Thanks for attending the first half earnings presentation for Grupo Santander. As we do every quarter, our group CEO will address In detail, the first half highlights as well as the group performance. Then our group CFO will talk about the different business areas we use. And Obviously, the group CEO will go into the key takeaways before jumping straight into the Q and A. The conference call should take us around 1 hour.
And now, Jose Antonio, the floor is yours.
Okay. Good morning to everyone. Thank you for attending this 2nd quarter results presentation. So as you very well know, the quarter has been very challenging. The environment was significantly deteriorated by the pandemia.
And in this environment, this difficult environment, the bank has delivered solid operating performance despite the economic environment. So during the Q2, we were able to continue the performance trend set during the previous quarters in activity and underlying results. In terms of activity, the bank has extended substantial financial support to its customers to help them through the pandemic. The stock continued to grow in our 3 regions, and our digital adoption has accelerated a lot. We are starting to see signs of normalization in retail new lending, particularly in Europe, with mortgage and consumer new business increasing.
Edsmeades and Corporates were supported by the 16 government warranty programs. JV reduced from the peak In April, I will talk more in-depth about the different segments of the activity. The strong top line performance given the current market [SPEAKER JOSE ANTONIO ALVAREZ PALLETE:] Contacts with a net operating income increase of 2%, driven by resilient customer revenue and our cost reduction plan, minus 5% year on year in real terms. Soon plan, minus 5% year on year in real terms. The cost reductions are ahead of plan driven by successful expense management in the last few years and additional savings measures adopted since the beginning of the crisis.
Higher loan loss provisions based on the application to our model, the scenarios we I would like to you in the previous quarter. The total loan loss provisions are BRL 7,000,000,000 in the first half of the year And an underlying profit of €1,500,000,000 in the quarter, €1,900,000,000 in the first half twenty twenty. However, As a result of the pandemic, the bank has complete a review of the valuation of the bank goodwill held against past acquisitions and of the tax Credit's carry forward. We've recorded a non cash nonrecurring impairment charge of EUR 12,600,000,000 resulting in an statutory attributable loss for the first half of EUR 10,800,000,000. I will explain in the details later.
Additionally, we have strengthened the balance sheet. We maintain the estimation of the cost of credit we gave to you In 1st Q, expecting to reach 1.4%, 1.5% at year end, with very good credit quality supported by mitigation measures that we've been taking. Furthermore, we reinforced our capital position in the quarter, delivered a strong organic capital generation 28 basis points in the quarter with group CET1 reaching 11.84 at the top end of the bank's 11%, 12% target after the accrual of 6 basis points of collective Tier 1 capital in the quarter to allow the flexibility to pay a cash dividend from 2020 earnings. In addition, the board intention is to propose to shareholders the payment of a scrap dividend paying in shares in 2019. As soon as possible, depending on the macro and the regulatory requirements, The intention of the Board is to go to full cash dividend to 100% cash dividend, as I said, as soon as possible.
Going to the P and L. So we delivered a strong performance. Strength rate has a significant has had a significant impact, 3 percentage points in revenues and 6 percentage points In cost, Brazilian customer revenue even with lower business activity, a strong performance on CIB Phase that is reflected in other income, we accelerate our cost reduction and higher loan loss provisions due to COVID-nineteen related provisions. In Q1, these were within the provision overlay, which we included in the net capital gains and provisions, which have now Being allocated by country in this line, you have the details in the appendix. As a result, 2nd quarter underlying attributable profit of EUR 1531 million, driven first half twenty twenty results of EUR 1 €900,000,000 after absorbing €7,000,000,000 of loan loss provision.
We have also recorded nonrecurring charges, which I am going to explain and breakdown in the following slide. Every year, usually in Q4, Grupo evaluates whether the adjustment of the goodwill generating the acquisition of the subsidiary is necessary. In the quarter, following the trigger events occurred requiring an earlier review. This is a very special economic situation. The changes in the economic Environment has been very high.
We expect GDP to contract in all the countries in which we operate and anticipate a 2 year 2, 3 year recovery period. At the same time, we had a lower for longer interest rates with significant decreases in many jurisdictions. And the increase we also increased the discount rates to reflect market volatility and higher risk premiums when we discounted the future cash flows. [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] So the analysis of value in euros guidance and its comparison with the group value results in a total goodwill impairment of €10,100,000,000 of which EUR 4,000,000,000 is the result of a 1 percentage point increase in the discount rate. By country, you can see the figures in terms of like Santander U.
K. Dollars 6,100,000,000 U. S. Dollars 2,300,000,000 Poland 1,200,000,000 and consumer finance, dollars 500,000,000 some in Nordic, some in Germany. Additionally, the economic environment also affect our capacity to use the tax Credit is going forward in the short run, especially those that are registered in Spain, the Spanish consolidated fiscal group.
As a result, we also recorded a €2,500,000,000 impairment to deferred tax access. The impairments, as you know, And non cash items have no impact on our market position and credit risk position and are neutral in CET1 Capital. Nevertheless, we remain optimistic that the growth potential in the markets in which we operate And this impairment does not reflect in any case the importance of the markets in which we operate and how core are for us. Going for Capital, we continue to build capital. In the quarter, we generate 28 basis points Organic capital in the quarter due to higher net profit, management of risk weighted assets and increased liquidization.
This together with the positive regulatory impact Driven by the expected European regulation of capital requirements, CRR 2 quick fix measures led to a total increase of 52 basis points. On the other hand, there were several non recurring impacts in the quarter, such as EBITDA acquisition and negative impacts coming from FX mainly and some from pensions. All Of these results in a CET1 of 1184 and the management buffer of circa 300 basis points versus 189 basis points pre COVID-nineteen. Today, we have greater visibility than a few months ago. We did not believe that We're going to destroy capital.
