salaries in some countries and the upfront cost of rolling our global platforms. In CIB, Wealth and Payments, where we are investing, costs grew. However, they showed positive operating jaws with a double-digit fee increase, as I have just explained. This excellent performance resulted in a 5% rise in net operating income from already high levels last year, and our efficiency ratio improved to 41.3%, the best we have reported in more than 15 years. Going forward, we expect sustainable improvements in operational leverage as we further implement the structural changes to our model, especially in Retail and Consumer, which represent 70% of our cost base. The risk profile of our balance sheet remains low with robust credit quality across our footprint on the back of low unemployment and easing monetary policies in most countries. Loan loss provisions increased 5% year-on-year, reflecting the decision to reduce NPLs and also some deterioration in Brazil in the context of higher interest rates. Credit quality continued to improve year-on-year as reflected both in the NPL ratio and cost of risk. The NPL ratio was fairly stable at 2.92%. Remember that much of our NPL portfolio has collateral, guarantees and provisions that account for more than 80% of its total exposure. Cost of risk improved year-on-year and quarter-on-quarter to 1.13% despite the management actions I just explained. In Retail, cost of risk improved year-on-year across all our main countries and was steady in the quarter. In Consumer, cost of risk also improved both year-on-year and quarter-on-quarter as the excellent trends in the U.S. continued in the third quarter, even with the usual seasonality. U.S. auto has demonstrated to be a highly profitable and resilient business through multiple macroeconomic cycles. It continues to perform better than expected even after some normalization of the delinquency rate in line with our expectations with over 90-day delinquency at historically low levels, backed by strong labor markets and resilient used car values. Finally, our lending exposure to private markets is less than 1% of the group's lending exposure. We anticipate a stable cost of risk going forward, supported by stable labor markets. Moving on to capital. As you know, we have been working on improving our capital productivity and accelerating our capital generation for some time. Our CET1 ratio increased again to 13.1% and is now above the top end of our 12% to 13% operating range. This quarter, we generated 56 basis points of capital from attributable profit, which enabled us to accumulate capital after allocating some capital to profitable organic risk-weighted asset growth, mostly offset by asset rotation initiatives, compensating capital distribution charges for shareholder remuneration and AT1s and absorbing other charges, including some regulatory headwinds, which, as we discussed last quarter, this year will be lower than initially expected as some of them have been postponed to 2026 and some of the technical notes published by the EBA were more favorable than anticipated. We continue to deploy capital to the most profitable opportunities and leverage our global asset desks, mobilization capabilities to maximize capital productivity. Our disciplined capital allocation delivered a new book RoRWA of 2.8% in the quarter, equivalent to a return on tangible equity of 22%, well above that of our back book. Hector, back to you.

Thanks, Jose. In conclusion, these are great results. Good business dynamics and our business model supported solid revenue growth with fees rising high single digits while we reduced costs in euros. Cost of risk improved and remains in line with our target of around 1.15% at the end of the year. We grew the CET1 ratio again to 13.1%, exceeding the upper end of our operating range on the back of our strong capital generation, while we profitably grow our business organically and continue to reward our shareholders. Our RoTE improved and is on track to reach our target of around 16.5% in '25 and TNAV plus cash dividend per share keeps growing double digits. In summary, very solid results even in a less favorable environment than we initially anticipated, which makes us confident that we will achieve all our '25 targets. We expect to maintain the good trends supported by our focus on profitable growth as we deepen in our transformation in a context of resilient labor markets. We are building a stronger and more connected Santander to track the full potential of our unique combination of customer focus, scale and diversification. This is exactly what makes us confident that we will keep on growing and creating long-term value across different economic cycles. And the best is yet to come. Now we will be happy to take your questions. Thank you.

Thank you, Hector. Thank you, Jose. Could we go to the first question, please?

I have two questions. First, regarding your RoTE target of 16.5% for the year, will there need to be acceleration in the fourth quarter to reach that level? What will be the main drivers for achieving this? Don't you think revenue and net interest income have likely bottomed out this quarter, and we should see a more significant increase in the upcoming quarters? Or will fees be the main contributor to that performance? Additionally, how should we approach 2026 in that context? My second question is for clarification regarding credit quality in Brazil. There has been a slight improvement this quarter, and provisions have decreased. How should we view the cost of risk? Have there been any releases of provisions taken in the second quarter for the extraordinary top-up, or is this simply a reflection of the underlying improvement in credit quality and provisioning?

