Banco Santander, S.A. (SAN) Q2 2013 Earnings Report, Transcript and Summary

Javier Marín Romano – CEO Jose Antonio Alvarez –CFO Juan Manuel Cendoya Mendez de Vigo – EVP, Communication, Corporate Marketing and Research Javier Marín Romano: Okay. We’ll start. Good morning to everybody. Welcome to Santander’s First Half Results Presentation. Jose Antonio Alvarez, CFO of the Bank; and Manuel Cendoya de Vigo will be joining me for this presentation. As usual, I will begin with some key facts and figures for the Group. Later on, Jose Antonio will do the same with the respect to the individual units. And then, we will open – I will close with a few conclusions, and then we will open the – some time for Q&A. Let me start with a few highlights of what has been the second quarter for the bank. Santander continues to develop its business on a very complex macroeconomic and regulatory environment. The Group maintained the priorities of previous quarters; strong balance sheet in terms of liquidity and capital, and reinforcing underlying results offsetting external impacts in several units. Some key features, business volumes reflect the macroeconomic situation of the countries where we operate and the strategy of bolstering the balance sheet vis-à-vis in a sharp negative impact from exchange rates. Excluding it for management purposes, the Group’s deposits grew 7% and loans decreased 2% while de-leveraging in some countries. As a result, there was a further improvement in liquidity with a ratio of loan-to-deposits already moving into 107% which is a very comfortable ratio for us. There was a very strong organic generation of capital in the quarter, 44 basis points with a BIS II ratio rising to 11.11%, and of course very comfortably in order to meet the Basel 3 requirements for the end of the year. Of note in results were revenue stability, with some countries recovering and a still high provisions but much lower than 2012, where we had the exceptional provisions for the real estate loans in Spain. The first half attributable profit was EUR2.255 billion, the same as for the whole 2012. Let us look a little bit into these points. We have created a little composite here of what has been the growth of GDP in accordance with the footprint of the bank. We see basically the emerging markets growing slightly better, of course in the developing world but of course at a slower pace than they did last year at 2.3% with better prospects for 2014 where the IMF is already expecting a 3.3% growth. For developed countries, we would say that they were basically flat, and some countries in recession like Spain or Portugal and some other with a flat growth. And again with some better prospects for 2014, where the IMF is expecting with these composite index growth of 1.4% in the economies where we operate. Interest rates are also impacting business this year. We have flat interest rates, the historic lows in our – in the matured countries where we operate and we will see this at least until 2014. And we saw a sharp fall in interest rates in emerging market, around 140 basis points on an average compared with the first half of 2012, which is more than 20% in relative terms, especially this taking place in Brazil, although here we’ve seen are several where they are still in reversion in this trend and in Poland. How this translates into our loan and deposit growth. It is some de-leveraging mature markets due to lower demand for loans combined with more selective growth and even reduction in some areas, and some products like real estate in Spain or some portfolios in run-off that we have in the USA. We have a higher and more balanced growth in emerging markets that has accelerated through the second quarter, especially in Brazil, Mexico, and Chile, and that we expect especially in the three of them to accelerate over the next quarters. This has translated obviously into the liquidity position of the bank. As a consequence of the evolutions of loans and deposits, the liquidity trend continues to improve. We narrowed the trade deposit gap by EUR63 billion in 18 months which more than covers the maturity of medium long-term debt for this period. The liquidity ratios showed improvement. The most basic one, the loan-to-deposit ratio stands now at 107% within our comfort levels that will be between 110% and 115%. Worth to mention is our loan-to-deposit ratio for Spain, which Jose Antonio will later on elaborate on, which now stands at 85%. In terms of capital, the Group has continued to strongly generate capital organically during the second quarter. Basel 2 Core capital was 44 basis points higher, absorbing the negative impact of interest rates that impacted 11 basis points in the quarter. This rise was due basically first of all from profit retention favored by a high acceptance of the scrip dividend between 80% and 85% -- 86% for the last scrip that we announced a week ago. And there is also a sharp fall in risk-weighted assets of 7% stemming from reduced credit risk and improvement in market and operational risk. The leverage ratio, equity to total assets also improved to 6.80% according to IMF criteria. There has been no substantial changes in the Basel 3 ratio or what we have already been announced. Basically during the phase-in, we will see a very comfortable position always over 11% and in a fully-loaded 2019 that will always sit above 9%. From above, Santander has a few advantages over the mid-term compared to other banks. First a low capital buffer for systemic risk. We are at the lowest level, 100 basis points, that compares favorably to the average of our peers in Europe that are at 160 basis points and some of our competitors that stand at 250 basis points. As a consequence of course of having a lower risk profile than many of our competitors, and thus requiring smaller capital surplus. The second advantage that we see is basically the launch of the Single Supervisor in 2014. Single Supervisor will conduct a stress test basically through an asset review over the last part of this year, and then a stress test over the first half of next year, where they will go through as very thorough review of the quality of our assets in the balance sheets, and then a stress testing of the bank. It’s worth to mention that we already underwent a similar stress test just a year ago. Out of this, we were the only bank generating Core Tier 1 capital over the period with a surplus of more than EUR25 billion of capital even in the most – even in the toughest situation. However, I would like to mention that over the last five years – the last five years have been a truth – the truly stress test for the bank where we have provisioned EUR60 billion, generated more than EUR20 billion in capital, provided to our investors more than EUR20 billion in dividends, and of course coming out of the crisis really in a much more – in a much stronger situation in terms of balance sheet capital and liquidity than before. Another advantage we believe is the new Crisis Management Directive. The new framework as you all know requires a bail-in of 80% of liabilities and shareholders’ equity before records to external aid, governments, the European funds or whatever which is limited to 5% of the banks liabilities. This mechanism introduced much greater market discipline and rewards the soundest and best managed banks regardless of where the parent bank is based. In other words, investors would rather be in a good bank that is in a lesser stronger country of residence than a weaker bank but that is in a stronger country. In the case of Santander Spain, our Core Tier 1 plus the hybrids exceed 9% of liabilities. So this means that in case of any trouble, not only our deposits would be safe but also our senior bonds. Another advantage for us with respect to the launch of the Senior Supervisor is the ratio of transformation of assets into risk-weighted assets. Relevant studies like the studies from the Basel Committee for Banking Supervision or study that we – here in Spain, we asked Oliver Wyman to produce. So very strong local differences, focused on credit risk and loss giving default liabilities in the wholesale portfolios, especially in the case of the report from Oliver Wyman, the Spanish banks, should we apply the same rules that are applied in Central Europe would have – would increase their capital levels between 100 and 150 basis points. We believe that Santander is among the bank with the highest ratio of transformation of assets into risk-weighted assets, significantly above the average of our European peers. You see there in the graph that the ratio of transformation is around 44% that compares to the average of 33% of our peers in Europe, and compares to some of our competitors that are even below 20%. As a conclusion I would say, after taking a look into the liquidity and capital, that we are very comfortable with our liquidity and capital ratios and which both together generate a great foundation for the new future for growth. In terms of Group profit, the second quarter profit was EUR1.050 billion. This excludes of course the capital gains, extraordinary capital gains from the agreement with Aegon that has been offset by some restructuring costs for the integrations in Spain and Poland, and of course we have not included the EUR700 million of capital gains from these strategic agreement for Santander Asset Management that should be booked over the second quarter of – the second half of this year. The profit for the first half that is EUR2.255 billion is 29% above the results for the same period of 2012. And basically the same as the one we had over the whole last year, given the impact of the real estate provisions in the second half of year 2012. We believe that this is the first step towards the normalization of the Group’s profit. With respect to the P&L, we will say basically three main aspects, three key features to point out; year-on-year fall in gross income, largely due to exchange rates which took about 4 percentage points of growth and accounts for about one-third of the decline. The liquidity buffer, as we show, the increase in the liquidity position of the bank that accounts for one quarter in decrease, and the narrowing of the spreads in a few countries that could not offset the growth in volumes in the same, that accounts for another quarter. Loan-loss provision was lower than in 2012. With, I would say a broad improvement across the different units, should we – and in terms of real estate provisions in the first half of 2012, were higher than the capital gains while in 2013, gains were neutralized. Compared to the first quarter, we see a slight rise in growth in gross income, both in the financial margin and in commissions. Provisions actually increased 5% but should we exclude an extraordinary provision of EUR188 million resulting from the merger of Banesto, as customers were recorded on a like-for-like basis under the most conservative criteria, provisions would have actually decreased compared to the first quarter of this year. This has to do a lot with the standardized loans of course, and not with the individualized managed ones. This extraordinary charge will be compensated over the next year – semester with some future capital gains. Other results were higher because the first quarter of 2013 were below the normal levels. In the second quarter, they are back to more normal levels. Basically within this item, we have the extraordinary charges for registers and civil lawsuits in Brazil. Our expenses levels, we would say that costs were basically flat as a result of declines in countries where integration aren’t taking places like in Spain and Poland. We have also lower costs in Portugal, higher on the other hand in other countries where we are developing or growing our franchises, i.e. Brazil, the US and Mexico. In Brazil, although Jose Antonio will explain, our costs grow below inflation; in US they grow due to opened IT investments in order to grow our franchise. And in Mexico, as you all know, we are extending our branch network and we have opened more than 90 branches over the last year. We are making a big effort in order to combine business capacity growth with control over spending. We are maintaining a significant advantage in efficiency over our peers, but I am sure that we have still a lot of potential to keep on improving with the integrations that cruising in speed especially in the Spain and at a minor level in Poland, we will see there is still some more cost reductions. With respect to credit quality, the trends in the ratios basically continue. Coverage remains stable at around 70% following the provision that was made in 2012. The stability – we have a stability in the quarter in most units, except for Poland and Mexico due to one-off factors. In Poland basically to one operation in the developing world, and in the developers world, and in Mexico due to as to the developers and also to the slowing of the economy that we have experienced over this first half of the year, that has basically affected the numbers for consumption but we think that will come back during the next few quarters. We have no surprise on the non-performing loans ratio, 16 basis points more than the first quarter coming from 4.76 into 4.92. The non-performing loans entries were the same as in the first quarter and below the quarterly average for the last two years. We see new non-performing loans in some countries like Spain or Brazil basically coming down. And of course, we have the impact of the ratio of the fall of credit that actually accounts for about one quarter in the rise of the ratio of the non-performing loans, excluding the exchange rate impact. To this evolution, we should add the additional impact from reclassification of sub-standard operations in Spain, which is the dotted line you see in the chart. It represents an increase of 26 basis points at the Group non-performing loan ratio, one percentage point only if we take a look into Spain. In our case, it affects basically EUR2 billion which were previously recorded as sub-standard loans and are now recorded as non-performing loans. I would like to mention that 93% of these new non-performing loans actually are performing, so the clients are basically paying on these loans. So I would like to mention this as some technical non-performing loans. This reclassification would not have an impact on provisions as this portfolio had a provision already of EUR340 million in accordance with what is traditional conservative policy of the bank. We have a portfolio there of EUR3 billion of the mortgages that have been refinanced, out of which EUR2 billion have been reclassified into non-performing loans in accordance with a circular from Bank of Spain that have already this EUR340 million of provisions. We have an extra EUR200 million provision for the other EUR1 billion mortgages refinanced that are still classified as sub-standard, and for the overall portfolio of EUR33 billion that we have in reclassified loans, which have a real estate warranty of 84% we have a provision of EUR6.6 billion that we think is more than enough for what we expect from this portfolio. With respect to the three basic units, they have evolved of course differently. Expense ratio continues to rise mostly due of course to this reclassification. There is also a numerator company in terms of the non-performing loans continue to grow in companies, although the entrances are flat with respect to the previous quarter and we have the decline in lending, the reduction in the stock. The later was responsible for 15 basis points of the increase during the second quarter. There is a slight drop in the UK, both in retail as well as in companies. Our ratios in mortgages and foreclosed properties continued to be better than our peers. And the good news come from Brazil, where basically you see a sharp fall of 41 basis points in the second quarter, confirming the trends we already announced on bringing the non-performing loan ratio below to the one we had in June 2012. We think we’ll have reached the pick for both individuals and companies in Brazil in terms of non-performing loans, and we the arrears income for the fifth quarter in a row below. So we think that this should produce into the next quarters into a reduction in the non-performing loan ratio for Brazil. With respect to provisions and cost of credit; the credit quality is basically of course reflected in provisions with two basic ideas. First, for the second quarter’s provisions were lower than the average for the previous quarters. By units, we see the rises in Spain basically in companies as we mentioned. And in Mexico, homebuilders and a slightly consumer credit is due to the deceleration of the company – of the economy which is offset by significant falls in the rest of the big units precisely Brazil and the UK or the USA. Second, after the real estate provision we did in 2012, the Group’s cost of credit has started to decline. It was 2.05% calculated as the provisions for the last 12 quarters over the average lending taking into account only the second quarter on a stand-alone basis, it would come down to 1.65% annualized. This is too high compared to pre-crisis levels. I remember that in 2008, we had 109 basis points and in 2007, 63 basis points and towards these levels, we should move within the coming years. Let me hand now the mike now to Jose Antonio that will elaborate a little bit more on the evaluation of the different units, and I will come back for some conclusions.

