Good morning, everyone. Thanks for joining to this first quarter 2020 earnings presentation for Banco Santander. First of all, on behalf of the Santander team, I hope you and yours are well under the extremely challenging current circumstances. The call should take around, as usual, one hour. Our group CEO will address the first quarter highlights. Our group Chief Financial Officer will address the group business and areas to review as every quarter. The group CEO will take this mic again to address in a bit on detail and give you a bit of color on what we are seeing in our different markets after the Q1 close, before jumping into the Q&A. Again, thanks for being here with us today. Obviously right after the call, the entire IR team will be at your disposal for any follow-up you might have.
Now, please, José Antonio.
Thank you, Sergio. Good morning to everyone. I hope you find well in the middle of this health crisis, you and your families and relatives. Well, this quarter has been a strange quarter. We've been in business as usual till the last two weeks. The last two weeks, the COVID-19 outbreak has produced an unprecedented worldwide health crisis. This is a health crisis which is resulting in an economic crisis, where the financial system, I think, is more resilient. Banks need to be an important part of the solution of the COVID-19 economic situation. Since the crisis started, and with some anticipation, we implemented in all our geographies specific measures to take care of our employees, customers, shareholders, and investors in order to protect them and to mitigate the economic and social impact. I will talk more about this in the last part of my speech.
Starting with the quarter, let me to follow how the figures have behaved. In volumes, we grew significantly, more at the end of the quarter than the beginning. The loan book grew to EUR 26 billion. The pickup was basically in the latest part of March due to the drawdown of the committed lines by the large corporations. Deposit grew 6% with a jump also in the second part of the month of March. Our customer digital activity reached record figures. That is not strange. The growth in the group digital customer base doubled that compared with the previous quarters. As regards results, we recorded a provision overlay of EUR 1.6 billion to cover the expected deterioration of the macroeconomic conditions arising from the health crisis. As a result, attributable profit was only EUR 331 million.
Excluding this charge, underlying attributable profit amounted EUR 1,977 million, 1% higher than the same period in 2019, 8% excluding the exchange rate impact. In the current environment, our credit quality and liquidity remain solid in all geographic areas you have in the numbers. We continue to generate capital organically, although the growth in risk-weighted assets has been approximately three times the ordinary growth. The consumption of capital due to growth in risk-weighted assets was 21 basis points in the quarter that were offset by the non-dividend payment. As a result, the Core Equity Tier 1 Ratio at the end of the quarter was 11.58. Going to the geographic areas, the resilience of the underlying performance of results is based in our diversification and scale. By region, we can see growth in loyal customers, increase in loans and customer funds, notably in the Americas.
In Europe, profit and profitability were dampened by the already complex economic environment before the crisis due to low interest rates that become lower in some geographies, particularly in U.K., and therefore, more by confinement measures in many European countries in March. North and South America, on the other hand, record strong profit growth and improved profitability. Going to the global business, performance has been stellar. We grew both in CIB and wealth management at 21% underlying profit in the quarter. CIB grew strongly, particularly in the last few months, answering the funding needs of our customers, which were reflected in a greater utilization of existing credit lines. In March alone, more than EUR 15 billion, an increase in deposits.
Wealth management and insurance recorded also very high profits due to strong activity levels early this year, which slowed down at the end of the quarter due to the impact of the crisis in the market. Going to the P&L. Well, first thing to say is exchange rates play a significant role, has a negative impact of five percentage points year-on-year. If we take a look at cost in euro will reflect the underlying operating trends, we see customer revenue growing at 3% with cost management and growth in provisions partly driven by higher volumes, not yet for the economic crisis that we expect from the health crisis.
As a result, underlying attributable profit amounted, as I said before, EUR 1,977 million, 8% higher, excluding the exchange rate impact compared with the first quarter of 2019. The non-recurring charge of EUR 1.6 billion corresponds to the already mentioned provision overlay and the remaining amount of restructuring costs that you have for more detail in the appendix. As regards the targeted provisions, and as acknowledged by the IASB and other regulators and supervisors, it is likely to be difficult at this time to know the specific effect of the health crisis on government and central bank support measures.