Conversely, we think it's more feasible to pay dividends. So we have been included in this capital position The sale of Puerto Rico, not the sale of Puerto Rico. Now the potential impact of the software deduction that may come At the end of the year, that will be in the region of 20 north of 20 basis points impact. So going to the activity, let me to guide you to the activity in the quarter. First, on the operational side, we The bank has operated remarkably well in all geographic areas.
The business continuity was not compromise, and we haven't had any relevant incident. At the same time, we continue to serve our customers with the attention they deserve. Currently, nearly 90% of our branches are open. We strengthened our corporate centers capabilities and we are over 37,500 ATMs are valued with the group working as usual. Also, our point of sale turnover has recovered to need to prepare prices levels following 25% turnover growth from the low we shipped in April.
Also, we started to gradually return to our usual workplace in some countries at the end of May, always following the recommendation of the local governments, respecting the individual needs of each employee. When it goes to the activity, to the financial activity, you have on the screen The new retail new lending. While we are seeing some signs of normalization, particularly in terms in Europe, also in the U. S, less intense in Latin America. In Europe, as you can see, mortgage lending new business is recovering, particularly in U.
K. And Spain. North America and South America are below pre crisis levels with South America more affected as some restrictions still apply. In consumer lending, recovering quickly in all the European countries with Nordics above recovery activity and Germany in 100% and Spain and Italy over 70%. We had strong origination volumes in the U.
S, particularly in prime, boosted by FSA campaign. In South America, volumes are still below pre COVID despite having spike in April. When we go to the corporate and CIB lending, Let me do remember that this has been a quarter in which we've been using the grade facilities Through the government warranty programs, over 630,000 operations have been formalized amounting for more than €25,000,000,000 mainly in Spain, also in UK and some in the U. S. In lending to SMEs and Corporates, in Europe, growth was driven mainly by Spain, in large part due to AICA loans and also in the UK, Bauschbach loans and CBILS.
North America volumes return to pre COVID levels. South America is still an earlier phase Of the crisis and continue to have mixed performance across countries. Brazil declining month on month, while Chile and Argentina having some growth. In CIB, credit growth of EUR 16,000,000,000 in February, such in drop downs across countries in March The February week is on February, but normalizing in the later half of the quarter. Much of this liquidity has been placed directly in deposits That grew €25,000,000,000 in the quarter.
So if we go for geographic areas, you see the activity. In June, group new lending was similar to pre COVID levels. In the second quarter, stock continued to grow in our 3 regions, resulting in a 6% Year on year increase in loans and 7% growth in customer funds. The stock, you have the stock there. Basically, retail loans remain fairly stable, while corporate and wholesale balance increased across the board.
Finally, as a result of the The health crisis, digital adoption has accelerated a lot. Our digital products and services are Becoming more important than ever. We have increased 6,000,000 mobile customers since 2019, growing 22% and we reached 40,000,000 digital customers In first half twenty twenty, we grew 50% more than in first half of twenty nineteen. Our digital sales penetration increased about 47% in Q2 versus 36% in 2019. Of note, the Guaccentander UK equipped an exceptional 92% of digital Sales of the total in Q2, 76% in the first half of twenty twenty.
As a result, we have again achieved Record quarterly figures in the number of digital services and transactions. Going to the group earnings, let me just start with revenue. I will Qualify the revenue as I did at the beginning there. We're seeing significant growth in the Americas, North America is still growing and Europe some decrease mainly due to the fee income line as a result of lower activity. Well, overall, as I said at the beginning, very resilient revenue, which is the result of our business model that is characterized by strong relationship with our customers.
You go to different parts of the revenue lines, different revenue lines, NII was EUR 16,200,000,000 Basically flat compared with the previous year. So although internally, we have significant changes, better Higher volumes, the impact of the lower interval rates, some regulatory, particularly in Brazil with the overdrafts And the higher the very high liquidity offer, the highest ever that has implications in the cost. But overall, flat NII in constant currencies. Going to the fee income, we have like 3 walls here, the retail banking that suffered naturally the lack of activity in the quarter, the lower volumes of transactions mainly in Europe and regulatory changes in several units. The Americas remained broadly stable.
From the business point of view, of note is wealth management and insurance and CIB increased fees and represent 47% of the group fees. This quarter, we can perceive a gradual recovery in net fee income associated with normalization of the activity. In retail, Point of sales and car turnover increased 25% 28% between April June after the sharp plunge of 24% year on year on like. In Wealth Management and Insurance, volumes show positive year on year growth In Santander asset margin, driven by market movements and positive net sales in May June. In insurance, new production started to recover peak crisis events in the Q2, mainly in Latin America.
In CIB, the evolution has been very good, 20% up, the fee income driven by Global Transaction Banking, Global Debt Financing and the Global Markets. Our strategy remains focused on increasing loyalty and growing higher value added products and services, and we are more optimistic for the coming quarters. Costs, as I mentioned at the beginning, 5% lower in Real terms, reflecting our successful management in this space. We are accelerating the cost reduction trends in most markets, notably in Spain minus 10%, UK minus 6% and U. S.
Minus 4%. This allow us to be ahead of scheduling our cost reduction plan and recaptured incremental cost efficiency. We have already achieved efficiencies in Europe over €300,000,000 year to date. We represent 75% of the initial full year 2020 target. The efficiency ratio remained broadly in line with The previous year at 47%, that is remarkable in this environment.
And we believe that the management that we plan to do By region and the lessons learned from the management of the pandemic, we enabled us to accelerate our transformation plan in the future and consequently Further optimize cost while improving customer experience. We are optimistic about the cost evolution in the coming quarters. So going to credit quality, we recorded our loan loss provisions, as I mentioned before, of $7,000,000,000 3,900,000,000 Quarter, EUR 3,100,000,000 second quarter. As a result, we still expect the cost of risk of the group to be in the region of 1.4, 1.4, 1.5 as we already mentioned. So the traditional measures of credit quality at these states Do not apply that much NPL, remain fairly flat.
