Santander First Q 2018 Earnings Conference Call Webcast Presentation. As normally we do, our group CEO will address the group performance for this first quarter of the year. Our Group Chief Financial Officer will address in more detail business areas performance, again for the first quarter and, obviously, our CEO just ahead of the Q&A session will conclude the presentation. With no further delays, José Antonio, the floor is yours. José Antonio Álvarez Álvarez: Thank you, Sergio, and good morning to everyone. Thank you for attending this first Q results presentation. The first area I want to share with you is that we are well on track to reach our targets for 2018, the targets we established almost three years ago. This is the first area that I want to tell you. The year I will say started with making good progress in our commercial transformation. Our commercial transformation, as you know, we put out the emphasis in growing both the loyal customers and the digital customers, and we are progressing well on this regard. At the same time, the customer satisfaction and the operational excellence, that is a combination of cost, income and customer satisfaction is progressing well. We are able to translate this good behavior on the customer side into results. As you see in the numbers, the profit year-on-year grew 10%, 22% in constant terms. If we exclude the perimeter, probably - the Popular, probably were growing in constant numbers at around 15% and with group progress compared with the previous quarter and the previous year. As a result of this our return on tangible equity is 12.4%, and we are generating - we are strengthening the balance sheet, generating capital. We generate organically in the quarter 9 basis points. I will elaborate later on as we…

Thanks, José, as well. Indeed, we have now plenty of time for your Q&A. I will appreciate if you introduce yourself and stick to two, three questions max per analyst. Please go ahead.

Thank you very much. Ladies and gentlemen, the Q&A session starts now. [Operator Instructions] Thank you. The first question comes from Francisco Riquel from Alantra Equities. Please go ahead, sir.

Yes, hello. Francisco Riquel from Alantra Equities. A couple of questions for me. First, on capital. Regarding the change in the regulatory treatment of the SCUSA minorities, I wonder if it could not be more efficient to buy out the minorities. If you can share your views with us on this. Second, you are including in the pro forma capital ratios the profit from the sale of the noncore assets from Popular, TotalBank we think. And I wonder if there is any negative to come, for example, from the winding of the rest JV's of Popular. You can also update on this. And also, a clarification, whether the 11% target for the full year, if it is assuming IFRS 9 on a fully loaded basis or not. And if so, how do you plan to offset for the shortfall of the new regulatory headwind, if you - we should expect a faster organic generation or if there would be any asset that that could be up for sale? Thank you. José Antonio Álvarez Álvarez: Thank you, Francisco. The three questions were related with capital, yeah. So the first question was about SCUSA minorities and up to what point. There's an arbitrage of capital there. Naturally, there is, but we don't have any plan to do anything in relation with this stake. The pro forma capital ratios with the joint venture from Popular, I provide the data of the agreements we already signed. When we made progress in the remaining agreements, we provide you the maybe negatives, maybe positives, depending on the final agreements with the partners in the remaining issues we have - issues, joint ventures that basically is insurance, asset management. And it comes to my mind, acquiring, yeah, acquiring businesses is the other. At the same time, remember that we continue to dispose real estate assets and all the real estate disposal on the other side and probably some capital generation coming from those estates. The 11% target was established before IFRS 9, was established in 2016. Well, our organic generation, we continue as there is no reason this year to not to think that we want to continue to generate in the region of 10 basis points per quarter on average and maybe quarters in which we are generating more, maybe quarters in which we generate less, but this is the average. Probably you ask me going forward and the macroeconomic situation remains, probably we should expect at some point faster growth. And our organic capital generation, if that's the case, will get reduced. But this year, I see to continue with the same organic capital generation.

Thanks, Francisco. Next question, please.

Thank you very much. The next question comes from Alvaro Serrano from Morgan Stanley. The floor is yours.

Hi. The first question is on Spain fees and NII were down. You explained the ALCO contribution. But, in general, I would expect maybe fees to be bit stronger given Santander Asset Management was being integrated. So the question is how's the integration of Popular affecting the franchise? Have you seen more attrition in revenues than you expected before? And the second question is on the U.S. After sort of overcoming some of the regulatory restrictions, there was supposed to be quite a lot of cost-cutting potential in compliance and other sort of general integration of the bank. But the costs are up, and in particular, in the retail bank they're up quite a lot. So maybe can you give us an update on how is the turnaround to the U.S. going and what kind of profits could we expect this year for the whole of the U.S. franchise? Thank you. José Antonio Álvarez Álvarez: Okay, first question about Spain NII and fee income. In the quarter, well, probably the quarter has, as José already elaborated, has some impacts both in NII and fee income. NII, the disposal of the ALCO portfolio, the ALCO portfolio is much more than it was. And customer NIM is basically flat. And we - I think that we have room for a - even in a highly competitive market on the asset side to reduce our funding costs, and to have a NII basically improving little bit in the coming quarters in this environment that as I said is highly competitive. When it comes to fee income, you mentioned a couple of hypothesis of what's going on in attrition, revenues and all these things. Now, this is much more simple than that. We expect for the whole year, including SAM, the Asset Management to…

Thanks, Alvaro. Next question, please.