Nevertheless, in the first quarter, based on the information and the environment at the quarter end, and following the regulatory guidelines, based on the expected duration of the macroeconomic conditions, a provision overlay will be recorded, conceptually reflecting the permanent impacts from the COVID-19 in the medium long-term arising from the expected worsening of the portfolio's credit quality, and avoiding the negative effects from profitability and volatility of the IFRS 9 in the very short run. In this environment of extremely high uncertainty, the macro variables considered here are very much in line with those published by the IMF. It is not exactly the IMF on a country-by-country basis, but we have a scenario on a country-by-country, where the main items that affect the potential provision level going forward are GDP growth, unemployment, and house prices. In our case, also the car sales.
It's important how deep the recession is, but it's probably more important in accounting for how long the recession or the recovery, or when the recovery comes. Going into the revenue. In the first quarter, customer revenue grew 3%, boosted by the Americas, as I said before, and our global business. Net interest income grew due to greater volumes combined with active management of deposit costs in an environment of falling interest rates. In net income, where our global business wealth management + 6%, CIB + 20%, which account for more than 44% of the group total fees generated. We are confident that we will continue to deliver quality revenue growth. I will further discuss this at the end of the presentation in the conclusions. On costs, 3% lower in real terms.
In Europe, as we were indicating to you in our efficiency plan, costs dropped significantly in all countries, notably in Spain, -8%, U.K. -6%. This performance comes from the efficiency plans we are executing in all this geography. This enable us to obtain the expected synergies in the quarter needed to deliver our target for the year. Good management in North America, where costs have no material change. In South America, of particular note was Brazil with a 2% fall in real terms. This performance allow us to remain leader in efficiency among our peers, with efficiency ratio of 47%. Our goal is to continue to making progress regarding operation environment and cost management adapted to the new environment. We continue to pursue our targets as we indicated to you in our investor update.
Credit quality, while the quarter was in line with the traditional trends, the NPLs coverage ratio and cost of credit remain basically stable with the same trends you've seen before. Well, we continue to strengthen our capital ratios. The quarter, we once again generate capital organically, combined with the favorable impact from the dividend measures taken, resulted in an increase of 36 basis points in the quarter. The increase took place in a context marked by strong growth in risk-weighted assets, 21 basis points in the quarter, three times the ordinary increase, mainly due to the higher lending and some market volatility that affect the risk weighting of the market positions. On the other hand, were significant non-recurring negative impacts.
As you can see in the slide, 19 basis points for corporate transactions that were already announced, Allianz, Elavon, and the minorities of Crédito Consignado, Olé Consignado in Brazil. 15 basis points from regulatory impact amounts that we were expecting is the majority of what we are expecting for this year, and nine basis points from markets, basically the mark to market of the ALCO portfolios in Mexico and Brazil. We are comfortable with our capital levels. We maintain our 11%-12% capital target in the scenario we foresee in the coming quarters, with the aim of being on the upper side of the range.
Finally, before handing to José to comment the performance of our main markets, I would like to highlight the resilience of our profitability ratios, both in terms of underlying return on tangible equity and return on risk-weighted assets, as well as the TNAV per share will remain above four euros per share, although suffer some impact from effects from the exchange rates. I hand over to José to elaborate over the different units and regions.
Thank you, José Antonio. Good morning, everyone. As for the performance by region and country, the Americas increased their weight as a percentage of total profits to almost 60%, so we remained very well diversified. As previously mentioned by José Antonio, North America and South America grew at double-digit rates, while the performance in Europe was impacted by the economic environment. Also, our global businesses increased at double-digit rates, which helped to strengthen our local franchises. Taking a look at volumes, we also had a positive performance in the quarter and covered our customers' funding needs. Loans grew 7% in real terms, excluding exchange rate year -on- year, mostly driven by South and North America, which grew at double-digit rates across all markets. In Europe, 4% growth with increases in all countries except Spain, as I will explain later.
Customer funds were also up in nine markets, deposits 6%, while mutual funds fell 2%, mainly driven by the drop in equity and fixed income markets. In Spain, we had positive commercial trends, especially in March, when loans increased by nearly EUR 3 billion, driven by SMEs and corporates. This trend accelerated in April as the ICO, the ICO lines became available. March was also a month of intense digital activity. We operated most of the month with 50% of our branches open and recorded the highest month in the number of digital customers. Almost five million digital customers interacted with the bank. The number of new contracts signed with digital signatures tripled, accounting for more than 50% of the bank total sales. We had slightly lower net income, although profit before tax was up, as cost savings offset the drop in total revenue.
