Good morning, everyone. Thanks for joining this Q2 2015 results conference call. [Sergio Galván], Global Head of Investor Relations. As we proceeded exactly last quarter, our CEO, Mr. Álvarez will present the Group performance, followed our CFO, Mr. García Cantera, who will detail on the business areas performance. The presentation will finish as we did last quarter with a live Q&A session and we'll appreciate if no more than two questions are asked by analysts or investors. With no further delay, I'll hand over the floor to our CEO. José Antonio Álvarez: Thank you, Sergio; and good morning to everyone. Thank you for attending to this conference call about the second quarter results. Let me to -- first, to say the presentation is going to be divided in three parts. The first one, I will elaborate about the Group performance in the second quarter and in the first half of the year compared with the previous year. Afterwards, our CFO, Mr. García Cantera will comment on the business areas; not all of them, on the most important ones in order not to lengthen too much the presentation and maybe give you more time for questions. The rest of the units are included in the presentation and you have all the information there. Lastly, I will make some closing remarks about where are we in our transformation plan. Beginning with environment, well, in the quarter we have had a significant volatility out of -- coming out of the Greek crisis, mainly in the second half of the quarter. We conduct our business in an environment of well, quite significant growth in the main geographies -- in almost all geographies but Brazil. In the U.S., UK and in Spain growth has been significant. Economies are growing above 2% in all these countries.…

Thanks, José Antonio. Indeed, we open now the Q&A session and if possible gentle reminder, no more than just two questions per analyst, investor.

[Operator Instructions] The first question comes from Alvaro Serrano from Morgan Stanley. Please go ahead sir.

Yes, two questions. First of all, can you elaborate a bit more about the outlook in Spain NII? In particular, can you touch on what you think the impact of the 123 account might be over the next couple of quarters? And also why you think the loan growth is not coming through? I think you had a 3% to 5% loan growth target for this year and it's almost flat at the moment. And the second question is on Brazil. Can you just comment on what the early NPL indicators are; what deterioration you're seeing? José Antonio Álvarez: So, I'll look for Spain. In Spain, two questions, one about the outlook for Spain and potential impact of the 123 account. Well, the trends we show in the presentation are pretty clear. There is still some reduction in the funding costs, so in deposit costs that largely are done. There is some room grow still, but limited. And what the trend that is going to prevail in relation with the overall trend of the net interest income is going to be the asset spreads. And the asset spread, the environment is really tough in these days. So the spreads went down significantly, both in SMEs and in mortgages that are two main businesses. Probably in SMEs, we saw in the front book somehow like 60 basis points year-on-year. And in mortgages, you are seeing the offers in the market. So, I'm not optimistic about this, because there is a fierce competition in the market in these days. Every player tries to grow with plenty of liquidity there, so I’m not optimistic in relation with this. So, I will see this as a continuing trend, at least for some time. In relation with the 123 account, naturally, this has two impacts.…

The next question comes from Raoul Leonard from Deutsche Bank. Please go ahead sir.

I wanted to ask a question about potential Basel IV impact on your CET1 ratios. And in particular, this is about operational risk proposals on the table right now that appeared to be revenue driven, with some kind of scaling up effect, so that effectively the bigger you are, the more you have up-risk RWAs. Can you give us some guidance on what RWA inflation might be coming from this? Perhaps put differently, do you think the regulator's going to look at you as a Group or break this down into separate countries, so your operational risk impact is just not quite as big? That's one question. My second question is around just Santander UK. Can you give us some guidance on the Bank levy P&L impact tax rate will work going forward? So, an easier one there. José Antonio Álvarez: In relation with operational risk, it's true that we have a significant -- as you said rightly, operational risk in the standard model is largely related with revenues; and in countries, in our case, particularly a country like Brazil, where the revenues are quite large, due to the spreads. On the asset side, you end up having higher capital consumption due to operational risk. Well, you can work on standard model, you can work on advanced model for risk management and at the same time, we may end up with some kind of new standard for the industry. So, it's not -- regulation is far from clear here. What is true is we have a significant capital consumption higher than our peers, due to operational risk, mainly due to Brazil, as we are in the standard model and the advanced model is going to take for a while, but we are not sure that the standard model is going to play in the industry or if the regulators come with another standard that will apply to everyone else. I don't know if you want to elaborate more on this. In UK, you've got the numbers, the levy. José García Cantera: Yes, the combination of the higher tax rate and the bank levy means, in aggregate from here till 2020 £500 million.

The next question comes from Carlos Garcia from Societe Generale. Please go ahead, sir.