Thank you very much. The next question comes from Sofie Peterzens from J.P. Morgan. Please go ahead.

Yeah, hi. Here is Sofie Peterzens from J.P. Morgan. I had a question on Brazil. We have elections there later this year. What's your view on the Brazilian elections? And do you have - do you believe it will have any impact on loan growth margins and asset quality? And could you just reiterate and do you still believe that you can reach around 400 basis points cost of risk in Brazil? And my second question was on UK. NII was reasonably weak, but NIM was flat this quarter. So could you just give us some guidelines on what drove the net interest income weakness? And you also mentioned that you didn't take any PPI provisions in the first quarter, but should we expect any further PPI provisions later in the year? Thank you. José Antonio Álvarez Álvarez: Okay. The first question in Brazil is, what you say is basically absolutely true. We have Brazilian elections in - presidential elections back in - well, in October, in the next month of October. Probably it's too early to make an elaboration, because we don't know even the - which candidates are going to have the main parties, meaning the parties that are sent to the right, that traditional is the main candidate is probably too early to say. We know some candidates and all the polls are reflecting basically the candidates that are already known. But we don't have a stated quality in this. But more on that, as José said, economic situation is Brazil has improved significantly, and we are seeing this in the business. We are seeing more in the retail arena than in Global Corporate Banking and corporates. So we are seeing significant growth in the retail. We are not seeing that yet in the corporate and GCB.…

Thanks, Sofie. Next question, please.

Thank you very much. The next question comes from Britta Schmidt from Autonomous Research. Please go ahead.

Yeah, hi. I've got two questions, please. Coming back to Brazil, the loan yield increased quite strongly this quarter and net interest income is performing well. Could you help us break it down a little bit, how much of the improvement was down to the mix shift and how much is down to potentially assets with pressure coming from the interest rate environment? And then the second question I would have is in terms of refinancing. Could you give us a little bit of an idea as to how the TLTRO-II maturities fit into your refinancing strategy and how you're going to confront this over the next couple of years? Do you intend to replace it with some GCB financing? How much of that do you think will be replaced by TLAC issuance? If you could give us some idea here. Thank you. José Antonio Álvarez Álvarez: First question - I will elaborate on the first question, the second one I pass to José on the TLTRO. In Brazil, the fact is that we are gaining significant market share across-the-board, particularly in retail. So you look at the number, well, our market share is growing significantly in car lending, where our market share is north of 20%. We've been gaining market share the last two years and we'll continue to gain market share. Also, we continue to gain significant market share even faster than in car lending, in payroll-based lending, what is called their Crédito Consignado. And those are the two main drivers of the growth of the loan book, the car lending plus Crédito Consignado. Also, we are growing in mortgages, how to - starting from very low levels. The production more than doubled, but starting from very low levels. So it's about gaining market share in these segments.…

Thanks, Britta. Next question, please.

Thank you. The next question comes from Jose Abad from Goldman Sachs. The floor is yours.

Yeah. Hello, good morning. Three questions, very brief, on Spain. The first one is on the integration of Popular. You announced this morning the acceleration of the process. Could you give us an update on the size and timing of branch closures of Banco Popular, whether actually the announcement this morning is changing this in any way? The second is that I think you referred to the Spanish competitive environment as very, very competitive. So - but is this actually changing towards more competitive lately or to a bit less competitive lately? And we have probably a little evidence of a number of actual local players being a bit more aggressive lately. But I'm not sure whether this is just anecdotal or this is only that you are actually - that you are actually seeing. And I mean, maybe on volumes, what you are seeing in trends in terms of actually demand would be interesting. And the last thing is actually on Spain is that, obviously, you made this big acquisition. Actually, Banco Popular last year, you are the number - well, the largest bank actually in Spain, domestically. So could we say that you have no plans - you are closed for business when it comes to making further acquisitions or you are still open to analyze potential targets if the conditions are the right ones? Thank you very much. José Antonio Álvarez Álvarez: Well, starting first question, Popular integration, we just - we announced today the absorption of Banco Popular. This is going to take place by the fall, around the fall. There is some anticipation here. Well, as I already said in the AGM, if we establish, in my mind, we have like three steps, the third quarter integration that was already done and it's about to…

Thanks, Jose. Next question, please.