Net interest income was down 8% due to smaller ALCO portfolios and lower average earning assets in wholesale banking. We are in line with our cost savings plan, as José Antonio said, delivering 8% drop in costs. Non-performing loans fell 41 basis points year -on -year, and provisions remained also under control. In Santander Consumer Finance, the business was the first to be impacted by the health crisis, first in China, where, as you know, we have an operation, and later in our units in Italy and Spain. New car sales in Europe dropped 26% in the first quarter, while new lending in Santander Consumer Finance fell only 5% due to the strong performance in January and February. Driven by the confinement measures, the declines were sharper.
New lending in Italy and Spain was at 10%-20% of the usual volumes, that drop of 80%-90%. In Germany, the levels were 50%-70% of normal levels, only the Nordic countries remained our pre-crisis levels. These declines were reflected in our results, especially net fee income, which fell 12%. On the other hand, due to the good performance at the beginning of the quarter, net interest income increased 5%. Costs rose due to the new alliances that we signed in the quarter and in the previous 12 months. Excluding the change in perimeter, they fell 3%. Provisions were higher, mainly driven by lower portfolio sales compared to the first quarter of last year. The underlying profit, as you can see here in the upper right of the slide, it fell 5%. Moving to the United Kingdom, volumes grew at good rates.
Loans increased 5% year-on-year. In the quarter, and driven by mortgages, loans grew 2%. However, in April, new mortgage applications fell 80%, while the demand for mortgage repayment holidays amounted to around 50% of the total mortgage portfolio. Revenue was affected by lower yields on new production and the continued SVR attrition. Fee income was lower, in part due to the reduction in overdrafts. However, we had a good performance in the P&L. Costs were reduced by 5%, provisions fell 20%, and cost of risk remained at very low levels. In Brazil, we kept our good momentum going, which continued to show recurring profit generation, even in the more adverse current circumstances, current environment. In volumes, lending increased 18% year-on-year, with all segments growing, notably corporates and CIB.
Consumer funds rose, boosted by demand and time deposits, up 31% and 17% year-over-year respectively, both partly favored by foreign currency balances, the depreciation of the Real. The return on tangible equity rose to 22%, following the 10% increase in profits, as you can see in the P&L. Net interest income increased driven by higher volumes, which offset margin pressures due to the mix effect, the negative impact from the fall in the Selic rate, in the interest rates, and the limit on the overdraft interest rates. Net fee income grew, driven by payments, Comex, and Forex. Strong efficiency improvement year-over-year. The cost of credit remained stable.
In the quarter, profit rose 8% due to the strong fall in costs and provisions, seasonally higher in the fourth quarter, which obviously favors the quarter-on-quarter comparison, and which more than offset the fall in net interest income due to lower spreads and net fee income. To finish in Brazil, let me give you some color of the activity in recent weeks. The acquiring business is down 15% relative to pre-crisis levels, cash withdrawals down 30%, and auto loans down 40%-50%. In the U.S., we had a strong volume growth in the quarter, driven by both corporates and auto, which do not yet reflect the fall in activity recorded in recent weeks. Underlying attributable profit rose 46% year-on-year, with an adjusted return on tangible equity of 12%, backed by higher revenue and cost control.
As you can see on the page, profit rose strongly quarter-on-quarter, driven by seasonally lower provisions and costs in the first quarter. In Mexico, loans and customer funds grew at double-digit rates. New lending to corporates and CIB more than doubled in March compared to a regular month. They went back to usual levels in the first weeks of April. Profits rose 22% year-on-year, backed by positive performance of income and lower non-controlling interests. Costs were higher due to increased amortizations and technology investments. However, efficiency improved by more than one percentage point. We also had good asset quality, with all metrics improving. Compared to the fourth quarter of 2019, underlying attributable profit fell due to high gains from financial transactions in the previous quarter.
To finish, I will make some quick comments on the corporate center, where underlying attributable loss decreased 16% compared to 2019, mainly due to the combination of two things. On the one hand, in total income, positive impact of around EUR 93 million in gains from financial transactions, mostly coming from foreign exchange, foreign currency hedging, and two, costs, which improved 13% year-on-year, reflecting the positive impact from streamlining and simplification of our processes carried out in previous quarters. With this, I will turn it back to José Antonio for the first section of the presentation. Thank you.