So all these provisions are based on the models plus applying the scenarios to the model, as you know. Let me do having said that, let me give you some color about what's going on in our loan book. As we mentioned in the previous quarter, Payment holidays have been and the amount of customers affected by that got a payment holidays has been significant. More than 5,000,000 customers got It's some kind of moratoria for a total amount of BRL160 1,000,000,000. Close to 80% of this amount is granted to individuals, of which around 90% is secured lending.
The vast majority is mortgage related and it represents 60% And it's more to be concentrated in our highly collateralized U. K. Portfolio. Moreover, as 100% of the dilutive moratoria, A large majority of the customers in the UK have requested the payment holiday as a way to benefit for favorable financial conditions. Indeed, circa 90% of these customers do not have any arrears on record.
Consumer accounts for 20% of the 30 of which 2 thirds is out of loans. So atemoratoria is short term, typically 2, 3 months and is starting to expire and I will provide you some data Immediately. Yes, 6% of the SME and corporate portfolio is under moratorium and is complemented with New liquidity facilities bucketed by government warranties by more than €20,000,000,000 as I mentioned before. In summary, according to our internal risk analysis, 75% of the portfolio subject to moratoria is defined as a low risk and still as early given the uncertainty levels to draw final conditions. Let me share with you what's going on with this portfolio as the current moratorium has expired.
As you can observe, close to 90% of the moratorium will mature in 2020, of which 25% had already expired as of 30 June and 50% more will do so in the next 3 months. And so it's still too early to draw any conclusions on despite volumes. We can see that the current expirations are behaving with no material deviation from their normal behavior. Of the total spread at 30 June, circa €29,000,000,000 98% remains performing. More than 60% are residential mortgage, mainly concentrated in the UK, EUR 18,000,000,000 30% is consumer, of which 90% EUR 8,000,000,000 is shut off mainly in Scusa.
Concerning SMEs and Corporates as of June, despite loans are concentrated mainly in Brazil. We are reinforcing local recovery schemes. This moratorium And the early performance of the supply paying holidays were taken into account when calculated the estimated cost of credit At year end of 140 basis points, 150 basis points. As of 15 July, more than EUR 40,000,000,000 These loans had spied, maintaining similar credit quality, and only 2% of the total had entered into Stage 3. So let me to hand it now to Jose That is going to elaborate to different business areas, regions and business areas in the quarter.
Thank you, Jose Antonio, and good morning, everyone. As previously mentioned, group net operating income was again supported by the bank's geographic and business diversification. North and South America grew their operating income, while the performance of Europe was impacted by the economic environment showing the different Stages in the evolution of the pandemic. We had an outstanding performance in our global businesses, both in net operating income and profit, enhancing our local scale with Global Reach. As mentioned, our Corporate and Investment Bank grew profits by 23%, achieving double digit growth in all of its main businesses, but particularly in global markets and global debt financing.
Also, Wealth Management and Insurance expanded its profits based on sound revenue and flat costs. Now moving on to Moving on to the countries, let's start with Spain, in a period heavily impacted by the state of Alarm, we led in among Spanish banks the response to the economic crisis. It is worth mentioning The implementation of Plan A Yuta, help plan or a plan to protect our most vulnerable customers with more than 170 joining the mortgage consumer and card payment holiday measures. From the outset, we've been the most proactive bank in eco funding. And thanks to process optimization, we granted EUR 20,000,000,000 of eco loans in over 150,000 operations, which represents a market share of 27%.
Customer funds were 2% lower year on year, impacted by the fall in time deposits on mutual funds, mainly due to Marcus performance. However, customer deposits grew 6% in the quarter. Underlying attributable profit amounted to EUR 251,000,000 in the quarter, 64% down year on year, obviously driven by higher provisions. In addition, total income decreased due to lower net interest income, basically lower rates and a smaller ALCO explained the majority of this drop and also lower net fee income due to reduced transaction volumes. These impacts were partially offset by double digit growth cost reduction sorry, double digit cost reduction as a result of the optimization processes carried out.
Looking forward, We would expect to see improved trend in net interest income boosted by higher volumes as it was the case quarter on quarter and also we will see further cost reduction. Santander Consumer Finance, we are starting to see Strong signs of recovery in most of the markets where it operates. New car sales in Europe dropped only 40% in the first half, while new lending in Santander Consumer Finance fell by less than half due to the strong performance in January February. The largest force in the business were in Southern Europe, while Northern Europe, less affected by the lockdown, held up better. As the CEO already explained, new businesses
has have
bounced back considerably in recent weeks, approaching pre crisis levels in many markets or even exceeding as it is the case in the Nordics. Net interest income increased 3%, driven by strong loan growth year on year, particularly in Northern Europe. However, net fee income, which is directly related to the falling new car sales, decreased 16%. Costs were down 4% year on year, 8% quarter on quarter due to the efficiency programs that we have launched already before the COVID. Loan loss provisions increased to historically high levels, but the cost of credit, the cost of risk remains at a low level for this type of business.
As a result, underlying profits fell 26%, although it rebounded 19% in the quarter. In the UK, volumes continue to grow heavily. Launch rose 4% year on year. And the line attributable profit continued to be impacted by revenue pressures. Net interest income affected by the base rate reduction and the SVR and net fee income affected by lower transactionality and regulatory changes to overdrive.
There was also an expected significant impact on loan loss provisions. We have reason to However, an improvement for the rest of the year. We have reduced the rates on the 1 to 3 world accounts in May, and we have announced a further reduction in August. Additionally, funding from the Bank of England's term funding scheme has significantly reduced funding costs. Both of these will support net interest income over the rest of the year.