Thank you, Ignacio. First, let me touch on the RoTE of 16.5% of CET1 target. As you've noted, in the first nine months, we achieved a record profit with a RoTE of 16.1%. Looking specifically at Q3, the underlying RoTE is significantly above 16.5%, which is important to highlight. Additionally, we anticipate a strong Q4 performance driven by several factors. There will be seasonal higher fees, increased momentum from the ONE Transformation execution, and we are reaffirming our guidance of approximately EUR 62 billion in revenue for 2025. We are expecting lower costs and a cost of risk around 1.15%, along with other results around EUR 3 billion. I believe our strategy, business model, diversification, and disciplined capital allocation will yield the positive results we seek, enabling us to reach around 16.5%. It's also crucial to consider the disciplined capital allocation driving a 15% growth in value creation and enhanced shareholder returns, with a robust CET1 at approximately 13.1%. Furthermore, regarding the outlook for 2026, over the past two years, we have consistently executed our strategy and delivered RoTE above the 15% we had in 2022. We will provide more details during our Investor Day in February 2026. It’s important to recognize that every unit of the bank is showing improvement, and each global business is also on an upward trajectory. As mentioned before, we are only beginning to tap into the potential of the ONE Transformation. Our goal has been to become the best bank in each geography, and currently, we are best-in-class in five areas, but still have five more to bridge the gap with the market leaders. This perspective suggests we will continue improving. Additionally, 2026 will be a transitional year due to the impact of Poland, which will reduce net profit by EUR 700 million, and the TSB contribution is expected to enhance once we advance on the integration. The current cost base is elevated due to the shift towards global platforms, resulting in some cost duplication. Nonetheless, I am optimistic about 2026. In terms of... Sorry, Jose, go ahead.

I also want to discuss the cost of risk in Brazil. In the last quarter, loan loss provisions decreased by 9% compared to the previous quarter. The 12-month cost of risk remained stable at approximately 4.71%. Over the past two years, we have reduced risks on our balance sheet, which we have communicated every quarter. This was achieved by significantly reducing unsecured and less profitable lines, like personal and payroll loans, which we previously mentioned as part of our strategy to change the mix, and this is beneficial for us. However, we are dealing with some of the highest rates in the developed world, with real rates at 10%, creating challenges for businesses, especially in agribusiness and corporate sectors. It is indeed a tough environment. We are optimistic that rates will decrease slightly during the first quarter, which should support credit quality, volume growth, and earnings in an improving macroeconomic context that we have observed. Even with the current rates, Brazil is projected to grow around 2% this year. We hope that by the end of 2027, rates will fall to 10.5%. Jose can provide more details.

Yes. I also want to talk about cost of risk in Brazil. Look, in the quarter, loan loss provisions fell 9% quarter-on-quarter, okay? 12-month cost of risk remained stable at around 4.71%. Over the last 2 years, we have derisked the balance sheet as we have been explaining to you every single quarter. With a rapid contraction of unsecured and less profitable lines such as personal and payroll loans that remember that I explained to you that we were changing the mix, and that's basically helping us out. However, I mean, we have rates that are the highest in the developed world.

No, no, cost of risk in Brazil.

Yes. Yes, I also want to talk about cost of risk in Brazil. Look, in the quarter, loan loss provisions fell 9% quarter-on-quarter, okay? 12-month cost of risk remained stable at around 4.71%. Over the last 2 years, we have derisked the balance sheet as we have been explaining to you every single quarter. With a rapid contraction of unsecured and less profitable lines such as personal and payroll loans that remember that I explained to you that we were changing the mix, and that's basically helping us out. However, I mean, we have rates that are the highest in the developed world.

Just to add, if you look at cost of risk on a quarterly basis, in 2024, cost of risk was 4.5% every quarter. In the first 2 quarters of this year, we had cost of risk of 4.9%. It's back to 4.5% in the third quarter. There's nothing extraordinary, no reversal of provisions or anything. So it's a more normalized asset quality level, the one that we've seen in the third quarter. And we would expect to finish the year within the range that we guided you for, which is somewhere between 4.7% to 4.8% or around 4.8% cost of risk.