Thank you, José. I'm going to elaborate basically on the actions we've taken as a result of the COVID-19 crisis. I'm going to provide you the latest data available to give you the facts, how the business is performing, till the data I'm providing to you in this section till the 22nd of April. Starting with how do we match the crisis. Well, this crisis has produced an unprecedented situation. The end of the first quarter was very conditioned by the spread of the virus. We had to match the business in a total different way. We've been monitoring since the beginning, the situation, and activated all the necessary protocols to ensure business continuity.
We implement different measures, taking into consideration also the authorities' recommendations, while the central banks have been acting. We take these measures in order to protect our stakeholders and to fulfill their expectations in our actions. As the pandemic has evolved within each market, the group has reevaluated the situation and rolled out measures in line with the specific needs of each country. I would like to explain in more detail how did we manage the crisis. In crisis situation, preserving our critical functions is key in order to provide service of high standards to our customers. Different action plans were implemented in different corporate areas and the counterparties in all the countries. These action plans covered the four dimensions included in the slide. Health and prevention. We follow a large-scale strategy to work from home. Currently, more than 110,000 people is working from home.
This was combined with keeping 70% of our branches open and their employees working shifts. Our ATMs are fully functioning, and most of our employees in contact centers are also telecommuting. We've been proactive regarding internal-external communication to be as transparent as possible. Our aim is to keep our people, customers, shareholders, and investors informed of all the times and providing advice if needed. We are monitoring risk and liquidity day to day. Well, measures we took also measures for the community in which we are working. One of our main priorities is to contribute to the well-being of the society as a whole. We have implemented actions and mobilized resources together with governments and institutions to help the society. We already raised EUR 100 million to combat the pandemic.
Some of the main initiatives are the creation of solidarity fund, which already amounts EUR 54 million, financed by reduction in remuneration and voluntary contributions from the bank employees. We've been pretty active in Spain, one of the most affected countries in this pandemic. The bank has donated several millions of protection masks, respirators, hospital beds and blankets, and other things that were in high demand in these days. In Santander Universities, we reallocate EUR 30 million to fight COVID-19. Various local units are supporting vulnerable groups with EUR 16 million. We are working with third parties to facilitate donations and to help where this is needed and is required from us. Let me talk a little bit, one area of the bank that has become crucial in this situation, and this is the T&O.
It has been key through this process, allowing us to continue to running the bank and serve our customers remotely. We increased, as you may expect, our network capacity, our bandwidth, and increased the maximum number of users supported by the VPNs. You have the figures in the slide. In Q1, naturally as a natural reaction of the confinement, we had dramatic increase in the operation through digital channels. We doubled the number of increase in the digital customer base. The digital sales increased significantly. Record quarterly number of assets. The behavior of the group was more accentuated in some countries, particularly Spain, Poland, and U.K. Let me go to the figures. Already, José mentioned some of the figures in relation with the activity. We have also adopted measures to facilitate our customer life during the crisis in all regions. We provide payment holidays or referrals in most markets.
You have in the slide some figures. Temporary option to increase credit card and overdraft limits, proactive support for vulnerable customers, being proactive and trying to cover their needs, reduction and suspension of some fees. With regards to the payment holidays, we receive applications or requests both relating to the government programs as well as the Santander own options. On the slide, you can see the number of applications for the largest customers and how they are well above one million. Also, you can see the weight as a percentage of the total portfolio as of 22 of April. This process is still underway, as you can imagine, and we think that we could end up affecting 15%-20% of the mortgage book in Europe, 5%-10% of the consumer book in Europe, and 20%-25% of the consumer book in the U.S.
Another feature of this crisis is the governments in different countries has been particularly active in establishing programs for SMEs and corporates, whose aim is to provide liquidity and credit facilities with favorable conditions for business facing hardship. You have in the screen some of the programs established by the different governments in Europe and the U.S. and South America. Perhaps, well, I'm giving you the figures on the right side that related to Spain. Spain has approved two tranches of EUR 20 billion each. We were assigned with some of these warranty lines. We already approved 60,000 operations, EUR 9.6 billion, of which EUR 7.2 billion are warranted by the government. The figure is spread across different segments, where we reach all the sectors, from large corporates to self-employed. We provide EUR 7 billion for the smaller size companies across 59,000 operations. Additionally, we continue with the ordinary activity.