Moreover, our transformation program is driving the 5% year on year drop in costs, 6% in real terms. Our credit quality remains strong related to payment holidays that have been granted. As previously mentioned, the majority are mortgages with very high quality borrowers who have requested the holiday due to its favorable financial conditions. Looking forward, we believe that we have weathered the worst of the crisis and expect an upward trend in the coming quarters. The U.
K. Remains a core strategic market for the group. Brazil has again proved its balance sheet strength and successful business model, which enabled us to maintain high returns for the shareholders. Return on tangible equity was 17%. Additionally, we continue to focus on improving our service quality, and this was reflected in a substantial increase in NPS to record levels.
Lending increased 18% year on year with all segments growing. Customer funds also rose boosted by demand and time deposits. Net operating income rose 5%, but by positive performance of revenues and efforts to reduce costs. Net interest income increased slightly, driven by larger volumes with offset margin pressures due to the changing mix, interest rate cuts and change of the Czech special terms, regulatory change, while net interest income was impacted by the slowdown in activity. Costs were 1% lower, excluding inflation, with improved efficiency year on year, 67 basis points down.
The good net operating income was not reflected in underlying attributable profit because obviously higher provisions, which also led to an increase in cost of credit, but within our expectations. In short, the bank continues its excellent performance even in a more difficult environment. During the pandemic, Santander U. S. Has remained focused on supporting its customers, employees and communities while pursuing its strategic priorities.
In the bank, in SBNA, we continued our digital and branch transformation while enhancing our auto finance partnership with Santander Consumer focused on prime loans. In Santander Consumer, we had disciplined originations through our dealer network, enhancing our partnership with Fiat Chrysler and SBNA and the bank. Loans were boosted by the paycheck protection program. In Santander Consumer, originations declined in March April, but have recovered later in the quarter driven by FCA initiative programs. Underlying attributable profit decreased 56 percent year on year due primarily to provisions, which increased almost 50%.
Compared to the previous year underlying attributable profits was 1.5x2.5x 150 percent higher due to lower costs, loan loss provisions and reduced minority interest. In summary, we had a solid volume growth in the quarter than in previous quarters with double profits in the last 2 years, And we have strengthened our capital position as shown in the stress test. This is the result of the continuous improvement in our franchise, and we believe we can continue grow an add value in a key market for us. In Mexico, the bank continued with its debtor support program Individuals and SMEs. In addition, a significant number of branches operated with reduced staff.
Digital channels and contact centers worked normally. Digital activity increased substantially year on year with a 38% increase in mobile customers, 45 presenting transactions and digital sales penetration is now 11 percentage points higher than in the first half of twenty nineteen. Loan growth was driven by corporate, CIB and mortgages. Quarter on quarter, obviously, it was impacted by the slowdown in the use of credit lines from corporate and CID following the strong growth that we had in the month of March. Net operating income increased 11% year on year, supported by positive revenue performance and improved efficiency.
Costs show a better trend than in previous quarters and the efficiency ratio improved by more than 2 percentage points. And the line attributable profit rose 4% year on year, which benefited the reduced but which benefited from reduced non controlling interests. In short, very positive trends reflecting the improvement of our franchise in recent years. And finally, in the corporate center, the first thing I wanted to say is It continues to play a critical role in supporting the group through the special situation committees. Also starting in May, the progressive reincooperation of Employees to the workplace began with a mixture of on-site and remote working, always following government and health authority recommendations, maintaining a high level of flexibility to meet individual needs.
With regards to results, underlying attributable loss is flat compared to 2019, mainly due to the combination of, on the one hand, the positive impact on of the foreign currency hedging, which is reflected in financial transactions of €250,000,000 and a 4% reduction in costs. On the other hand, net interest income was negatively affected by larger liquidity buffer, while the revaluation of some small stakes is reflected in provisions. And now I will hand it back To Jose Antonio for his concluding remarks. Thank you.
Thank you, Jose. Let me to conclude and to go back to the questions you may have. So the Q2, as I said at the very beginning, continue to We operate under specific conditions that were not the best to deliver in terms of our business. Having said that, as I mentioned at the beginning, operationally, we serve Very well, I will say our customers, and we were able to keep the business going. So as a result of this situation, the management of this situation, we mentioned already, we continue with strong capital.
We generated significant capital in the quarter, organic capital generation, and we maintain our core target in the top of our 11%, 12% range. As I mentioned before and given the strength of the bank's capital underlying performance, the bank has accrued 6 basis points of CET1 capital in to allowing the option to pay dividend from 2020 earnings. On top of that, we have intention to pay a discrete dividend payable in shares before the year end and coming back to 100% the cash dividend when this is feasible from the macro point of view and from the regulatory point of view. We delivered strong performance on pre provision profit, Brazilian income and cost reduction accelerating. In second half of this year, we expect to recover our customer revenue via NII and fees and to continue to delivering on our cost reduction ahead of our plans.
We have Good credit quality. So we maintain the cost of credit after some of the customers' demoritories has expired, and We shared with you today that this continue to be consistent with our expectation of course of this for this year. In summary, I will say our business model Strength and execution of our strategy continue to show resilience across different cycles. [SPEAKER JOSE ANTONIO ALVAREZ PALLETE:] This is helped by the group's strong pre provision profit, the amount of credit reserves of €24,000,000,000 and the fact in all the stress test capital destroy is significantly lower than our competitors. This makes us confident about our future performance and our ability to continue to generate capital.
Finally, Accelerating our transformation plans are key. For this region, we are accelerating our transformation plans to leverage both our scale and the collective strength of our regions and global businesses are focusing on simplifying our operation and improving customer experience to grow profitability And with improved efficiency, have learned from customer behavior changes during the pandemic and from our own operational experience And convenience that all of this will enable us to work more efficiently, which combined with greater integration to be reflected in an increase to our profitability. All these elements make our net operating income forecast consisting with our Investor Day meeting targets. That's all on our side. And now we have time for questions.