The first one is on capital. You have guided for around 20 basis points of regulatory headwinds, if I'm not mistaken, for the rest of the year, which now obviously looks like it will come in Q4. Is that still the case? Considering Q4 is typically a more intensive risk-weighted asset quarter and that there could be an additional hit from U.K. motor provisions. How comfortable are you with the 13% CET1 target? And then my second one is on corporate actions. For the Santander Bank Polska sale and the TSB acquisition, is everything still on track to be closed by year-end and early 2026, respectively? And is there any change to capital impacts or any of the financial impacts previously announced?

Thank you, Cecilia. I'll address your second question. Regarding Santander Bank Polska, I review the progress on that every week, and I believe we are on track to close in the first quarter. As for capital, I will ask Jose to provide you with his overview of what you asked.

The outlook for regulatory and supervisory charges has improved, as I mentioned during the presentation. Some charges we anticipated this year have been postponed and are likely to be lower than expected, now scheduled for 2026. Additionally, some technical notes and model adjustments have turned out better than anticipated. Overall, I expect regulatory and supervisory charges to be around 20 to 25 basis points for the year, with 16 basis points recorded in the first nine months. Regarding our targets, we expect to generate capital in the fourth quarter, building on the 13.1% ratio reported in September. We anticipate that the capital ratio will continue to increase in the fourth quarter. As for the capital charges related to acquisitions, there are no changes. We expect Poland to contribute about 90 basis points of capital, though this could vary depending on deductions. The acquisition of TSB is projected to incur a capital charge of around 50 to 52 basis points. Also, we previously announced a share buyback of EUR 3.2 billion upon closing Poland, which accounts for about 50 basis points. These capital charges from the transactions have not changed over the past couple of months, and we do not expect significant alterations from the figures I provided.

My first question is on NII in Spain, which is 1% up quarter-on-quarter. You were guiding for a decline. You already improved the full year guidance from minus 6%, minus 7% to minus 4%, minus 5%. So I wonder if you can update again on this guidance because I think I feel trends are better than expected and comment also on the margin dynamics. I see the customer spread is down, but NIM is stable. So what should we expect for NII loan growth in Spain in Q4 and in 2026? And then my second question is, I wonder if you can update on the rollout of the Gravity platform. You have recently completed in large markets like Spain and Chile. I wonder what type of efficiency and productivity gains are you capturing already? And what shall we expect on a full-year basis?

Thank you, Francisco. Yes, NII in Spain has significantly improved, and the Spanish team has excelled in managing betas. As Jose mentioned in his presentation, we have performed well in this area, which is reflected in the 1% increase in NII. We anticipate a low single-digit growth for the fourth quarter, building on our expected flat performance. Looking ahead to 2026, we see positive dynamics; however, we encourage you to wait for our Investor Day presentation for a clearer picture of our expectations. Regarding the Gravity rollout, I'm pleased you brought it up. We recently completed the migration in Mexico, another major market. Once we migrate a country to Gravity, we begin to shut down the mainframes. For instance, we migrated Spain in April, where we previously had five mainframes, and we have already shut down two, with plans to close the remaining three in the next 18 months. This process significantly reduces costs as it eliminates supplier charges. While I don’t have precise numbers to share right now, I believe that by the end of 2026, all major countries will be transitioned, allowing us to start with smaller countries. The results so far are promising, with an improved NPS from customers and enhanced speed of service. For customers, the experience is much quicker as we no longer need to revert to the mainframe for every balance inquiry. Spain has seen reduced costs, and the response in Chile has been very positive. The successful migration in Mexico will lead to immediate reductions in mainframe capacity, and we expect to see further results in 2026 when we shut down the mainframes in these markets.

Sure. I want to provide some additional insights on net interest income. You inquired about the distinction between customer margins and net interest income. We are performing well in managing deposit costs, even better than expected. We are increasing volumes at a lower cost. This is one aspect compared to our initial guidance at the start of the year. Additionally, the hedging decisions we've made are significant. Currently, we hold about EUR 50 billion in Spanish government bonds with an average yield of 3.4% and a duration of 5 years. This is anticipated to contribute significantly to net interest income in the fourth quarter and into next year. Sequentially, as I mentioned, we are nearing a low point. We might observe a slight decrease quarter-over-quarter for one or two more quarters, but it will be very close to flat, possibly slightly down. Looking at the whole year, we initially predicted a decline of 6%, then 4%, and now it seems we will end up flat or with a slight decrease year-on-year. However, the outlook for 2026, after these one or two quarters of potentially minor declines, is quite positive.