Since the mid-March, the ordinary activity has been progressing well according with our expectations. In this context, if we look at the loan book in different segments, what you see is kind of stable, slightly up, individual-related business, being mortgages and consumer. It's too early, at the end of the March, I will provide you figures for the applications in April. SMEs and corporates, you see in March a significant increase in the size of the loan books due to higher demand and drawdowns, particularly on the CIB space, where the book grew in the month of March, EUR 19 billion. If you go to the trends, José mentioned some of them. You have here in this slide the new mortgage lending, how it's evolving. When we refer to new mortgage lending, it's payments, actual payments that goes into the stock.
The daily average in the different regions fell 60% in mortgages. While the applications, and you have on the right side, this goes from -80% in Spain, U.K., to a smaller impact still in Latin American business. In consumer lending, you have the same figures there, -25% in new consumer lending and applications falling differently depending on the countries and regions and businesses. This is a summary of the behavior of the individuals vis-a-vis in the middle of this crisis. When it goes to the corporates and CIB, we have a total different picture. We see the opposite. New SMEs and corporates lending grew already in March, and much more in April due to the use of the government programs.
The daily average went from EUR 500-EUR 600 in February, that is probably the normal level, to close to EUR 700 in March, and more than EUR 1.1 billion daily average in April. In CIB, it happened the same, was the massive drawdowns of existing credit facilities in March, while in April, the balance sheet is fairly stable. I hope this gives you a sense of what's going on in the business in these days. Just to finish, and to allow you to have time to ask the questions you may have, let me to share with you a couple of points. We think the best way to support our shareholders is to prioritize the health and safety of our employees, and our top priority as a way to help customers and communities and ensure profitability for the shareholders. This is the best way to act in this scenario.
We are confident going forward because we have a strong starting point, both in terms of balance sheet, liquidity, capital, and in terms of P&L. Our pre-provision profit is one of the strongest in the industry. Finally, our business model is very resilient, and you have seen year after year in the stress test that we tend to be less affected because the resilience of the balance sheet. We are activating management actions in revenues and costs that could mitigate the negative impacts that will be derived from the COVID-19. Firstly, we reiterate our EUR 1.2 billion cost reduction commitment. We will take additional action on costs, including detailed analysis of our process in the new operating environment. From the revenue side, we are matching cost of funds to reflect the new interest rate environment. The cost of deposits has been reducing over the past few quarters.
We still have some levels to continue this trend going forward. Also, on a case by case, we will trying to design an efficient pricing strategy on the asset side to reflect the deterioration in risk profile. However, it's too early to be conclusive about the macro and financial effect of the current health crisis. As stated during the latest AGM, the medium-term strategic objective will be reviewed once the economic impact of the crisis is clear. In the meantime, considering the high level of uncertainty and lack of visibility, the situation recommend to be prudent, and at this stage, we are not in a position to provide a guidance that with the levels of certainty required. To conclude, I would like to reassert that the pillars of the group strategy remain unchanged.
Improving operating performance, optimizing capital allocations to the regions and business that generate the highest returns, and accelerate the group digital transformation. That's all on our side, and we will be ready to answer the questions that you may have. Thank you.
Thank you, José Antonio. Indeed, we have now the rest of the hour for Q&A. Please operators, proceed with the questions.
Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please press zero one on your telephone keypad. Thank you. The first question comes from Alvaro Serrano from Morgan Stanley. Please go ahead.
Good morning. Thank you very much for the very comprehensive view of the current situation. I have a few follow-ups, hopefully very short. Can you give us the breakdown of the EUR 1.6 billion provision overlay? I can't reconcile with the divisions. The two follow-ups to that is, if I take the EUR 3.9 billion total provisions you've taken in the quarter, should we annualize that? I've heard you, José Antonio, say that it's very uncertain and you're taking IMF, but at what circumstances should we annualize it? Should we not annualize it? Could it be worse? Maybe some color there. The last point, all related is, one of your competitors or peers, yes, in their results, was saying that their provisions were consistent with saying that 50% of the payment holidays would ultimately result in being a default. Can you give us a color?
I know the provisions don't strictly work like that. Can you give us a color of what do you think the payment holidays today, ultimately, how much of that could result in defaults based on your modeling? What do you think about the quality of those payment holidays? Thank you.