Sergio, Thank
you, Jose Antonio. Thanks, Jose. Indeed, we have now time for Q and A. So please let's proceed with the session. First question?
Thank you. The first question comes from Amvaro Serrano from Morgan Stanley. Please go ahead.
Good morning. Thanks for taking my questions. Just one on the dividend and another on impairments. On the dividend, just the mandatory script, just the rationale behind it, given it has no impact on valuation and given it's Certainly affecting the perception among institutional investors. What's the rationale behind it?
And you've also To point out that you're going to move in cash dividend. Just wanted to discuss if you can discuss the visibility. Obviously, on the macro, we And visibility is what it is. But I'm more asking about regulatory headwinds. The ECB announced the TRIM exercise is back Live now.
So how comfortable are you that the visibility is better from a regulatory perspective Given you were going to move in cash last year. And so what makes you more comfortable there? And the second question on impairments. I don't know if you can maybe, after the call, share So the assumptions behind the impairments and the DTAs and goodwill impairments, and will that Are you comfortable now that we should not have any further impacts on tangible value going forward from extraordinary ones, of course? Thank
you. Okay, Alvaro. Thank you for your question. The first one is the rationale behind the mandatory script. So as you know, our shareholder base 40 north of 40% of the shareholder base are retail shareholders, And they've been quite vocal on this, asking us for keeping some kind of remuneration in script.
That's the main rationale. I know that the share count goes up and this is probably something that May not please some institutional investors, but we need to take into account all our shareholder base, institutional and retail shareholders. So the second question, regulatory, well, we also want to stress to you and state to you that The board intention is to go back to cash dividend as soon as to 100% cash dividend as soon as we can on this line. We accrued 6 basis points, roughly speaking, EUR 400,000,000 as is the intention. The profit generation goes accordingly with our [SPEAKER JOSE ANTONIO ALVAREZ PALLETE:] Expectations to keep accruing dividend in the coming quarters.
And we think that the ECB regulatory the ECB position on this As cannot be our way, it's going to be related with the capacity of banks to keep generating profits along this cycle. As long as we are forecasting a recurring capacity to generate profits, We accrued dividend that shows the board intention to pay dividend in cash. We continue to generate profits. Naturally, There are 2 uncertainties here. 1 is on the macro side, if we are wrong on the macro and the profits are not the ones we expected.
It may happen. We are not in this line. We think that we're going to keep generating profit to current profit. And second one is the recommendations from the regulator that in my view will depend more on the capacity of the banks not to destroy capital during the crisis. The impairment assumptions for the impairment.
So basically, the impairment, I mentioned Three factors behind this. The first one and the most important one is the macro situation that deteriorate Significantly, the profits in the very short run, not in the medium term. This is more in the short run. As you are seeing this quarter, we are reporting a significant lower profits. I mean, underlying profits than the ones we were reporting 1 year ago as a result of the health crisis.
This is going to effect for 2 years, 3 years, as I mentioned before. And this has an impact. The reaction of the central banks to this situation In many jurisdictions has been to reduce rights, particularly in U. S, in U. K, where this has some effects.
The first But the health crisis translating to higher loan loss provisions, the second part put pressure on NII. And finally, we increased the discount rate, on average, 1%. Not in all the jurisdiction is the same, but take The 1% as a wrong number, more in some division less than others as a result of the higher market volatility and As a result, higher risk premiums. And this has an impact of I mentioned I think I mentioned in the presentation 4,000,000,000 out of the 10,000,000,000, 4,000,000,000 is due to higher discount rate and 6,000,000,000 coming from the other two factors I mentioned.
Thank you, Alvaro. Next question, please. Next question?
The next question comes From Ignacio Ulargui from Exane. Please go ahead.
Thanks for taking my question. The first I have one question only. If you could elaborate a bit on what is the outlook for pre provisioning profit at a group level into the second half with the different moving parts in revenues and costs. And whether that 2Q number, it's with the information that we have today, the bottom of 2020. Okay.
We elaborate a bit about this. We are expecting a lot of this depends on the naturally on the But the scenario in which we are working is having somehow new normality, what is called new normality somehow in Europe and the U. S. With some still activity that is at the current levels, not 100% back because probably this is not going to be possible till we get efficient treatment for the COVID or a machine being widely spread. So we are working with Cisnevio close to the one we have today in Europe and U.
S. And Latin America coming back to certain normality in the next two months, Yes. So this is an area which we are working. In this scenario, we should be able to recover our NII, As we mentioned, I'm fairly positive on NII where we are re pricing Liabilities in many jurisdictions, particularly in terms, as Jose mentioned, in the U. K, also in other jurisdictions.
And NII should have certain strength in the 2nd quarter and to recover some free income that we lost as a result of the lockdown, particularly in Europe. I showed you the numbers and the effect on fee income was due to significantly lower activity during the lockdown. As long as we don't have lockdowns, and this is the hypothesis I'm making, we should have a The stronger pre provision profit in the second half of the year than the one we had in the first half of the year. And I do not see in this scenario, again, Uncertainty in the scenario is that higher provisions than the one we recorded in the first half of the year. So That's my assumption for the rest of the year.
Thanks, Nacho. Next question, please.
The next question comes from Fernando Hill from Barclays. Please go ahead.
Hi, good morning. Thank you for taking my questions. Two questions from my side. First is, can you please remind us the book value of the UK and U. S.
After these goodwill impairments? This is 1. 2nd is, can you please refresh the FX exchange sensitivity going forward in the P and L? Thanks.
So do you have the figures for U. K. And U. S? Remember, it's USD12 1,000,000,000.