Good morning. As Javier said, I am going to elaborate about the business, the different divisions. Let me start with the chart that shows where the profit comes from by geographies. In reality few changes here, basically we get 56% of the profits coming from emerging markets of which 25% is Brazil, Mexico represents 12%, Chile and Poland 5%, 6%. In matured markets, we have the US and UK with 12%, 13% and Spain represents 8% and Germany 5%. Let me start to analyze the activity of results of the different business areas with Spain. The first thing I should say is in the second quarter we completed legal measures [ph] between the three banks in Spain. The parent company balanced our money [ph]. We are going according to the schedule, a little bit ahead in commercial terms, and while we do see the results basically the synergies we are now coming through the P&L in the next quarters. In relation with the activity in the quarter, let me to highlight that we continue to gain market share particularly in deposits and mutual funds, also in loans in this quarter. And probably the most important factors happened this quarter is the inflection point in the net interest income. The net interest income grew 4% compared with the first quarter, and I think that this is a change in the trend on the net interest income as it has been falling for several quarters in a row. While you don’t see these better net interest income in the gross income, because the failing gains in this quarter were lower due to the lower banking markets – seasonally lower banking markets produced less trading gains in the second quarter. So in the provisionary as Javier elaborated on this, more provision due to companies but when you compare it with 2012, we are running basically at the same level and we expect to stick this year with cost of credit of 150 basis points from entire business in Spain. In short, what we expect for the business in Spain is lower deposit cost to offset – more than offset going forward, the repricing of the mortgage book to – plus some cost reduction plus the provisions start to normalize probably at the end of this year will produce a better result in the coming quarters. Let me analyze a little bit of activity in Spain, little to say here. We are pretty much with the same trend, that de-leverage is still going on. You will see the loan book still shrinking. We are making efforts to try to grow in the – particularly in the SME world but till now the de-leverage is stronger than our efforts – our efforts are not still reflected in the loan book. In deposits, as I said before, we continue to gain market share strongly. We won 270 basis points in the last 18 month. We also won market share in mutual funds 35 basis points during the quarter. So in terms of activity, activity is going well, in both loans and deposits. In terms of credit quality, while still deteriorating. We’ve been telling you that we continue to see some continuation particularly in the companies war, investment war [ph], you have the new entries on the right side of this slide. And compared – this is a graph that is how we compare the first quarter of 2008 with being Base 100, with today, that is 300 – still running high, is through that individuals, both in mortgages and in consumers, the trend is the opposite but we are still generating significantly NPL entries in the SME world. When you look at the ratio, you should look at the denominator that is shrinking, so the ratio apparently goes up faster than the new entries reflect on the right side of the chart. If we go to Portugal, well three main items here. We are getting significant market share gains, both in loans and deposits. In deposits 80 basis points in 12 months, in loans 20 basis points in 12 months. Portugal, this is the stronger franchise in the country, so compared with our peers, both in capital ratio, credit quality, efficiency and profitability we are well above our peers. And well what we are seeing in the country is more stable revenues and provisions, so already we are reaching a new plateau of – in which we can build on top of that going forward. Poland, where we’ve been facing a bit quicker macro environment with the internal rates being in historic lows in the country. Now share now is the integration that this is on track. The integration between Kredyt Bank and our franchise, and to be able to increase the KB branch productivity in line with the BZ WBK productivity, that we got in BZ WBK. The activity we are clearly outperforming the bridge, we are growing the lending, the loan book lending grew 2% in the second quarter, deposits dropped 3% but if you combine with a growth in mutual funds of 8% this is part of the repricing – the process of repricing the KB deposits, the cost of KB deposits more in line with the ones coming from this BZ WBK. In terms of results, again we are clearly outperforming peers. This comes basically from a reduction in the deposit costs and it’s through that to manage the net interest income in a much slower integrator environment is going to make it more difficult. Fee income continued to rise plus 3% in the quarter, the cost fell 8%. This is part of the synergies we are getting from the measures with KB, and provision increased by a particular case, but we don’t see here any increase, any permanent increase, we see stability income. In the second half, where the GDP growth outlook is better, our priorities continue to execute the margin well, march the revenues in our lower interest rate environment that of course is more challenging that in the past. Going to Santander Consumer Finance unit, first idea here, the car sales in Europe, car lending is the main business of this unit. It’s two-third of the business. Car sales came in significantly lower in Europe. The unit is performing very well I would say in this environment because due to three reasons. The first one is market share gains. We are gaining market share across the world in almost every country in which the unit operates. Second, the excellent management of the net interest margin, and third, excellent credit quality, the cost of leases at the levels that they significantly lower than in previous years. By countries, the business is performing extremely well in all the countries due to volumes, and in Spain due to lower provisions. Germany and Poland are recovering from the previous quarters. The outlook is to gradually recover. We expect a gradual recovery of the car market that will have the unit, in the meantime, we expect to gaining market share through agreements with the carmakers to be the providers of the loans to be Santander Consumer Finance the provider of the loans. The Spanish business in run-off, so the real estate. So let me remind you that this division includes foreclosed properties, customer loans with real estate purposes and with stakes related to the property sector, Metrovacesa and Sareb. The net balance went down to EUR11.6 billion, and the reduction in one year has been EUR7.4 billion from June 2012. The base of next year has been EUR400 million EUR500 million net per quarter basically loans with falling 11%. The coverage is in the region of 50% and we plan to keep the loss of this division in the first half has been EUR337 million. UK, well the macro is slightly better in the UK. So this is a good starting point. In activity, our activity in volumes particularly in the loan book, reflect our selective growth policy with become more – our lending strategy was more demanding interest-only mortgages, but as a result of this policy the book fell EUR9.2 billion in 18 months and we are growing well in corporate lending plus 11%, basically in SMEs where we are growing 12%. We are at the same time focused in the reduction of most expensive deposits, and trying to grow in current accounts, the 1-2-3 strategy that we has annualized to grow 60% year-on-year with current accounts with this strategy. The banking net interest margin losses improve compared with the previous year. In result, the net profit was in the quarter EUR224 million, 17% up compared with the previous quarters. The good performance is reflect of stable net interest income and lower cost of deposits and the cost of funding and improving in the yields in loan book, lower provisions due to excellent credit quality and good quarter in trade revenues as we have set with some provisions. So the profit in the first half was EUR440 million, up 3% more than in 2012. It’s the first time that we grow compared with the previous year. Let me focus in what we are doing in the business in UK. Let me highlight three points, the selective deposit growth that I mentioned before. So the strategy, 1-2-3 Strategy is working very well. The current accounts grew the balances 60% in 12 months and we are – probably it’s more important that we are increasing the number of customers and the relationship of those customers with the bank. In terms of balance sheet, the mix is changing. It’s changing from being almost in trading mortgages to more diversified balance sheet, where the SME represents 11% of the loan book and we expect to keep growing from here. And finally, the solid capital position as FSA has shown our capital position is extremely good and is compared in a favorable way with our peers. So I would say a sum up. This is something for him to continue to grow the results in the coming quarters. Now Brazil, we need to elaborate a little bit. Well in terms of activity, we are very much in line with our competitor. So the loan book of the para-banks is growing at 5%, ours is growing at 6% so more or less in line. We start a significant recovery in the second quarter. We grew the lending in the second quarter 