Okay. A couple of different questions, Alvaro, to answer at this juncture. The breakdown of the overlay, we don't have a specific breakdown. We went by segments, using a global scenario that is not exactly, but is close to IMF scenario. We don't have, at this stage, a specific breakdown that I can provide to you on a country-by-country basis, as I understood you were asking. We made EUR 3.9 billion provisions in the quarter. Can this number be annualized in these terms? Well, I will say, generally speaking, my thinking on this, don't take it as written in stone, we are matching the scenarios. We tend to look backward and to try to assess what has happened in different countries in scenarios like this. We have the real estate crisis in Spain, we have the recession in Brazil in the other side.
If you look backwards in the real estate crisis in Spain, the group as a whole, we were running in the 1.4, 1.5 cost risk at this time. If you look backward in Brazil, when the recession hit the country and the GDP fell by 10%, the cost of risk went from the current, a little bit lower than 400 basis points - 500 basis points. Those are the kind of figures that we have in our mind. Well, payment holidays. You mentioned how much of this is going to be default. Well, you need to look at the book. 40% of our total book as a group are mortgages. We do not expect a significant default in the payment holidays related with mortgages.
The majority of the payment holidays related with mortgages have a financial advantage to the customer and makes sense from the financial point of view, the customer, to take these payment holidays, and we think that many of them are taking, some of them because they are facing a difficult situation, some others because it's an advantage. Having said that, the main factor behind potential defaults here, and when I mentioned before, GDP, unemployment, house prices. The house prices, how did they develop? Not in 2020. It's more 2021 and 2022 is the most important factor in relation with potential default in mortgages. I do not expect in mortgages. The majority of payment holidays are in mortgages, and I do not expect a bad outcome there. In consumer, we need to elaborate on country-by-country basis.
You've seen that, and José provide information and in the latest figures I provide to you, in consumer in Europe, we have four countries that the production collapse and the other four countries, half of the business still performing relatively well, Germany, Nordics, and countries around this. We do expect different outcomes according with this kind of situation. Particularly in the U.S., in SCUSA, extensions, that we provide you the number of extensions, is business as usual. The number of extensions we do in a normal month without having a crisis is in the region of 15,000 a month. Now grew dramatically, but is part of the business as usual, and it's difficult for us to assess how much is going to end up in higher cost of risk.
Thank you, Alvaro. Next question, please.
Comes from Francisco Riquel from Alantra Equities. Please go ahead.
Yes. Thank you. Just a follow-up on the previous questions. You mentioned that the scenarios that you are managing are in line with the past crisis in Spain, you mentioned, or the recession in Brazil. This time, the economic recession is going to be bigger overall, not only in those countries, but worldwide. What makes you confident that the cost of risk should not be bigger than what you have been mentioning for those scenarios in past crisis? That's a general question. Specifically, wanted to ask you about Brazil. You mentioned that the cost of risk in the past recession, 2015, 2016, went up from 4% to 5%. At that time, you went through the recession in Brazil in a fairly good shape.
How do you expect now the Brazilian bank to perform in this crisis, given that you have grown relatively fast, and how confident are you of the risk-taking in the last few years? Thank you.
Thank you, Paco. The first question, why this time is not going to be bigger. As you know, provision is related with expected losses in a medium long-term period. What matters here is we have a new kind of crisis this time. It's a crisis that we've never seen. For that reason, it's extremely uncertain, the outcome. If you look at the different scenarios, not necessarily only IMF, well, overall, all the scenarios have a strong impact in 2020 and relatively rapid recovery in 2021 and 2022. If that's the case, the level of defaults is not that high. Remember the last crisis when I spoke before in Brazil, the GDP fell 10% and the recovery is still ongoing. Okay? Three years later, still not recovering this. In Spain, the top to the bottom was around also 10%, 9%.
I think it took four or five years to recover. The kind of crisis we have in front of us is a crisis in which you have a deep recession with very short duration. Short meaning months or maybe three months, maybe six months, maybe nine months, depending on the kind of V or the kind of U scenario you want to choose. In any case, relatively short period of deep recession that follows a relatively rapid recovery immediately after. This is not a very bad scenario if this happens for the cost of risk. The longer the recession lasts, even if the intensity is lower, the higher penalization, I mentioned already the mortgages, in which what matters is not that much how deep the house prices fall immediately, is how long it takes to recover the prices afterwards. This is the general thinking on this.