USD12 1,000,000,000. USD12 1,000,000,000. It's in our Quarter report, I am speaking by memory, dollars 12,000,000,000 Sergio, you remember the number for the U. S? We come back to you and give you the exact criteria, but this is published in our annual report.
You have The book value and the goodwill, the goodwill at the group level was €25,000,000,000 This impairment is going to go to the €15,000,000,000 concentrated mainly and speaking by memory in Brazil, Mexico And very few very little in UK after this impairment, very little in U. S. So this is I think, Alvaro, your colleague asked me in the first question. I didn't address this. Further impacts So all of the impairments in TNAB, no, I do not see further impairments that affect TNAB.
Tiena, I do not see further impairments. In fact, when we do impairment test, only when it comes negative, you record. In many cases, it's positive. And when we compare the discount cash future expected cash flows with the current market value. FX
Impact, as you know, we have the policy of hedging Practically, the P and L, it is hedged for the rest of the year mostly, Almost all currencies are hedged for the rest of the year. And we have started already to hedge in some of the position for next year, particularly the U. S. Dollar, the Mexican peso and the Brazilian real. Stock fully hedged next year, but we are starting we have started to do it.
But let me to elaborate on this. Well, the effects this First half of the year impact has been intense. The depreciation of emerging markets current has been very significant across the board. In general, the euro stand is there. And what we expect Going forward is after this depreciation not having additional significant depreciation impacts Other than the one that may come for very high inflation countries.
In our case, it's basically Argentina, but I'm more it could be more constructive on FX in Mexico and Brazil, that are the 2 most important countries. Given the fact that I think the markets are taking a Overlay negative view over the developments in those countries. And as you can see in our figures, we have seen The activity and the levels of activity and the capacity generating profits in those markets continues to be relatively Strong, and this means that the economy is handling the crisis better than I think many market participants are thinking.
This is a follow-up, if I may. Current value from the U. K. Is EUR 14,000,000,000,000 ESKUSA and EUR 10,000,000,000 ESB and A. And out of the post impairment, EUR 12,000,000,000 Goodwill for the entire group Brazil represents around EUR 3,000,000,000.
But obviously, happy to catch up in more detail about the numbers after the call. Next question, please.
The next question comes from Andrea Finti from Mediobanca. Please go ahead.
Good morning. Thank you for taking my question. Could you please update us on IFRS 9 charges? Where are you on those? And what macro scenario you're reflecting now?
Are you envisaging further COVID charges in H2 2020? What sort of capital headwinds do you envisage from risk weighted asset procyclicality As macro deteriorates in the coming quarters. And are there any pending TRIM impacts left at this stage. You said that you confirmed the 1.4% to 1.5% cost of risk guidance, Reflecting the benefits of the moratoria, what would this be without that? And just finally, What is the TLTRO III benefit to come, I guess, from Q3 onwards?
Thank you.
Okay. Plenty of questions, Andrea. I'm going to address some of them and I will pass to Jose. IFRS 9 charge is what is reflected in our loan loss provision. We are working with a Actually, with our models and the scenario that I mentioned, we haven't changed the scenario.
It's the one I mentioned in the previous quarter. That is not exactly, but very much in line with what IMF scenario was at this time. We haven't changed [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] Yes. So do we expect further COVID related provisions unless we have a different scenario going forward? I do not expect additional that are already embedded in our numbers.
Second question is, is it weighted as a procyclicality? It's true that there is some procyclicality already happening. So we are there is rate immigration and we are already including we have some rate immigration particularly In some cases, significant rate immigration, particularly in the CIB space. It happens On a continuous basis and it's going to be reflected quarter after quarter, yes. So including the Q2 where the profitability was significant and is included in our organic capital generation.
The paying impact, Jose, may you want to take this one. The moratoria, as I mentioned, does not Help in the cost of risk. So the cost of waste at this stage is comes from the application of scenarios to the models. If we were recording Cost of risk based on observation like it was in the past, the cost of risk would be significantly lower. We take into account naturally all the moratoriums, What is going on with the moratoriums because, well, naturally, this is but the majority of the cost of this comes from The extra cost of this comes from the models.
Would you want to elaborate in TRIM impact? Yes.
With regards to TRIM Manoses, we have the most significant one is the TRIM on Spain's SMEs That was put on hold last year to try to help lending to this sector. And that obviously with the end of the extraordinary conditions, this may come back. It could be up to 16 basis points. And then we have some other smaller OSIS that might happen before the end of the year, although some might be postponed for next year, could be up to 5 basis points. So worst case scenario, I think we're talking tops 20 basis points.
With regards to the TLTRO, we increased TLTRO in the region of EUR17 1,000,000,000 relative to what we had last year.
Next question, please.
The next question comes from Sophie Petresen from JPMorgan. Please go ahead.
Yes. Here is Sophie Pietrusen from JPMorgan. I had a question On the NII outlook, you mentioned that volume growth was very strong and was holding up Quite well in the quarter, but how should we think about the NII outlook in Spain going forward? My second question would be on your Dina. It was down around 5% quarter on quarter.
Are you doing anything to keep Dina a little bit more stable going forward? Have you any hedges in place? And how should we think about the D NAV growth going forward? And the last question Jim would be just a follow-up on the previous question. What kind of macro assumptions do you have For your various geographies, for example, in Spain, are you using the Bank of Spain macro scenarios?
Or how are you Thinking about the macro picture in your different markets. Thank you.
Okay. Thank you, Sofie, for your questions. Let me do elaborate on the NII in UK going forward. So as Jose mentioned in the presentation, Probably we've seen the worst already in the first, second quarter. So it's a liabilities [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] We price an exercise that is going on.
And we started to see this starting in May. It's going to accelerate never, some probably will go back to kind of normal in the 4th quarter, yes? So accelerating this probably the 4th quarter, we should go back to what we had the previous year, yes? So after the repricing of all the liabilities, that's the reason why We said, Jose said that we are optimistic on the NII evolution in the UK. It's basically a Liability repricing across all the deposit base.