3%, the para-banks grew 1%. So we are seeing in the whole year to be around double-digit kind of growth in loan book. In terms of results, well when you see the lower figure than in the first quarter in terms of revenues was due to trading gains, you see the net interest income was almost the same compared with the previous quarters that we saw some declines in the net interest income. First half attributable profit was EUR990 million. Positive points, costs grew significantly less than inflation. It used not to be case in the past. They rose 6% in 2012 and 2% in year-on-year in the first half. Lower provisions as the CEO mentioned, the credit quality came much better in the sale associated with evolution – a good evolution of NPLs and early arrears, all the indicators in credit quality are heading in the right direction in Brazil. There is actually an attributable profit over 2012 was due to lower net interest income which I will explain now. The fall in net interest income is due to the reduction, the margin compression. Margin compression in our case 75% compared with the prior year coming from change in mix. You see the lending portfolio – how the lending portfolio is growing compared with the previous year. You see the portfolio is growing faster in kind of mortgages, large companies and SME and companies unless on the consumer side that typically has high, displaces high cost of risk. So in this case the effect in net interest income comes from 75% of the sales from the mix and 25% from reduction in spreads. We believe that the greater part of the changing weeks has already happened and we expect still some margin compression coming from some of the products particularly in the consumer side. Regarding the credit quality, the NPL dropped by 41 basis points in the quarter with all indicators shown as that the trend is positive in this year, earlier years declining for several quarters both in individuals and companies improved the NPL ratios, provisions are falling, so we are finally positive on these regard in relation with future results. So in short, in Brazil we see an environment of risen interest rates, pressure on the spreads will continue, not due to mix, more due to some pressure in particular products. Volumes, we will reach faster than in the first half in the second half. Personnel and general cost increasing well below inflation, definitely improving the cost of credit in coming quarters that we already show in the last quarter. Mexico, what we have here is – the quarter in Mexico from macroeconomic terms are typically weak because while there was a change in government, when the government changes in Mexico, normally the public spending gets reduced for a short period of time, two or three quarters. So this quarter was relatively weak in terms of macro performance in Mexico. This was reflected in a slower pace of lending in the sector as a whole, although, we continued to grow very fast in our main challenge and vis-à-vis we grew 43%, in cars 15%, in mortgages 14%. So on deposits continue to grow in double digits. So a bit weaker macro environment, we continued to grow very fast. In this environment, net interest income rose 2% over the first quarter due to volumes and it’s impacted by the lower rates. So we made money – significant money in deposits in Mexico and the interest rates were reduced from 4.5% to 4%. Year-on-year gross income grow strongly 14%. Costs were flat in the second quarter, higher on year-on-year because as you know we are opening branches in the country to span our commercial capacity in the country. Provisions in the quarter were affected by the homebuilders in (inaudible) this was changed to equity, but in IFRS was change to results. And sum the derivation in the quality of the sector of consumer credit. So in short, higher provisions affected the quarter results but there the trend the business was still good and growth higher than the market in target challenge. Chile, well, let me start with activity, I will say in the quarter, the level of activity improved compared with the previous quarters. In fact, lending grew in the quarter 4%, deposit grew 3% sorry, particularly focusing SMEs, high-income individuals and main deposits where we grew in double-digit. Both loans and deposits were higher than in the first quarter, so a bit better levels of activity in the unit. Results, the results in the quarter basically are – the main explanation of the results is the inflation. The net interest income remains challenge, and this is due to the lower inflation offset the higher volumes, while basically the margins were relatively stable. Reduces the income due to the regulatory change in insurance accounts, trading gains because some portfolio disposal was relatively small. The costs continue to get reduced. The increase in the quarter is clearly seasonal, so we expect a better performance in cost going forward. Provisions continued to fall in the third quarter so – and our view is to continue this trend. So we expect in the coming quarters, a significant improvement in the activity in the second half, a recovery in volumes, high inflation and lower – a bit lower provisions. In other countries in Latin America generally speaking all of them are growing in double-digits. Argentina, first half profit was EUR166 million, double-digit growth in all the figures, and the net interest income, gross income, and net operating income. Puerto Rico profit rose for few quarters and more than double from the first half of 2012. Uruguay went up 14% and Peru 2%. So we don’t see reasons to change these trends in the coming quarters. US, basic ideas here Sovereign is more focused on companies and retail deposits. Year-on-year there is a fall in line from commercial real estate, we are disposing more and more which is the mortgage (inaudible) we are disposing all of them, and a reduction in the portfolio on run-off. Fall in gross income and sharp decline in provisions, the fall in gross income in the first half were due to squeezed spreads, the impact of the sale of mortgages and the reduction in non-strategic portfolios. This heat net interest income and trading gains, the fee income trade improved reflecting our priorities in the country, we are developing the franchise, we are launching new products and this should be reflected in the future and growth in the fee income that is probably our weaker line when we compare with our peers in the country. And provisions declined significantly, the credit quality is excellent. So provisions are running very low level. SCUSA, the consumer business in US. New lending grew strongly partly due to the agreement with Chrysler. The production is more than doubled, yes, it’s growing at 103% and the profit developed from here is EUR249 million in the first half, 9% more than year-on-year. For coming quarters, we continue to see consumer US strong, with new lending growing strongly and Sovereign with revenues more diversified due to the range of products. Asset quality, we don’t see any issue here. Finally, the corporate center, let me to elaborate, the trade made a loss of EUR1 billion – EUR1.068 billion compared with EUR928 million in the first half of 2012 before recording capital gains. Net interest income was more negative this year. This quarter a little bit better than the previous quarter, due to the repayment of the LTRO that we did in the first quarter of 2013. Trading gains reflect the result of centralized management of interest rate and exchange rate which as well that was EUR580 million positive, up from EUR325 million in first half of 2012. The cost increased basically associated with higher indirect taxes and ex-provisions includes as the CEO mentioned before the one-off charge for standardized loans in Spain in order to align more conservative practice (inaudible). Now I hand over to Javier to finish – to sum up this presentation. Javier Marín Romano: Thank you, Jose Antonio. As a conclusion, first thing we are combining business growth and balance sheet enhancements. We are growing in a balanced way in accordance with the situation of each unit and each country. Liquidity and capital remain very strong and are improving. We’re very comfortable within this levels, and have the added advantages of Santander’s business model. With respect to good results, today we are under pressure because of recession and regulatory issues. We are managing the drivers under our control, spreads, costs, business mix, in order to speed up the recovery. We are already seeing some progress in some area and also have identified areas of improvement of course. And not less important, we are working on our future with strengthening basically our high commercial effectiveness. Integrations in key countries, new global division from retail banking, global business push such as the asset management or insurance are key elements within business strategy. In short, we are improving Santander’s position to obtain the maximum profitability for the next stage of banking business. From strengthening our balance sheet in terms of liquidity and capital, into a new phase of a strengthening our franchise and growing in clients in the different units where we operate. Lastly, but not least, I would like to mention before we move into the Q&A about the prize for Santander and the recognition as the most sustainable bank in the world. And for Santander Brazil as the most sustainable bank in America. This is a recognition of strategic importance that the bank gives to sustainability and joins the awards that (inaudible) in previous years. So thank you very much for your attention, and for your time. Let me now just open the time for questions. Manuel?