Here is Sofie from Goldman Sachs. My first question is about the litigation provisions that are still pending. You made a provision in the Corporate Centre in the fourth quarter. Can you provide any additional details about this provision? How much should we anticipate from the U.K. motor and AXA provisions? Are there other litigation provisions we should expect from different countries in the upcoming quarter or year? My second question is regarding the net interest income outlook in Brazil. I understand that interest rates are projected to decrease. In the short to medium term, what do you foresee for volume growth? Could you remind us of your rate sensitivity in Brazil? Additionally, how long does it typically take for lower rates to impact Brazilian net interest income?

Thank you, Sofie. First of all, regarding the litigation provisions, we do not anticipate that the net impact of the judgment concerning the U.K. AXA situation will significantly affect the group. In October 2022, the court allowed Santander to appeal, and the case will proceed to the Court of Appeal. Since this matter is ongoing, we cannot provide further comments at this time. As for the U.K. motor finance, in 2024 we set aside nearly GBP 300 million for the U.K. FCA motor finance review. Recently, the FCA published a consultation regarding a proposed redress scheme, and Santander U.K. is analyzing this consultation closely to understand the potential implications. It is important to note that the FCA's proposed approach varies significantly from the Supreme Court's decision, and the legal basis for the redress scheme's relevant period is unclear, as it is still in the consultation phase. Therefore, there is uncertainty surrounding the final scope, methodology, and timing of the redress scheme that may be implemented. At this point, it remains quite complex, and I can assure you that it is not expected to materially affect the group, contributing no more than a few basis points to CET1. We will provide further updates with the Q4 results, and we reaffirm that we are on track to meet the targets and guidance we set for 2025. In terms of the net interest income outlook for Brazil, it's essential to understand Brazil's context. The loan book in Brazil represents only 9% of the total group loans, highlighting the benefits of diversification. The effects of higher interest rates and inflation in Brazil have been positively balanced by better performance in Europe and other sectors. Additionally, Brazil is projected to grow by 2% in 2025, with resilient labor markets despite a challenging interest rate environment. As I mentioned earlier, we are dealing with very high real interest rates, which is a crucial aspect to consider. We are adjusting our focus towards a higher quality business, which may yield lower margins but will ensure more stable asset quality. I am confident that as monetary policy eases, we will outperform our previous performance in the last easing cycle. It’s also important to remember that we are negatively sensitive to high rates in Brazil. Once rates decline, we expect this to positively impact our margins. Jose, would you like to add anything?

Certainly. As of today, the sensitivity to a 100 basis point change in the interest rate curve is EUR 75 million in both directions. This figure is lower than what we've seen over the past few years, as we have been working to decrease our overall sensitivity. More significantly, we have aimed to achieve a more uniform sensitivity across the curve. This means we are less reliant on short-term rates and have a spread sensitivity ranging from 0 to 3 or 4 years, which we believe positions us well in anticipation of lower rates next year. We expect net interest income to remain stable in 2025, with overall revenue steady and an increase in fees, particularly from loans, which we also foresee being stable in 2025. Looking ahead to 2026 and 2027, we anticipate that our existing sensitivity will contribute positively to the evolution of net interest income in Brazil over the next few years.

I have a follow-up regarding costs and U.S. asset quality. On costs, we are seeing an improvement in the cost-income ratio quarter-on-quarter. I also wanted to follow up on what you mentioned about the Mexico Gravity implementation over the weekend. Could you share the pipeline for the upcoming countries in the next few quarters? As we consider costs for next year in the medium term, you've previously mentioned the possibility of achieving flat costs, particularly in retail. Is this achievable in Brazil and Mexico? I ask because your cost-income ratio in Mexico is not as strong as that of your peers, leading me to wonder if there's an advantage we might not be considering. Regarding costs, I noted your comments on stable asset quality performance in the U.S. However, looking at the ABS data as a whole, there seems to be a deterioration, particularly in the subprime auto sector, where you have some exposure. Can you explain why you believe you're not experiencing this deterioration? Is it due to limited growth in that segment over the past couple of years or perhaps because you're not exposed to undocumented borrowers who might be facing challenges? I'd appreciate more insights on the stable asset quality performance in the U.S. that you've mentioned.