2nd, I believe the team up to question to Jose going forward. Macro assumptions, you mentioned specifically Spain, we are working in the region of 10% GDP decrease this year and a significant recovery next year. I don't remember exactly the number, but I think it was 7% or 6% or 7% next year. As I said to you, our scenario is not far away from Maybe a bit better, a bit worse country by country, but on average not significantly different than the one of IMF. The TNAB, you want to elaborate on this, Jose?
No, I mean, the TNAB Jose Antonio already said that if you look at the 2 charges that we made in the Q1, obviously, The impairment of crude oil has no impact on TNAV. The DTAs have and we would not expect to have any one offs affecting TNAV going forward. So obviously, the evolution of TNAV will depend on our capacity to generate earnings affected by the currency, the evolution of the FX. That, as Jose Antonio said, was extraordinarily high in the first quarter, in the first half, We would not expect to see the same level of depreciation of the currencies in the countries where we operate in the second half. So I would with all things being considered, I think we could be we can be quite more optimistic about the Tiena evolution in the coming quarters.
Thank you, Sophie. Next question, please.
The next question comes from Mario Ropero from Cidentiis. Please go ahead.
Hi, good morning. My first question is on fees in the U. K. Could you please explain how much was the impact Of the regulatory cap on overdraft and how much you expect to recover in the Q3? And then the second question is on loan yields in Spain, which went down significantly in the quarter despite some marginal help From Euribor.
So is the pressure on yields in Spain due to Aiko loans? And what do you expect in the coming quarters? Thank you.
Yes. So fee income in U. K, you rightly pointed to overdrafts. As you know, we were not allowed to apply in the overdrafts the interest rate we were planning to apply. It It was mandatory and this reduced our capacity to generate.
It goes more to the NII than the other, but We were expecting to lose net net between NII and fee income like €100,000,000,000 100 and €30,000,000 to €140,000,000 and now we are €100,000,000 lower than that or something like that, yes? So it's the numbers I got in my mind. So we're going to recover somehow charging interest on the overdrafts in line with what we want to do, but was not allowed to do this quarter and this We'll come back in coming quarters. Long yield in Spain is pure mix. So It's true.
AICA loans came basically in line with the existing loans and the mix has changed a bit the consumer lending decrease, the weight of the consumer lending decrease, while The CIB and large corporates increase and this result in a drop in the loan yield. That while You asked me going forward what's going to happen as long as we recover the level of activity that we are doing right now in the retail arena, We should be able to recover somehow to the previous levels or even higher levels depending on your driver, As you rightly pointed out, that has an effect. Euribor is like 20% of our portfolio. Mortgages at 20% Eurailgo mortgage at 20% of our portfolio.
Thank you. Next question, please.
The next question comes from Carlos Peixoto from Caixabank BPI. Please go ahead.
Hello, good morning. A couple of
questions here. First one would be
on the dividend and then on the EBITDA on 2020 earnings. So if I do some math on the 6 basis points accrued on the first half earnings, it looks as though you're buying here An 18% to 20% payout ratio or expected payout ratio on 2020 earnings. Is that the case? Then on NII in Brazil. We witnessed strong compression in margins and basically with volumes growing at a healthy pace, I would say.
And I was still down. I guess, it's changes in mix can account for part of this, probably interest rates as well. But I was wondering how do you see this moving going forward? So basically, what's the outlook you see there on NII and also on the cost of risk, by the way? Thank you.
Okay. Thank you. So dividend 2020, we accrued 6 basis points. Well, this is I will take the number as a strong sign and lead effect that provided that the macro conditions remain As we behave as we are expecting, subject to regulatory recommendations. We are not we don't have in mind any We should be payout what we have in mind or what the scenario which we are working is we're going to be at the top end of our Correct, the Tier 1 target, and that is 11%, 12%, so we're going to be close to 12% or around 12%.
And this will allow us to keep a dividend naturally first based on the profit generation, but I will not Take this 6 basis points compared with the profit that we generate in the first half as a guide of the So guidance for the payout that for the whole year, probably the payout, if we are right in the Macro recommendation in the macro scenario and the propagation issue is the one we expect probably we can go beyond that Provided we are allowed to do so. NII in Brazil, so 2 different NII in Brazil, there is a product That in Brazil, they call check special that is kind of overdraft in Brazil that the interest rate was very high and The regulator put a cap in this product. This product, we lost well, Last year, we started to reduce our presence in these products. And in fact, our market share was close to 20%, now it's 12%, And this is the main impact. So it's a bit of mix and the main impact comes from this specific product that has very high yield, extremely high interest cost of risk.
So it has an impact in the NII, A significant impact also in the cost of risk. So now going forward, You mentioned interest rates. Interest rates are not that as important in Brazil as they are in all jurisdictions, Given the high reserve requirements, it matters. But I will say in the very in the 1st year probably is a net net positive, the impact Slightly positive. Afterwards, it may sound a little bit negative.
But at the beginning, it's not as important in the other market due to high reserve requirements in the country. The main effect from mix change due to this specific product and that we have been doing more Activity in corporates and large corporates. Let me just say that on a like for like basis, our Spread in Brazil is increasing, okay, significantly. So lower volumes, higher spread on a like for like basis. The mix is and these products are the ones who explain the decrease in NII.
The cost of risk in Brazil, well, in fact, We are developing or we develop a full plan to address collections and recoveries in the country, And we do not expect a spike. I think at this stage, we are clearly, clearly much more optimistic than my perception where the market is. So we are not seeing that large deterioration. Maybe we In this environment, moratoriums are not that high in Brazil. They last only for 1 or 2 months.