Good morning. Thank you, Javier, Jose Antonio. Welcome to the Q&A part of the presentation. As always, we will try and cover as questions received through the web, through internet and if we have time at the end, we will also welcome questions coming through the phone. As we have done in previous occasions, I will try to organize questions through different things. First one, being the strategy regulation and perspectives of the Group. First question will come from Andrea Filtri from Mediobanca about our opinion on the EU Council proposal and banking supervision and regulation and results, and if we expect any impact on funding costs with regards to this potential changes? Javier Marín Romano: Okay, thank you, Andrea. We are very positive about the European Banking Union. I think this is our first step towards this. For us we actually think that that at some point our cost of our financing should come down as we mentioned over the presentation that our capital on an average go over more than 9% of the liabilities of the bank. So I believe that it creates a more level playing field for the European banks, and thus we should be benefited from this.

Also linked to the European situation, Britta Schmidt from Autonomous asks about the AQR, the Asset Quality Review, what are management expectation for these stress both for Santander and for the European sector more generally speaking? Javier Marín Romano: Well for the European sector I have no expectations. I don’t know exactly, what’s the individual situation of the rest of the banks. In our case, we are very comfortable. We went through the stress test only a year ago. We have – as you have seen, we have strengthened our capital base, we have strengthened our balance and we expect to come out of this new stress test that should take place over the first half of next year with very good results.