Thank you very much. The next question comes from Rohith Chandrarajan from Barclays. Please go ahead.

Hi, good morning. It's Rohith Chandrarajan from Barclays. I'll likely just follow up actually with a couple of questions on NII in Brazil and the UK. So I just to follow Britta's question, actually. So the loan yield in Brazil was up 23 basis points in the quarter after several quarters of sequential declines. It would be really helpful actually, because that's quite a big step change to understand how much of that is makeshift and how much is kind of right-driven repricing pressures. So I guess, thinking about the outlook, particularly on the loan yield side. And then in the UK, the loan yield was up a few basis points again. Having been in decline, particularly with the SVR repricing, do you now think that's pretty much done in the UK? And then, I guess, market expectations in terms of UK rate rises have been pushed back a bit, but when we do get a rate rise in the UK, how do you think loan and deposit pricing would react? Thank you. José Antonio Álvarez Álvarez: I'm going to elaborate on the UK side and I pass to José to go into the details of the yield on loans and the deposit cost in Brazil that allow us to increase our NIM. In the UK, all the comments I made before were done under the assumption that we're going to have 1 increase in rates, 25 basis points this year in the UK, no more than 1. This will help a little bit on the net interest margin, not that much, because the size of the increase is relatively small or the size of the increase we expect is relatively small. But the higher the increase in rates, the more positive impact because the bank - the position of…

Thanks, Rohith. Next question, please.

Thank you very much. The next question comes from Ben Toms from RBC. Please go ahead, sir.

Good morning. Thank you for taking my questions. There was a decline in UK deposits in the quarter. Can you just talk me through the drivers here, please? And secondly, in your presentation, you note volumes in Spain being hit by outflows in large companies and institutions. Can you elaborate a little more on that as well? Thank you very much. José Antonio Álvarez Álvarez: Do you have any? José Antonio García Cantera: Nothing on… José Antonio Álvarez Álvarez: Deposit scene in UK well, we come back to you and we'll elaborate on this, because I - nothing in particular comes to my mind. José Antonio García Cantera: It's seasonal, it's seasonal. The quarter is in seasonality. José Antonio Álvarez Álvarez: So while in Spain, naturally - well, in the more - we are reducing the deposit cost, the funding cost, both in Popular and Santander, yeah. So we change the 1|2|3 conditions back in February. The impact should be around $100 million in the year, in the whole year. So we are starting to see this. And I do expect the funding costs in Spain, both in Popular and Santander, getting reduced, particularly in the case of Popular. Some of the institutional and big accounts money, we are not paying for those deposits at all as we are running significant excess liquidity. And as a result of this maybe some of these flows went out. But when we speak about, let's say, stable deposits or retail deposits, including in retail SMEs, somehow operational money from corporates, we are doing well. We are doing well in Spain. I'm pleased with the developments we are seeing in this regard.

Thank you. Next question, please.

Thank you. The next question comes from Marta Sánchez from Bank of America Merrill Lynch. The floor is yours. Marta Sánchez Romero: Hello, good morning. I've got three questions. The first is one your ALCO strategy in Spain and Portugal. Are you replacing the bonds that you're setting? Are you building a healthy maturity portfolio? Are you worried about the effect they bring could have on Spain's credit spreads? And if you could provide an update on any of the sensitivity to moves in interest rates and credit spreads, that will be helpful. The second question is Santander Consumer. The cost of risk has doubled from last year. Is this a reflection of IFRS 9? Are you still benefiting from disposals of write-off portfolios? Where do you see the recurring cost of risk here? And the third one is a follow-up on the mix shift in Brazil. How is growth in the consumer lending portfolios that you've mentioned affecting the structural cost of risk in the country? Thank you. José Antonio Álvarez Álvarez: Can you elaborate on the ALCO strategy? José Antonio García Cantera: The ALCO, we right now have around €30 billion of ALCO portfolio in Spain. With a yield of around 100 basis points on an average maturity of three years, we have replaced - we sold close to €10 billion. We've replaced already four. Our idea is to have a sort of neutral - gradually neutral impact on margins. And that's why we've been talking about a recovery of the net interest margin in Spain as the year proceeds. No major change there, I mean, it's - the portfolio exists to cover interest rate risks. As interest rates go up, we are very positively geared towards higher rates in Spain. A parallel movement in the interest rate…

Thank you, Marta. Next question, please.

Thank you very much. The next question comes from Daragh Quinn from the KBW. Please go ahead.