A couple of questions. The first one is again on the 123 account. I would like to know, what is the volume of active clients that you have in Spain, what percentage do you think will migrate? And if you cannot give us the figures, at least what has been the experience in the UK, so what percentage of your client base is on the 123 account? The second question is on Brazil. Could you explain what could be the impact of a downgrade in the country in terms of risk-weighted assets, whether it could have a substantial impact on risk weightings or not? José Antonio Álvarez: Starting with the second question, as we have the majority of the book in Brazil in the standard model, downgrade doesn't -- has a significant impact on risk-weighted assets. In relation with 123 account, we will elaborate more in more detail by the Investor Day and we can have more numbers to give you. Now it's for six weeks in -- we launched six or seven weeks ago. Initially, what we are expecting and what is happening at the beginning and it happened in the UK at the beginning, normally at the beginning, you have more active customers, translating into loyal customer or customers with more products with us. Later on the new customers are progressing. This is the experience we got in the UK. In Spain, the first indications go in the same direction. To give -- the emigration is going to continue. So the experience in the UK is not very much similar to Spain. Keep in mind that in the UK, the position we had in current accounts in the UK is not comparable with the existing position we had in Spain, so probably in Spain -- in UK we were translating savings accounts into current accounts. In Spain, it's not going to be the case, because our position in current accounts, remember that our booking current accounts is the largest in the industry, and probably we have, at the beginning, active customers being translated into more loyal customers, assisting active customers unless coming from those side. But to have an indication what's going to happen in the 123, probably we need to wait. We'll give you all the figures in the Investor Day, but even in the Investor Day going to be limited to extrapolate. So, remember that in UK we've been for three years in a row with the same proposition. At the beginning, we started very slowly and now we have a -- as José García Cantera said, we are gathering 1 billion per month and 100,000 customers per month. This is the current running rate. I don't know the running rate in Spain we expect to be achieved and this was at least our plan, after six months the account was launched.

The next question comes from Francisco Riquel from N+1. Please go ahead, sir.

I wanted to ask also about the net interest income in Spain and two questions here. If you can give more details on the loan spread, front book versus back book dynamics by the -- for the main loan categories, so that we can assess, better assess the impact of the re-pricing going forward? And second, an update on the bond portfolio in Spain, size; duration; and deal contribution to NII? José García Cantera: As José Antonio said, if we look at businesses, these are loans with short duration; they're coming in at on average 200 basis points relative to 160 basis points a year ago. In mortgages, the front book is coming in at 150; the back book is around 90 basis points. Those are the two main categories in the P&L. In terms of the ALCO portfolio, we have a total of close to EUR 30 billion in Spain. And the contribution to the net interest income in the quarter was around EUR 130 million.

The next question comes from Carlos Peixoto from BPI. Please go ahead sir.

My first question would be regarding the UK, particularly on the level of provisions that was witnessed this quarter. And also, well I saw in the release that you mentioned that there was a release of provisions in there. I was wondering if you could further elaborate how much was this effect and how much -- what level of provision should we expect going forward? The second question would be more on the M&A front. There are some press reports regarding a possible interest in HSBC's operations in Brazil. My question would be, whether this could be something of interest to you and how would you consider to finance this acquisition, would it be through a capital increase in Santander Brazil or at the parent company level? José Antonio Álvarez: In the UK the loan loss provisions in the quarter, overall the credit quality in UK is very good, both in mortgage and non-mortgage book. In the quarter, we sold some portfolios. And those portfolios have some provisions. José García Cantera: Very small. José Antonio Álvarez: It's very small. So but this is the only exceptional item. You can give more on this. José García Cantera: They're very small number though. I mean we sold some loans in the aviation sector and we did some restructure and some sales in GBM as well. These are relatively small numbers with a small impact on the cost of credit in the quarter. It would have been instead of 8, it would have been probably 10 basis points or something like that, not significant. José Antonio Álvarez: And in relation with Brazil, I'm not going to comment on this as this is still an ongoing process as far as I know.

The next question comes from Johan De Mulder from Bernstein. Please go ahead sir.