With regards to M&A, Rohith Chandra from Barclays, Carlos Peixoto from BPI, and Britta Schmidt also from Autonomous make follow-on questions, which is what are our views on M&A in Spain specifically or elsewhere? And also what our thoughts, if we are interested in Catalunya Bank or NovaCaixaGalicia, and which of the two would better strategically fit our strategy in Spain? Javier Marín Romano: Well in general terms it will depend on the geographies. As I said before, our first objective is organic growth. However, we’ve been doing quite a number of operations over the last quarters. So we did the Kredyt Bank in Poland in order to strengthen our position in the country with Zachodni. We bought GetNet that is to create the most important acquiring credit card company in Brazil. We also bought the mortgage portfolio of ING in Mexico. So actually we’re doing things. Of course, as I mentioned the priority is organic growth but then we have – we would find some opportunities we will take a look into them and provided that they fit most strategically and financially within our objectives, we will proceed. We are – as I said before, we have the capital and the liquidity levels upper period in order to (inaudible). With respect to Caixa Catalunya and NovaCaixaGalicia, our priority in Spain today is to conclude the integration of Santander Banesto Banif. The technology information – sorry, the technological integration of Banesto and Santander will conclude for individuals and SMEs by the end of the year, but we will go deep into next year in order to do the integration basically from corporates where we have a lot of tailor-made solutions for them, and we don’t want our clients to suffer. So that’s our first priority, that is going very, very well and we look forward to meet our targets in terms, not only of synergies but also in terms of timing. Having said this, definitely we will look into NovaCaixaGalicia and Catalunya Bank. Of course, it needs to make sense, right, it needs to fit within this strategy and of course in terms of the financial requirements that we ask for any investment taking into account that our shareholders will be – we’ll need to take a look into our shareholders, and we need to a provide the return on the investments that they are all expecting. At the same time, it’s worth to say that we are growing in Spain organically, 270 basis points in our market share in deposits and current accounts. More than 60,000 new loyal customers over the last six months which is a fairly good results, where in terms of satisfaction due to the inquiries that are done externally by consultants for all the sector, we are top, right now. So we need to consider all the circumstances in order to decide whether we will definitely making an offer for either Galicia or – NovaCaixaGalicia or Catalunya Bank would make sense, but definitely it is our – we will take a look definitely, we’re there to take a look, but we will consider whether this fits or not.

There are several questions also with regards to IPOs. Carlos Peixoto from BPI, Britta Schmidt also from Autonomous make the following ones which is, if you could update timeframe of the different Group IPOs – subsidiaries of IPOs of course, and what is the expected impact from the IPO of Santander Consumer Finance USA, and if we have any timing preference or scale for that operation? Javier Marín Romano: With respect to the IPO of Santander Consumer USA, as you know we have filed already the register for the IPO. Well sometime to decide whether to do it. We have not decided yet, what we will do in terms, either we might not sell any participation that the bank is holding right now and not dilute our position. So in general, I would say that it will have no – at this point, I would say that it will have no capital impact on the bank. With respect to the IPO of other units, there is nothing on the table. So we have no plans for IPO in any other unit of the Group.

There are several questions around dividends, the policy – the Group policy in the regulation or comments coming from Bank of Spain. I will try to name everybody here but Francisco Riquel from N+1, Jaime Becerril from JP, David Vaamonde, Carlos Peixoto from BPI, Rohith Chandra from Barclays, Antonio Ramirez from Keefe. The question or the questions are, which is our position with regards to dividend, dividend guidelines and with regards to the comments from Bank of Spain. If we plan to change the dividend policy, if we plan to maintain the EUR0.60 which is about to me the same question and if we can go into that guiding line into 2014 also? Javier Marín Romano: With respect to our dividend policy, is perfectly covered by the recommendation of Bank of Spain with respect to the 25% of limitation on the cash payout. So we will continue with what we advanced over at the shareholders’ meeting of the bank, paying EUR0.60 of dividend this year and for scrip of EUR0.50 each. With respect to 2014, I don’t think it’s a time to decide this now. So actually what we will do at due time is consider this under board and submit this further approval at the General Shareholders’ Meeting.

With regard to regulation, there is also several questions about DTAs, Britta Schmidt also from Autonomous, Rohith Chandra from Barclays, Daragh Quinn from Nomura, Carlos Peixoto from BPI, Francisco Riquel from N+1 and Antonio Ramirez from Keefe. The summary of the questions would be, if we expect to benefit from any change in DTA treatment or the Spanish regulation treatment? If we would consider use in DTA state guarantee and under what conditions, what are the changes that we expect to take change here in Spain, to take a place here in Spain, and if we can kind of brief what are the DTAs in the Spain and what is the breakdown in between insolvencies, pensions and risks? Javier Marín Romano: Okay. First thing what we’d like to have in Europe is a level playing field for everything including the consideration of the DTAs as capital. Having said this, today out of the DTAs we have EUR6 billion of DTAs that come out basically from provisions and the pensions, right. We’re not in any negotiations of course, and our only plans today are that over the next five years, our requirement profit in Spain will bite more than 100 basis points into these DTAs due to the generation of profits in the country. So we’re not expecting nothing from these negotiation, and our homework is to generate the profits in Spain in order to bring this DTAs into strong capital.

I don’t know if you want to elaborate. I’ll read now is a question from Andrea Filtri, also related to the first question we made which is, Banco Santander [ph] solution if we are worried about the penetration of asymmetric across countries in national resolution funds, if national resolution funds prevail over a single resolution mechanism for the banking union? I don’t know. You already elaborated a little bit, I don’t know if want to add some comments there? Javier Marín Romano: Well we need to manage what we can manage, right? And actually what we can manage is the situation of the bank compared to our peers. The actual situation is that as I said before, more than 9% of our liabilities are covered by our capital and our hybrids, which I think compares very favorably to other peers in Europe. So this is basically what we are centering our efforts now and in the future.

And little bit in between regulation and financial management which is our next thing. There is a question from Britta Schmidt from Autonomous saying, which are our thoughts about issuing Tier 1 Capital, if we would consider to do something before the stress test, and if we can elaborate a little bit on that possibility of issuance? Javier Marín Romano: The quick answer is no. We’re not going to issue capital. As I mentioned over the presentation, we are very comfortable with the actual capital levels, and we have no plans to issue capital, either at the Group or at the subsidiaries.