For that reason, we remain relatively confident that if, and it's a big if at this stage, the scenarios behave like the ones we are seeing from the different economies, and we have a relatively quick and rapid recovery afterward, the scenario is workable, I would say. You said Brazil. Well, in the last crisis, you suggest that we had a different portfolio that we grew a lot in the last couple of years. It's true, but, well, our franchise now is much better franchise than it was four or five years ago, much more resilient, with much higher profitability, with much more capacity to take management actions. I'm fairly positive on the trends in Brazil. Naturally, the cost of this is going to go up, sure.
We are suffering right now, and you see in the NII, the impact of the overdraft, the charges that were reduced significantly, yes. The underlying trends are pretty good. We continue to see our strength across the board is significant. I think we are well prepared to face the headwinds that we're going to suffer in the coming quarters, and I feel confident that we're going to be able to match in the range I was telling you. Well, not exactly, don't take the numbers, take the range, as a potential outcome in the coming quarters.
Thanks, Paco. Next question, please.
Thank you. The next question comes from Carlos Cobo from Societe Generale. Please go ahead.
Hello. Thank you very much for the presentation. Carlos Cobo from Societe here. The first question would be on the FX hedging policy, if you could update how much of the currencies you've hedged, and for how long that hedge is in place. What would be if we fully seen the impact already in Q1, and what would be the phasing of that hedging running off? Secondly, if you could confirm that the EUR 1 billion cost-cutting target for Europe is being reiterated, I think as Antonio said, and whether you see any risk of missing that coming from investment-related needs in the context of the COVID-19. I would like to understand your thoughts around any room to beat the previous guidance on costs now, or on the contrary, to meet the targets, do you now need to make any stronger effort?
Finally, on capital, if we should still maintain the 12% year-end 2020 target, or how should we expect the capital evolving from here? Thank you.
Well, I will take the second and the third question. I will pass to José the first one, the FX hedging policy. Target for EUR 1 billion cost cutting in Europe remains in place. It's reiterated. I'm fairly optimistic. You see the numbers in the first quarter, fairly optimistic we're getting there. Probably in the short run, we're going to have, as I mentioned before at the end of the presentation, we're going to take management actions. Management actions on revenues and costs, we have capacity to reduce the cost further from our targets in this environment. Year-end 2020 capital, I said that we also expect to remain inside the range of our target.
Remember, our target in capital is 11%-12%, we will expect to be in the upper side of the range at the end of 2020, taking into account all that has been said in this presentation. José, thanks, hedging.
In terms of hedging, we have two different policies for capital. For the capital ratio, we fully hedge the capital ratio, and we do that on a monthly basis. Any exchange rate volatility does not affect the capital ratio directly. In terms of profits, we hedge basically based on our expectations for exchange rate movements. To go into the details, this year, we have the Mexican peso, the sterling, and the U.S. dollar fully hedged. We have the real partially hedged. In the next few quarters, if the exchange rates remain where they are today, we will still see some negative impacts on our numbers.
Thank you, Carlos. Next question, please.
Thank you. The next question comes from José Abad from Goldman Sachs. Please go ahead.
Hello, good morning. Thank you, guys, for the presentation. I have three questions. First one is, whether your EUR 1.6 billion post tax impairment taken today, does this include the positive impact from the warranties in the different countries that you operate? The second question is on the profitability. One of your European peers actually mentioned in a conference call, which was taking place in parallel to yours, that they expect to take zero profit from the government-warranted lines. Is this also the case for you in Spain or in other countries? The last question is, given that actually only in Spain, two transfers have been approved up to actually EUR 40 billion. You've granted EUR 9.6 billion. Based on this, should you expect actually this to go up to potentially EUR 25 billion in cumulative, incremental corporate lending until potentially Q3? Thank you very much.
Okay. When you are referring to the EUR 1.6 billion, including warranties, this include warranties, do not include warranties because we are assessing the portfolio that was in our books as of 31st of March. This new lending started in April, so does not include government warranties. How much profits we expect to reap, understand the profit in the overall lending related with government warranties. Really, I don't expect to make profits out of this. We're going to get some revenue, some cost of risk, but overall it's going to be difficult to make profits. We may make some profits, but not significant at all, yeah. The government warranties, you extrapolate. As you know, in Spain, the government established a kind of coupon for each bank based on the market share in the overall credit market. In our case was, I think, 18.5% or something like that.