Two questions. One is about the one of the P&L lines, other income. So we see that other income actually has come down quite significantly by 33% [ph] since the first quarter. And that seems to be mainly driven by Brazil, Spain and especially the corporate center. So, maybe if you could give a little bit more color about why the losses there were actually higher in the other income line? I know that you mentioned provisions to strengthen the balance sheet, but maybe if you could give some more color as to what exactly happened there, as well as in Brazil and Spain in that other income line? And then the second question relates to capital. So, we see that in the end, RWA contribution comes to 3 basis points of fully loaded core equity Tier 1. So we actually see that there's a little bit of a disconnect on one hand, just like your RWAs going down on a quarter-on-quarter, while on the other hand your loans actually go up by about 0.6%. So, it looks like this is especially the case in the USA, Spain, Brazil and Chile. And we were just wondering basically what is happening there. Is it that there is a lot of the loans sitting on advanced versus standardized? And is there actually more migration towards advanced expected in the future? These are the two questions. José Antonio Álvarez: Well, the first question was around other income. As you said, the other income came significantly lower than in the previous quarters. And as you so rightly said that it's Brazil, Spain and the corporate center. Well, I will say overall, I said in the presentation that the main purpose of this is to strengthen the balance sheet with a prudent policy, particularly important…

The next question comes from Stefan Nedialkov from Citigroup. Please go ahead sir.

Two questions from us as well. Number one, on the 123 account. Which countries are next, and over what timeframe? And the second question is on capital, with respect to deferred tax credits. There has been some change in Portugal regarding deferred tax credits, as they refer to loan loss provisions and potentially, the credit status could be removed from the DTAs that relates to loan loss provisions. Do you see this as potentially as a negative read across to Spain, down the road? And overall, how much of your capital benefits from DTCs? José Antonio Álvarez: To launch a new 123 proposition. Well, the 123 is one idea that's in line with our target of having more loyal customers, and we established this specific target to grow the loyal customers. The way the proposition is made in the different geographies is different, based on the current position in those geographies. We for sure -- we're going to launch new initiatives, not necessarily the same initiatives all across, just to improve our customer base, the loyalty of our customer base, given the fact that as we said to you several times, loyal customers is three, four, five times more profitable than active customer. We continue to work along this line in every geography in which working. If this is relating to the kind of strategy, not product may translate this into reality; it's going to be different by geographies. We're asking all the geographies to come with propositions to increase the loyalty of our customer base. The propositions will be elaborate at the local level, not necessarily the same proposition all across the board. In relation with the DTC, I don't know what has changed in Portugal. What I know is, as you rightly said, we have DTAs and the DTCs. As far as I know, there is no news in this regard, in relation with a potential change on the way the DTCs -- you referred to the DTCs are accounted on the capital base. The DTA, as you know, in the fully loaded, are already deducted. But I don't know the change you mentioned in Portugal. Well, what people is telling me that it doesn't affect us, because last year we didn't take those DTAs in Portugal, so it doesn't affect us the change done in Portugal.

Thanks, Stefan. We might follow up with you with more details after the call. Next question, please.

The next question comes from Ignacio Ulargui form BBVA. Please go ahead sir.

I just have two questions. One is on the Chile NII. There's plenty of volatility always linked to inflation, but what should we expect going forward? And the other thing is on the cost of risk in the U.S. and especially in Santander in SCUSA, what we should expect out of the unit into the coming quarters? José Antonio Álvarez: Chile, as you know, our net interest income has been fairly volatile. It's always fairly volatile, depending on inflation. As you know, particularly the mortgage book in Chile, there is a significant part of the loan book in Chile is -- the yield is establishing what they call UF, that is inflation plus. The inflation has been pretty high in Chile last year and relatively high this year. Quarter-on-quarter, there is plenty of volatility there. Going forward, I don't have in mind the kind of expectation the market has for volatility for inflation in Chile, but it's a factor that you should take into account and apply mainly to the long book. We tend to be long inflation, short nominal rate in the range of $4 billion to $7 billion in Chile. As a matter of fact, you can do your own numbers, base it on your expectations on inflation. SCUSA cost of risk, we said that quarter on -- basically, our policy is to have a provision for expected losses in the next 14 months to 16 months. So this is the policy. And largely, the cost of risk -- the number, the provisions, you see in the P&L depends on the retained assets, the kind of assets we retain, and the volume we retain, if we retain more subprime or less subprime assets, and the volume we retain. Normally, this is going to be fairly volatile, depending on the securitization. So, if we securitize more in one quarter, we have less assets, and we're going to have less net interest income, less cost of risk at the same time. On the other side, we're going to have some fee income due to the securitization. But basically, in the underlying business, we haven't seen any significant change in the cost of risk in the car, in the subprime, near prime and prime car lending in the U.S.

The next question comes from Sofie Peterzens from JP Morgan. Please go ahead.