As I said going into financial management, there are several questions around risk-weighted assets coming from Francisco Riquel from N+1, David Vaamonde, Álvaro Serrano from Morgan Stanley, Frédéric Teschner from Natixis, Jaime Becerril from JP, Irma Garrido from Ahorro Corporación, Cerezo from Credit Suisse, with regards to the evolution of the risk-weighted assets in the quarter. The question is, if we could explain the evolution. How much comes from delivering concepts of de-leverage and models for business or whatever, if we can also leverage on the models on advanced and non-advanced models? If this is we within the 67 basis points, we already said in advance of model impacts on the capital, as you can imagine, if we can explain in terms of what is happening around the risk-weight assets? Javier Marín Romano: Should we split the origin of the reduction in risk-weighted assets, 50% would come from basically exchange rates, and the evolution of the business being a big part of that the exchange rates and 50% would come from the internal models for operational risk and market risk, in line with what we had already advanced in the previous quarters.

There is a question from David Vaamonde about the AFAs adjustments, if we could explain them how much or why they have stayed in the quarter? Basically here let me remember you that is a reference in between the Forex evolution and the hedges not including goodwill in these discussion basically coming from the Brazilian reis. Remember that we tend to hedge the book within ranges, so it will do have some impacts, some impacts on the capital. And of course it is offset on the risk-weighted asset side which is what Javier was just explaining, of why part of the risk-weighted assets have come down, an important part of them. Questions around capital. You already said that we don’t plan to issue but there are questions coming from Daragh Quinn from Nomura, if we plan to raise capital and from Rohith Chandra from Barclays and Carlos Peixoto from BPI, if we could elaborate on the evolution of the capital ratio on the fully loaded Basel 3 Capital ratio. What is our expectations in evolution of these capital going forward? Javier Marín Romano: Yes. Capital ratio stands today Basel 2 at 11.11%, it should close over 12%. Basel 3 should close out over 9% at the end of the year. With respect to issuing capital, we’re not going to issue capital. With respect to Tier 1 in terms of preferred shares, we’re not planning either to substitute any of our preferred shares. Our first scenario, I will hand out over mike now to Jose Antonio to elaborate a little bit on this, shows that for the next few years we are very comfortable with our Core Tier capital, and we should not begin to issue preference shares in order to gross up our Tier 1. Jose Antonio, you want to elaborate a little bit more on this?

Well as we said in the capital ratio, the Core Capital ratio is what you said exactly. We don’t see any needs. In relation with the additional Tier 1 and lower Tier 2, the new instruments deciding on Basel 2 regulation, well, first thing to say at least in our Tier 1 is not crystal clear yet. We have net in this year year-on-year not next year any Tier 1, but going forward, two years from now, probably we start to issue according to the new regulation that is still not known 100%, while the Tier 2 and additional Tier 1 to cover eventually the 1% on the 1.5% contemplated in the regulation but not now, no. We are not expecting to issue in the next couple of months.

To finalize with capital, there is another question, Mario Lodos coming from Sabadell, asks if we plan any mitigation measures with regards to the potential negative impact on capital like selling on assets or any kind of de-leverage action? In this time we don’t plan anything. Javier Marín Romano: We have no plans.

Liquidity, several question here if we could update our refinancing schedule. The exposure to the ECB, and ECB relieve relievable assets and if you want to link to that, what is the current ALCO portfolios, both – I mean what is the Sovereign exposures and the contribution to NII? Javier Marín Romano: Jose Antonio would you please answer this question?

Yes. Well you started with liquidity, we showed the trends in the presentation. In Spain and Portugal the de-leverage is going on. We are growing faster in deposits, standing loans, so the gap – the long-term deposits is all in all across the group. So the amount of issuance compared with the maturities will be in the region of – maybe in the region of 30%. So probably talk about 30% of new issuance compared with the maturities is something that probably reflect the issuance of the Group going forward, on average is not really depends on geographies, we actively in on securitization in consumer and Santander Consumer Finance business also in Santander Consumer US and you’re going to see some issuance coming from UK and parent company but as I said 30% of roughly speaking of the maturities. In relation with ECB, we have paid in the first quarter DRO [ph], we have like around EUR5 billion, EUR6 billion in Portugal. This is the main funding we have from the ECB. ECB relievable assets, I don’t have the number of the parent company, but it should be in the region of EUR100 billion, yes, so we are not using it but it should be in this region. I don’t have exactly a number here. And ALCO portfolios, you see in the balance sheet, few changes here. So mainly in Spain, we keep portfolio in the region of EUR35 billion, the same line in the previous quarter. We reduce our portfolio – ALCO portfolio in the US which is close 60% of the mortgage-backed securities we had in this portfolio around EUR6 billion, EUR7 billion in the quarter. We reduced also the portfolio in Brazil like EUR4 billion, EUR5 billion. Yes. So all the other portfolios remains the same thing EUR5 billion in Spain, EUR3 billion to EUR4 billion in Poland. We are in the region of EUR10 billion in Brazil, EUR10 billion US compared with EUIR18 billion, EUR19 billion we had before and those are the portfolios. In relation with the sovereign exposure, all the ALCO portfolios, but US basically got – they have these sovereign exposure, so they have sovereign exposure or the local threshold, so that means in Brazil, Brazilian bonds, in Brazilian reis, in Mexican pesos but Sovereign where we have as I said (inaudible) assessing the ALCO portfolio.

With different questions around the same items Frédéric Teschner from Natixis, if we could split, explain the evolution of the quarter one in terms of profit and Forex? I think Javier has already elaborated on the risk-weighted assets, but basically they come from exchange impact in business and the rest is the other half of the variation or models that we already advanced to the market. Carlos Garcia from Societe Generale asks if it is defined a SIFI buffer of 100 basis for Santander? The answer is yes, it is defined as such. As you know it’s renewal, but this is what we have in comparison as also was mentioned in the presentation with our peers that range in between 150 to 250 basis points of buffer. And if we could elaborate on the leverage ratio, how it would look like with other calculations? We have tried to put a IMF criteria which we think given the validity [ph] today of leverage ratios that was the more kind of neutral one to present to the market. Ignacio Cerezo from Credit Suisse asks that the continuous downward trend of the loan to the positive ratio in Spain, if it makes the bank think in a more aggressive way in terms of lending in Spain, if we could increase aggressively the lending in Spain? Javier Marín Romano: What we want to do in Spain is growing clients, right. So if we need to grow our deposits at some point, or we need to grow our credit, it’s basically what our clients are demanding and what we want to do. Well because we are not going to relax our practices and our policies with respect to risk which has been stabled over the time, right. So once the economy is recuperates, and I would have to – and there is more demand for credit, definitely we will grow. We want to grow our market share? Yes we want, but this will not be done at the cost of relaxing our risk and standards.