Hi, it's Daragh from KBW. The question on the outlook for profitability in the UK, as loan losses normalize and this looks like the profitability would slip from the current levels. Is that just the way it's going to be or do you see anything you could do on costs or how would you offset that cyclical increase in loan loss charges? And just a follow-up question on the UK. If there were no PPI charges this quarter, if you could just provide a little detail on those other provisions of around €60 million and what kind of numbers should we expect there for the rest of the year? And then just on Brazil, sorry to come back to this again. But just to be clear, you're saying the change in mix the growth in retail is behind the margin loan yield's improvement. If that mix maintains that trend for the rest of the year, does it mean the loan loss charge is going to be higher than you'd guided to? Or are you saying, you're expecting the loan loss charge to fall in subsequent quarters? Thank you. José Antonio Álvarez Álvarez: So UK loan losses normalization, well, in the UK - so basically, we are having around 10, 12 basis points cost of risk. We do not expect a material change here maybe events like the one we had at the fourth quarter last year. But other than that, we do not spend - we do not expect a material change there. Our NPL's trend is still going down. So we are 1.17%, if I remember well, and went down in the quarter. So I don't expect any material development there. On the PPI, I already elaborate on this that, well, we are comparing our 2016 provision that is in the €300 million - above €300 million, €327 million. Monthly utilization in the first Q decreased from the 2017 average, in line with our expectations. The monthly utilization was €20 million last year and now is lower, and we think that - well, as I said, we are comfortable with the current stock of PPI provision. The second question was Brazil. Now I'm not meaning that we change our view in the arrangement with the cost of risk. Probably in the previous quarters, we talk about 4%, approaching 4%. We are now 4.35%. I think that is - still is the direction in which we are going. If we were, and I expect this to happen, growing incorporate on GCB, we will get there very rapidly, yeah. So - but until now, we haven't seen, to my surprise, a little bit growth in these segments, quite the opposite. We see a reduction in the lending to GCB, particular to GCB. While incorporates, we are relatively flattish, but we are seeing better trends than the ones we saw last year.

Thanks, Daragh. Next question, please.

Thank you. The next question comes from Andrea Unzueta from Credit Suisse. Please go ahead.

Yeah, good morning. I want to focus on the Spanish NII for a minute. You have guided in the past towards a loan growth for the year. But you've said today that the large corporates and institutional lending is actually coming worse than expected. Are you still expecting your loan book to grow? And then you have already talked about the ALCO. How - and you also mentioned that there are some benefits from the funding costs going forward. So how should we think of the Spanish NII going forward? José Antonio Álvarez Álvarez: So a couple of questions here. The loan growth for 2018, we were guiding you towards some growth. Probably still the case, depending on we're going to grow - I expect to grow in all the consumer SMEs and corporate-related lending to show 2% or 3% growth of showing relatively flat is going to depend if we do large deals or not with institutions or with GCB. But in terms of revenue, it's going to be in any case, marginal, yeah. So the ALCO, José already elaborate on this. We reduced significantly the size of the ALCO portfolio, and we are confident and we are reducing the funding cost, both in Popular and Santander, and we are confident that we can reduce this. In NII, I already told you that we expect in the coming quarters the NII to improve, because the - mainly the decline in funding costs and with volumes growing in the segments I already mentioned to you, probably where it's more difficult to grow at this stage is in mortgages, because of the high amortization we have. And GCB and institutional depends on our pricing. We are probably more demanding than the average at this stage in pricing in the high-end of the market.

Thanks, Andrea. Next question, please.

Next question comes from Ignacio Ulargui from Deutsche Bank. Please go ahead.

Hi, good morning, gentlemen. Just have two questions. On one side on cost growth outlook for Brazil, whether you could elaborate a bit on how do you see cost performing in Brazil going forward? And regarding litigation risk, on the Popular retail side, we have seen a number of press comments on ruling that have come out, whether we should expect additional other provisions there or this was already covered at the moment of the integration? Thanks. José Antonio Álvarez Álvarez: Growth in Brazil is related with - we are growing the costs above the inflation. But when you analyze in deep the costs, where the costs are growing in relation with the activity. So, we are gaining significant market share in acquiring business. We are gaining market share in credit card business. We are gaining market share in payroll based lending. And these activities have variable costs as long as we grow these costs keep growing. So overall, I expect the cost to keep growing above the inflation, maybe 2% or 3% above the inflation. But as I said, we have very high correlation with our capacity to gain market share and to continue to grow the business. So it's somehow you allow me to saying that variable cost. Litigation risk, well, we've been quite vocal on this. We are not expecting any material litigation risk coming out of Popular, different from the one we incorporate in our numbers at the time of the acquisition. So there's plenty of noise around this. The majority of the noise is related to mainly with the resolution of the Banco Popular. That is not up to us. While in the other side, our commercial action that with the other line of the - of last year got 80% of the customers' asset. I would offer that it reduce dramatically to very low levels, the litigation risk. So we are not - nothing new to comment on this.