They came back. So I'm not pessimistic about the outlook of constant freeze in Brazil, unless the situation Deteriorated further from the macro due to the health situation of the country. But as I said, I'm not pessimistic on this,
Thank you. Next question, please.
The next question comes from Stefan Nedialkov from Citi. Please go ahead. Thank you.
Yes. Hi, guys. Good morning. It's Stefan from Citi. Two questions on my side.
The first one is on capital. Have you done any risk Any synthetic risk securitizations which may or may not have helped your capital in the quarter? And also what's the outlook for synthetic risk Securitization for the rest of the year. The second question is about the moratoria. You gave some interesting statistics on the nonperforming loan ratio on meritorial loans that have expired.
Just to probe that a little bit further, What's the percent of clients that were furloughed within that $40,000,000,000 of matured moratorium loans? And related to that, are there any geographies and products that you're not accruing NII for in terms of moratorium loans, for example, Mexico or other countries? Thank you.
Okay. So in terms
of
securitizations, We did a capital that were really very small relative to what we thought we could that we had in our budget, but they were insignificant. I think it was like EUR 500,000,000 or something of risk weighted asset relief. So it was not Significant basically because the market was closed for most of the quarters, but it has started to open. So we would expect to be A bit more active in the second half, probably not reaching our expected activity for the year, but clearly a bit more active in the second half than in the first half. And indeed, we are working on a couple of more sizable transactions to be closed over the next few quarters or few months.
Okay. One question was about the moratorium, the EUR 40,000,000,000, the percentage The EUR 40,000,000,000 that is the moratorium that expired as of mid July, The percentage I mentioned in the presentation was very much in line that went into nonperforming whereby much in line with the ones who expired at the end of June, In line with the 2%, yes. So that's what we can share with you at this stage. And the other question, Stefan, your question was accruing NII on moratorium loans. The majority of the moratorium loans, I think the only big chunk [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] So, the majority of the others, they keep paying interest and the moratoria applies Two principles.
So what we've done, for example, in mortgages in Spain on a voluntary basis and in other jurisdictions is to be paying interest and not paying the principal. So we are accruing interest, for example, in UK for the Mortgage that are under moratorium, yes, so we accrue. And in emerging markets, well, emerging markets, as you know, [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] Not due to these prices, yes? So it's the way we accrue and the way we write down, remember that in those markets, we write down after 5, 6 months, all the consumer related credit card related lending, the write down happens very quickly, Okay. So the moratorium when the customers come back to the moratorium and we accrue some interest on this and we get unpaid, immediately goes Jumps into the write downs, yes?
So it happens. It's not like in mature markets where it takes longer, yes?
Okay. Last question, please. Go ahead.
The last question is from Adrian Tank from Credit Suisse. Please go ahead. Thank you. Hi
there. This is Adrian Chigi from Credit Suisse. You for taking my questions. Two questions, please, and a brief follow-up. So the first one is you've written off EUR 2,500,000,000 in DPA Deciding a deteriorating outlook, yet you recommitted the 13% to 15% RoTE target.
Can you give us any more color as to how to reconcile the 2? The second question is on cost. You've achieved an impressive performance on cost reduction this quarter again. And you also know that you're confident you can do more. Any chance we can get you to quantify or provide us a range of some of these potential incremental cost saves?
And then maybe a follow-up on cost of risk and trying to get your outlook In a different way, you mentioned the significant front loading costs from IFRS 9 models, but would you expect a meaningful decline maybe in cost of risk next year? Thank
you. Okay. So 2.5 BTA is naturally our outlook in the medium term. I mentioned that our outlook has changed in the medium term, provided that the scenario we have in mind works. And we mentioned I mentioned in the presentation that The impairment was related with the impacts on profits in the next in this period, in the next 2 years.
So 2, 3 years to recover the previous levels. What happens with the DTAs, So when you factor these 2 years of lower profits at the very beginning where discount rate has little effect, It's significant and leads us to these charts. And at the same time, remember that we put a higher discount rate. So the same applies to the DTA. It's higher discount rate that again is 40% of the impairment.
As I said, globally, dollars 10,000,000,000 in impairments. I said $6,000,000,000 coming from I would look particularly lower profits in the short run and the rest from the discount rate, the same applies here. So I think it's consistent in the medium term target. We are not seeing our capacity to generate profits in the markets in which we operate. As we see today, the market is there, and I don't see any reason not to keep those targets.
The cost reduction, the second question, the quantified cost savings, Our plan is to update later in the year, but for sure, we are much more optimistic as a result of the [SPEAKER FRANCOIS XAVIER BOUVIGNIES:] What has happened in the crisis, the favor of the customer, our capacity to operate our operational capabilities that we're showing in the crisis For sure. And we're going to produce higher cost reductions than the ones we commit to you in Europe. That is, As you know, we're €1,000,000,000 nominal drop in cash in Europe. We already got €300,000,000 in the first Q And sorry, in the first half, sorry. Thank you, Jose.
And we're going to see it easily distorted. Yes. So and this is I will we will update you once we finish our plans, but more in the fall or the end of the year.
The last question was
Next year, we're going to see it.
Well, I do expect, If we are right with our scenario, I do expect to see a drop next year naturally. So otherwise, We need to the macro should be significantly different than the one we have. Again, this is the Area in which the uncertainty is higher. Naturally, we are seeing what is going on with the COVID On a daily basis, well, we are working, as I said before, with any scenario in which we live in the scenario we live today in Europe And U. S.
With economy open up to a point with some restrictions to travel, but operating as of today, the economy For a while, till we get a Ipagin. Once we get a Ipagin, I think that we should be able to reduce the cost of risk.
Okay. So I'm afraid we need to leave it here. Thanks, everyone, for joining this call. Obviously, the IR team is during the disposal for any follow-up. So thanks very much.
See you next quarter.
Bye.