I was wondering if you could give, a little bit an outlook for Brazil, how you see NIM continuing. You had NIM down quarter on quarter, but if you look at Bank of Brazil data, it looks like some of your competitors are actually seeing quite attractive NIM expansion. Also, how we should think about the social contribution tax from Brazil and kind of overall, how you expect cost of risk in Brazil to move? And my second question is around the senior management changes, and all the new appointments we have seen in Santander U.S. Could you just elaborate what the rationale for these changes are? Thank you. José Antonio Álvarez: First question about NIM, net interest margin outlook in Brazil. We've been, in the last couple of quarters, changing the mix of our loan book. As you review the numbers, we grew significantly faster than large corporates and corporate, and we reduce our exposure to the consumer -- unsecured lending to consumers. This translates naturally into higher -- into lower net interest margin. And the difference in Brazil, the gap in Brazil as you know is very, very large. This process is mainly done. You saw in the last quarter, we were able to increase by 10 basis points if I remember the net interest margin in the loan book. Probably, we're going to see a more stable NIM outlook going forward or slightly trending up, knowing that the front book spreads currently are higher and the spreads are trending up in Brazil. So probably this should translate into higher NIM, combined with not significant growth. So in this environment probably the growth is going to be probably in line with inflation, no more than inflation or even less than that. So, changes in senior management in U.S., we've been doing significant changes there, it's true. We are improving our governance standards there. We changed the board, both in the holding company, the Bank and SCUSA, and the senior management, to try to strengthen our franchises there. We have a plan that includes not only the commercial side to strengthen the franchise, mainly the banking franchise, also to comply with the higher expectations from the regulators. As you know, and I elaborated in previous quarters, we are building from scratch a holding company that was non-existent, in terms of -- operational holding company, not a holding company that is just a legal or holding company, operational holding company from scratch and we are hiring people there and to create a new organization, but taking into account that we have a holding company and all the business in the U.S., not only the current two operating subsidiaries, below this holding company that will effectively match all the business. The hirings are due to this, to build this structure, this organization in the holding company.

The next question comes from Ignacio Cerezo from Credit Suisse. Please go ahead, sir.

A couple of questions on my side. Sorry for going back to the Spanish net interest income, but given all the factors actually you have mentioned through the call, when would you expect net interest income to bottom in the next three to four quarters? And in terms of provisions in Spain as well, the quality actually seems to be improving a little bit faster than we anticipated, so are you basically changing your guidance on provisions on the back of the last couple of quarters? And specifically on the real estate run-off book, actually, when should we expect that to give a zero cost of risk or around zero cost of risk? José Antonio Álvarez: Two questions, the first one is you're asking me forecast for the NII. Well, this depends largely not only on me; it depends on the competition in the market. I said in the presentation that I am not optimistic about this for the time being. Probably the timeframe you established, three or four quarters, if I may I will expect a fierce competition in the market on the asset side; probably not so much on the deposits. But the NII probably is going to suffer all. I'm referring to the commercial NII, not including here potential ALCO strategies that may play with currently. But commercially speaking, probably there is little left on the funding side, on deposit costs. The pressure coming from the asset side is going to continue, but in mortgages. As José said, the front book, back book mortgages still works in favor of the NII. Provisions, you saw the numbers. I'm fairly optimistic here. So, we were elaborating in the past that we were expecting this year around 90 basis points, 80 to 90; we are there. Probably we've been telling 60 to 70 basis points, is what we should expect over the cycle; probably overshooting is something that is going to happen. So, I'm not able now to put a number for next year, but probably some overshooting is going to happen anyway on the positive side in provisions. And we will go probably significantly below the average across the cycle.

The next question comes from Robert Noble from RBC. Please go ahead sir.

Two small questions from me. What's your exposure to Swiss franc mortgages in your Polish business and the potential impact on the government proposals; and finally, your Puerto Rican exposure as well? José García Cantera: For the Swiss francs, mortgages is slightly less than -- including everything, including what we have in Santander consumer and what we have in the Bank, it's less than EUR 4 billion. The proposal, as you know, it's a new proposal that is coming from the government. It is still in the works. Before that it's converted into legislation, it takes a very long time. We are starting to analyze that. The cost for the system, the government is estimating that the cost for the system as a whole is in the region of 9 billion zlotys. And in our case, it will very much depend on the people that actually go for that. But in any case, it's going to be a very manageable cost. And as you know, it's going to be spread over time. But again, it's very premature to make guesstimates, given the very early stages in which this proposal is at the moment. It's going to take quite a while before it is turned into legislation. In Puerto Rico, Puerto Rico made $90 million profit last year. We have a capital adequacy of 26%, 27%; it's extremely well capitalized. We have very limited exposure, not direct exposure, very limited exposure directly to the Puerto Rican government. We have some exposure to municipalities, which is very well hedged. The guarantee is very well collateralized. And we have some exposure to individuals as well, but we don't think we're going to see significant losses in Puerto Rico anyway.