Going into risks, which is our third group of questions, we have an initial one about restructured and refinanced loans. They come from different analysts from Francisco Riquel from N+1, Ignacio Cerezo from Credit Suisse, Patrick Lee from RBC, Rohith Chandra from Barclays. And they basically ask around the provisions that we have for those restructured and refinanced loans. The change that we have announced of EUR2 billion from sub-standard to NPLs, if we expect additional provisions from this change or going forward and in general terms if we could explain the movement? Javier Marín Romano: Our portfolio of refinanced loans accounts to EUR33 billion. It’s stable. It’s been stable over the year. And we have a general provision of EUR6.6 billion for this portfolio. The change in accordance with the circular of Bank of Spain basically affects EUR3 billion of refinanced mortgage loans to individuals. Out of this, EUR2 billion had been reclassified from sub-standard into non-performing loans, right. Even though, as I mentioned before, clients are actually paying. So we have 93% of this EUR2 billion that are actually paying a non-performing, right. So we would like to consider this more – as a more technical non-performing loans. This portfolio have already a provision of EUR300 million that covers more than enough the needs for this portfolio. Take into account that more than 80% we have warranties of real estate assets for more than 80% of the portfolio. So summing up the provision and the actual value of the real estate warranty would go over 100% of the amount of the loans. Do we expect more provision for this? Well this is probably the worst portfolio we have at the bank, there is still EUR33 billion. We believe that up to-date it has adequate provisions in accordance with what we expect, how this portfolio will behave over the next months and basically that’s it.

Okay. There is a question with regards to Spain. There is a question from Álvaro Serrano from Morgan Stanley saying that even our current coverage ratio 43% if we expect – what do we expect in terms of provision cost of risk or the run rate of provisions, if we could extrapolate Q2 numbers to the rest of the year or if we could elaborate on cost of risk in Spain in general terms? Javier Marín Romano: Yes. You saw what the rolling average for the last year, that has been slightly above 2%. The quarter has been at 1.65 on a stand-alone annualized basis. And we expect this to come down to 150 basis points over the next quarters from this year. Moving on to other years, we look forward over between 2014, 2015 to go into more normalized levels, that should be between 60 and 80 basis points of cost of rate.

That question was also made by Britta Schmidt also from Autonomous, if I got it right. Carlos Peixoto asks for the exposure to renewal energy. I think we already disclosed that we have around EUR1.5 billion, EUR1.6 billion of solar and thermo-solar energy exposure, and we do not expect additional impacts coming from that exposure apart from the cost of (inaudible) that was already mentioned for Spain of around 150 basis points this year. Going into Brazil, there are several questions with regards to NPL and provisions. Álvaro Serrano from Morgan Stanley, Daragh Quinn from Nomura, Ignacio Cerezo from Credit Suisse, and Antonio Ramirez from Keefe, they ask given that the provisions are down Q-on-Q, what are our expectations for 2013 and specifically 2014? Why is still low charges – loan loss charges are high in Brazil, so cost of risk is as represented in the region of 700 basis points. Why is it so high? If we think that it is sustainable, the drop in provisions going forward in Brazil? So it’s about the same. And probably link to this, Antonio Ramirez asks that given the macro perspectives for Brazil, if we have changed our expectations or estimations and if we can update in general terms, credit growth activity and P&L evolution going forward? Javier Marín Romano: Yes. Expectation for non-performing loans in Brazil. Well, our expectations is that I think it will continue to come down over the next quarters. And we believe this should be also – this drop should be sustainable also going into next year. The charges are still high, that we have a calendar effect and we should see cost of grade coming down more steeply over the next quarters. With respect to the macro perspective on our estimates in terms of growth, our estimates from growth for Brazil for this year would be around 2%. Credit, that has begun to accelerate after the stationary a very quiet first quarter. We believe that credit at Santander should be growing at high single-digits, around 9%, 10% by the end of the year. We have the profile of the growth credit is more biased towards mortgage loans for individual clients, SMEs and less pressure in consumption, where we see that basically autos coming down slightly and consumer grades that are slightly – little bit more than flat.

With regards to Mexico, there is kind of a same question coming from Ignacio Cerezo from Credit Suisse, from Rohith Chandra from Barclays and Antonio Ramirez from Keefe and Carlos Garcia from Societe Generale with regards to provisions in Mexico and NPLs are always in the risk arena. What is coming from homebuilders? If we can elaborate on the reason on both the increase of provisions in NPLs and the breakdown? Why is it increasing and outlook going forward in the following quarters? Javier Marín Romano: The increase is – yes sir, this is basically due to the consumer credit and to homebuilders being the big part of that basically consumer credit due to the deceleration of the economy over the first half of this year. We expect a pickup of the economy especially over the last quarter of this year and going through into 2014. So we expect (inaudible) launched to countdown and cost of grade to remain stable at least for the rest of 2013.

Poland, Frédéric Teschner from Natixis asks to what extent results are sustainable, specifically linking them to the NPL rise in coverage decrease in Poland and provisions in P&L? Javier Marín Romano: We have few things in Poland. First, the economy is growing and we’re growing with economy, which is good. Second is, we are reducing the cost of our deposit base, especially the deposits gaining from Kredyt Bank, which definitely will help, and compensate the reduction in interest rates in the country. At the same point you have the integration of Kredyt Bank and Zachodni, with the cost synergies that we are expected and that are very much in line or even above, not only in terms of amount but also in terms of calendar of what we are – of we previously anticipated. In terms of number for launch, we have one-off related to a company, a homebuilder, but there is one-off. So we don’t expect this to move through into the next quarters.

Okay. To end the risk part, couple of questions, one on Spain from Sergio Gamez, Merrill Lynch. If we could explain the charge in the corporate center of around EUR200 million due to the Santander Banesto merger, if we could elaborate a little bit there? The second one would be Carlos Garcia from Societe Generale asking if we expect from the AQR that you already elaborated earlier there, if we expect any change in NPLs, provisions or in general terms restructured loan, classifications and fast additional cost of risk from the Asset Quality Review? Javier Marín Romano: Yes. So the first one with respect to the charge that we have at the corporate center, it’s a EUR188 million. It’s basically due to the integration of Banesto and Santander. It relates to a standardized launch where we have clients that have different consideration in Santander and in Banesto. What we have done is basically take the most conservative approach being it Santander or the Banesto approach. So this has resulted in an extraordinary charge of EUR188 million that is extraordinary, it is one-off and this will not continue over the next quarters. We don’t expect – with respect to the Asset Quality Review, we don’t expect any further provisioning from the Asset Quality Review. As we believe that within the traditional conservative policy of Santander, we have a quite an early recognition of problems when we think they arise, and thus a good provisioning of the expected risks.

Moving to units, we started with Spain. We have different questions around net interest income coming from Álvaro Serrano from Morgan Stanley, Jaime Becerril from JP, Mario Lodos from Sabadell Bolsa basically asking what is our expectation for the evolution of the Spanish NII? We have given a guidance that most of the deposit cost would benefit in the second semester of this year if we maintain that idea. If we would expect similar increases of NII Q-on-Q going into Q3 and Q4? If we are in the bottom of the NII in the Spain or how far are we from there? And if the limitation of remuneration of deposits, I understand this comes from the media comments on Bank of Spain, if the new pricing of the production of deposits, if it is going to improve and how it can impact on the NII? So as you can see all around deposits and NII? Javier Marín Romano: Very good. Definitely, we expect over the next – for the rest of the year a good increase in the cost of our deposits, right. Actually the cost of deposits is going down. The cost of the stock is going down monthly between five and seven basis points, right. So that is basically what we expect for the rest of the year. We believe that net interest margin – the net interest income has bottomed up in Spain and we expect this to be growing into this year and especially into next year. We have already the reduction in the Euribor – in year Euribor for the mortgages have already been repriced into our mortgages, and this impact will be more than offset by the reduction in the cost of our deposits, especially taking into account that our loan to deposit ratio stands today at 85%. With respect to the client margin for the asset side, we expect this to remain stable.