Thanks, Ignacio. Next question, please.

Thank you very much. The next question comes from Carlos Peixoto from CaixaBank BPI. Please go ahead.

Hi, good morning. Just a couple of questions. The first one would be a bit on the evolution of cost of risk in Spain, or basically, how do you see it evolving throughout the year? The second question would be if you could give us some color on how much was Popular's contribution to first Q results, namely to net profit and then probably to NII, if you could share some light on that? And just the final question would be, how do you see the real estate division evolving, namely the cost base in this division now that essential part of the assets has been sold? What should we expect going forward on this front? Should this progressively become zero in the near-term? How do you see it? How do you see this evolving? Thank you. José Antonio Álvarez Álvarez: The first question, cost of risk in Spain, I think around 30 basis points, yeah. So the both, not a big difference between Santander and Popular. I think around 30 basis points is what you should expect. The second question was about…

Popular first quarter results. José Antonio Álvarez Álvarez: The Popular first quarter results, I don't have this number in mind because, well, I don't know, you have - we're going to publish a number for Popular, S.A. How comparable is this number with the previous numbers, it is difficult to say, yeah, so it's difficult to say. It's not comparable, yes, because the quarter costs are not there. The GCB business was already integrated. So we can provide you the numbers, but I don't have here the numbers. But I will say overall, Popular business, I will say, is going as expected with very good trends in SMEs, that you know is a critical business in which we are focusing in. And the integration is going on track. The numbers as we split the bank in several pieces already, we have one, TotalBank, Popular Portugal was integrated in Portugal. Quasar, the real estate portfolio, was disposed. We reached agreements with the joint ventures. So it's very difficult, the comparison is very difficult. In any case, you're going to have Popular numbers in the first Q. How representative those numbers are going to be, I will say very low representative. Real estate division, I don't know what - well, what I present there is the numbers of the real estate division that, let's say, remain in the bank balance sheet. It's still that we have the stakes in Merlin, Testa, Metrovacesa and all the others. And we continue to manage this. But in the real estate division I expect the losses to come down and to reduce significantly the real estate division already this year. So I set and this is our target, there's no question there. We're going to reduce to doing multi-tier levels. We can do operations as the one we done in the past so for sure we're going to keep disposing as we speak. But the losses will come down and probably to be - I don't know, if at the end of this year or next year to disappear from the bank balance sheet.

Thank you. And last question, please.

Thank you very much. The next question comes from Carlos Cobo from Société Générale. Please go ahead, sir.

Hello. Thank you for the call, Carlos here. A quick one on NII in Spain, again I'm sorry to revisit. But could you explain how is the rolling of the lower cost of the 1|2|3 account? Is that fully reflected in the cost of funding already in the first Q or that will have a gradual phasing? Just to understand NII dynamics in Span. Quick on SME pressure and price competition, as you said it's still intense. Could you elaborate a little bit on how is the competitive landscape here? Because now that you control about 0.25 of the market, I would have expected you to have more of a strong pricing power, why has it been difficult to control prices? Who is it, where is the competition coming from, if you could elaborate a little bit here? And finally, on this topic, are you seeing the central banks taking any steps to kind of inspect or monitor the pricing policy here as we saw the one I think in the past have said that they would monitor where the new pricing would much in the cost of risk and all the required pricing components? That's it. Thank you very much. José Antonio Álvarez Álvarez: Okay, first question, NII in Spain, I already elaborated on this. The lower 1|2|3, you haven't seen in the quarter, because we introduced it, if I am right, yeah, the beginning of March, yeah. So I mentioned also that as a result of this reduction is like €100 million in a whole year, and this will come in the next quarter. But it's not only about this, I also mentioned that the funding costs in Popular are reduced at the same time. SME price competition, SME as you know, the market is less transparent, down for other segments. It's not a commoditized market. We are not seeing, probably there is some price competition, but we are not seeing the competition here being as high as it is in the mortgage market and in large corporates, I will say, where we see some competitors being extremely aggressive, particularly those with low market share in those segments. That makes sense for them to trying to gain market share. And for doing that, we got - they are relatively aggressive on pricing. And the last question, central bank in relation with the pricing policy, you're saying something, no, no, no.

Okay, a little bit here. So thanks everyone for joining this call. And obviously, the IR team is at your entire disposal for any follow-up. Thank you. José Antonio Álvarez Álvarez: Okay. Thank you.