The next question comes from Mario Ropero from Fidentiis. Please go ahead sir.

Two quick questions, the first one is on the 123 account. Could you please give us some color on the time lag that you expect to go between the time you gain a loyal customer to the 123 and the time you offset the negative profitability impact through higher fees and higher transactionality? The other one is simply if you could give us some guidance on cost evolution in Spain, because it seems like the cost base has been stable over the last couple of quarters. José Antonio Álvarez: The 123, as I said, it's a proposition. Normally, there is a lag between, a customer opens or translates an account into a 123 account, and there is a lag between this time and when the customer translates the other products to us. We are gathering momentum on this. Normally, you have 123 accounts that they open, it takes for a while before they bring the bills to this account, in order to remember that the 123 account only pays interest if you have certain numbers of bills with us. So, this is a process that normally the experience in the UK is a couple of months, two or three months the customer is bringing to us the 123 -- the bills to the account and getting the loyalty required to get paid, to get the interest rate that we offer to pay a fee or have. Could you repeat the second question, Mario?

If you could give some guidance on the cost evolution in Spain, if we can expect some further cost savings? José Antonio Álvarez: In Spain, naturally this is an important question after the merger we've done. We've been reducing the cost base in Spain, now we face what I was referring in the presentation. We are on one side, we are investing; we are already investing in our front office. What we have is in our IT infrastructure, we have extremely good, extremely high quality data centers. The front office, we need to invest in the coming years, because to improve our digital proposition and to catch up with the market. The question in the digital proposition is time to market, because time to market in the way that we -- there is a process in which we should reduce cost on the traditional channels. At the same time, we invest in the new channels, and this is -- having this done properly is the key question here. The question is not if you invest or you don't invest in multichannel strategy in your strategy, every bank is going to do that. The question is, how and when and at the same time, how do you get a reduction or an increase in the productivity in the traditional channels? We're going to be in this process in the coming years. We are already in this process. And it's very likely that we're going to optimize, it's not only about closing branches or having more or less branches. It is about the processes you run, what we call the customer journeys, and having a real electronic process in all of those common processes, from opening a current account to having mortgages. All these processes we need to review. Not only because the front we need to offer a digital proposition, also because we need to have more streamlined processes in order to make efficiency gains on that side, because we need to offset the cost on the other side. Overall, our target, as I said, is to keep the costs growing in line with inflation or slightly below inflation overall and this includes Spain. But this I don't want to -- this requires a significant offer because, on one side, we have significant regulatory costs that are coming. Particularly on the risk side, we have the risk data aggregation program that we're going to invest 500 million and overall, in three years, 1 billion with regulatory related costs or investments; some of them will be investments. And we need to offset this with increasing productivity in the traditional business, and this applies to Spain. Probably, in Spain after the merger, this is the next frontier for us.

The next question comes from Britta Schmidt from Autonomous Research. Please go ahead.

I think you briefly touched on what I wanted to ask, which is on regulatory costs, there are changes in the structures in the UK with the ring fencing and also in the U.S. by creating the intermediate holding company. Can you give us some guidance about the cost increases that you expect for that vis-à-vis where we are today? I think you mentioned something about 1 billion of regulatory costs. Maybe you can put that into that context? And the second question is, can you please just elaborate a little bit more as to why you are so confident that the Brazilian weaker macro situation is not going to impact your asset quality significantly? What is driving that comfort level that you have? José Antonio Álvarez: Regulatory costs, I already mentioned some numbers. We have overall a cost income ratio that we have targeted to be below 45%, so everything is included there. And as I said, naturally we have the ring fence, increasing cost due to the ring fencing. In UK, increasing cost due to the regulatory requirements, in the U.S. to the regulatory expectation and also the ECB, not only the U.S. and the UK, the ECB one is also a regulator that required us to -- has demands on us. The same applied to the local regulators, are less known, but in Mexico or in Brazil the regulator is asking for -- have their own regulatory demands that put pressure on cost. Overall, I mentioned the 1 billion that we expect to invest in regulatory related requirements in three years. And on the other side, we have two sides that demands more cost that is regulatory related and also the digital -- the multichannel approach to the customers. On the other side, the business as usual;…