Couple of questions on the Spain remaining. One is with regards to the integration, between Banesto Santander and cost, that you already elaborated a little bit but Irma Garrido from Ahorro Corporación, Ignacio Cerezo from Credit Suisse and Javier Ruiz from Interim [ph]. They all ask about given the evolution of the employees in Spain that has gone down 2% in three months and that branches are more or less stable, what are the expected evolution with regards to this integration that we expect? If the charges that we have done in the quarter, if they are all that was expected from that integration, we announced around EUR400 million so we had not done all of it but if you can elaborate how that is going? And if we can expect additional charges with regards to that integration or we are on both calendar in what we announced? That would be the first pending question. The second one from Daragh Quinn from Nomura is, if how long do we expect Spain to maintain or to have (inaudible) going forward? So if we can elaborate on the P&L, not only on the upper part, in the full P&L for full Spain, I guess including all the units? Javier Marín Romano: Yes. Well firstly with respect to Banesto and the integration with Santander. The charge that we had, a sovereign charge of EUR270 million is not only for the integration in Spain, but also for the integration in Poland even though of course the bulk of it is from the Spanish integration. The cost of integration as we advanced were for EUR100 million that is exactly what we expect. The integration is absolutely in plans, not only in terms of savings, in terms of synergies but also in terms of calendar. The other question I think was about?

The second question is about… Javier Marín Romano: Sorry, the P&L for Spain, yes, P&L for Spain. Now first thing to mention is that our priority in Spain is to continue to grow in line of clients, both in individuals especially in the more affluence where we have a very strong market share but especially also in SMEs. So this should reflect first thing, at the level of or the financial margin with the repricing of the mortgages that we already set, repricing of grade and moving down the cost of deposits, financial margins should continue to improve. And we will see this much more strongly into next year. With respect to commissions, I would say that we are having increased operations at the bank. So we are growing again. We are market leaders in asset management with a market share close to 17%. You are seeing this impacting already this year on more into next year at the commission level and also in insurance where we’re growing very well especially in non-credit related insurance. With respect to costs, we will see next year, a more dramatic impact of the cost synergies of the integration with Banesto. With respect to provisions as we said before, we will be closing this year with the cost of credit to 150 basis points that should also continue to be lower through next year. So I would be quite fairly optimistic with respect to our expectations, with respect to the P&L of our Group in Spain.

Moving to UK, there is a question from Jaime Becerril from JP, if we expect additional PPI insurance claims or charges, and where we there? We already said that we made these provisions, if you remember last several quarters ago last year and we think we are covered there. We don’t expect additional heats from that concept. And Rohith Chandra also asks from Barclays, why other income negative is up in certain amount, basically that’s a generic provision we have done in the P&L. There is nothing special there. Ronit Ghose from Citi asks about the upper part of the UK P&L. How much do we expect in terms of NII and NIM to improve from current levels, and if we could elaborate a little bit on both revenues and specifically NII? Javier Marín Romano: Very good. Again the work over the last quarters in the UK has been great in terms of creating franchise, and it’s been reflected also of course at the P&L level. So we’ve grown almost 2 million clients, at the 1-2-3 offer. Not only in current accounts, but also in credit cards and so on. This definitely has cut to lower the cost of our deposits than its part of the impact you see at the net interest income and net interest margin. At the same time, the margins and grades are remaining fairly stable and we are managing quite well to manage the margins for the mortgage book. So basically I see this trend moving into the next part of the year which together with the strengthening of the economy in the UK, I think definitely will have.

Okay. And I would make it for UK. Now going to Brazil. You already elaborated on Brazil, so I’m going to try to add the new questions because there is Daragh Quinn from Nomura, Carlos Peixoto from BPI, Francisco Riquel from N+1 and Benjie Creelan from Macquarie. They all ask about macro that has already being elaborated, probably what could be new is given the evolution of both inflation and interest rates specifically on the SELIC. If we could elaborate on the impact of those movements? If we think that for the affordability ratios – the improvements for affordability ratios for consumer loans could affect positively or negatively that evolution so that on the side of volumes. And if we see a floor to the repricing of the asset in Brazil? The rest are macro, volume and growth, but I think you already leveraged it. Javier Marín Romano: What was the last one?

The last one was the repricing of the asset side in the floor of potential evolution in terms of that repricing on the loan side. Javier Marín Romano: Yes. Well first thing, with respect to inflation. Inflation stands today at 200 basis point over the level of the established by the BaFin. I could see especially the increase in the interest rates does not translate immediately into our credit portfolio, and as you know you have the compulsory deposits in Brazil. So it has an initial negative impact on the profitability of our portfolio, but we’ll come up over the next month when the portfolio is repriced, it will have a much more positive impact over the profitability of this portfolio. Affordability of grades, I already said that you have a very stationary quite first quarter. It’s been accelerating a credit growth of the second quarter and we see this accelerate even more for the next six months in order to conclude the year with growth at close to 10%. And the question of repricing of assets, sorry?

Basically the asset managing compression if you think... Javier Marín Romano: Okay. That was already answered, right. So first, initially an impact on the – until the portfolio upgrade is repriced that will take – that would be very short-term repriced portfolio. So it will happen over the next months.

Okay. Next unit, which is the run-off real estate unit in the Spain. There is one question coming from (inaudible). If we could give a – share with some data regarding these unit activity in terms of sales, I guess how it is evolving, if it’s above or below expectations? How much do we expect to in terms of activity and if we could also add some flavor to the P&L in terms of potential evolution going forward from the current losses in which we are now? Javier Marín Romano: Okay. So just a few figures on this. We have sold 8,300 units over the first six months. We have reduced the level of credit in almost EUR1.5 billion. In terms of the amount of real estate repossessed that you have sold is account for EUR500 million of what you see you know that basically the new foreclosed compared to sales are being flat because of basically the same amount. We’ve made a loss of EUR337 million over in first six months and we expect we’re basically in plan. We think this should accelerate a little bit over the second part of the year. The average discount of sales has been around 45%, slightly below what we – last year. So we’re quite in plans with respect to this unit.

Last unit is, we go to Mexico. There are a couple of questions there, Carlos Peixoto from BPI and Daragh Quinn from Nomura. First is if we expect any impact from the banking reform from the structural reforms, and if we think it would impact the outlook of the unit and which is that outlook, which is basically the question from Daragh Quinn the second one, what is the outlook for loan growth for year-end and for 2014 in terms of Santander Mexico? Javier Marín Romano: We think these structural reforms are going to be great for the country. I think we’ll have probably a structural 1 to 1.5 percentage more of growth in GDP. In terms of the loan portfolio, we expect this year to be growing in double-digits for the units around 14%.

Well I guess that’s all. They say to me that we don’t have any questions on the line. So thank you again for your presence. Any questions that have not been addressed, please do direct them to the investor relations department to cover them. Thank you.