As you know, we finished the assignment of the lines we were granted, that were granted to us one week ago, and we still have pending demand. That's something that you may expect, given the fact that although our participation in the overall credit portfolio, the market share is 18.5%. Our participation in the SMEs corporate space, that is the ones who are demanding more loans in these days, is in the region of 25%. For that reason, we have significant demand. Well, it's up to the government to give, to go from the EUR 40 billion to EUR 100 billion. They match this, and while what I can tell to you is we have still demand pending for this kind of facilities.
Thanks, José. Next question, please.
Thank you. The next question comes from Sofie Peterzens from JP Morgan. Please go ahead.
Yeah. Hi, here is Sofie from JP Morgan. When I look at your stage two and stage three exposures, they fell quarter and quarter, although very marginally. How much or what movement should we have expected in your stage two and stage three exposures if the EBA wouldn't have had the new rules out on forbearance? Would that have had any impact on your stage two and stage three exposures? My second question would be, clearly COVID-19 has different impacts in different countries, but overall, which countries are you most concerned about in terms of the outlook, and which countries are you the least concerned about? My final question would be if you could just remind us of your rate sensitivity, given that we are seeing lower rates, both in Brazil, Mexico, the U.S., and so on.
If you could remind us of your rate sensitivity. Thank you.
Well, I will answer the first two questions. I pass the third one, the sensitivity to rates to Well, José is going to take this one.
The first one? You want me to take it now?
Yeah.
Okay. The interest rate sensitivity to a drop of 100 basis points is around EUR 500 million, EUR 176 more or less in Spain. Very small sensitivity in Latin America. Overall for the group, it's around EUR 500 million, more or less.
The other two questions, stage two and stage three is too early to go into this detailed analysis. We have plenty of moving parts there. The first one is the scenario that very likely we're going to have more in stage two and stage three. Second, we have the government guarantees that are going to offset partially what goes to the stage two and stage three. The uncertainty is so high that at this stage, I can elaborate very little on this. The overall, which countries will be more affected. More than these countries, I will tell you, ex-government guarantees, the segments that I see potential higher effect. The first one is all the SMEs, self-employed, small corporate segments, on top of the traditional sectors that everybody has in mind. You know the sectors, everybody speaks about the sectors, yeah.
By segments, this is the segment that probably is going to be significantly affected. The second one is some pieces of the consumer finance Not necessarily cars, probably direct lending much more than car auto lending. As the second, I see a potential more impact. At this stage, and I may be wrong because this depends on how the house price evolve, I don't see a significant impact in the mortgage books because the interest rates are so low that affordability ratios and the loan-to-value ratios in our books are relatively low, interest rates very low, so affordability ratios are relatively high at this point. You combine the affordability ratios with the loan-to-value ratios, I do not expect a big impact overall in the mortgage book.
Thanks, Sofie. Next question, please.
Thank you. The next question comes from Adrian Tang from Credit Suisse. Please go ahead.
Hi there. This is Adrian Tang from Credit Suisse. Thank you very much for taking my questions. Three follow-up questions from me. On the EUR 1.6 billion provision overlay, can you maybe provide us some key sensitivities around your base case scenario? You mentioned GDP unemployment and house prices as the key variables. Just to judge if these get better or worse, what we could expect. On the capital, can you maybe help us think through the potential impact you expect from the risk migration given the increase in PDs and LGDs? Then the third one, just a clarification. Thanks for the disclosure on the mortgage and consumer payment holidays on slide 30. Can I just clarify that you're still accruing that interest income on all the loans in all geographies on these? Thank you.
Well, the EUR 1.6 billion, the question was exactly.
The sensitivity.
Well, this EUR 1.6 billion comes from the combination of two scenarios. One scenario that is kind of V scenario, that is relatively mild, and one scenario that we call internally U scenario that is much, much worse, and overall, it takes longer to recover some of the variables that are behind these expected losses, particularly, as I mentioned before, house prices. If house prices, let's say, fall 20% and it takes more than three years to recover, the impact is much more intense than if we have a stronger GDP fall in the short run and a recovery immediately after than otherwise will be the case. The base case we are using is a combination of V scenario with U scenario that give us, and I mentioned before, kind of IMF.
On a country-by-country basis, in some countries, it's more intense than IMF, in some others, it's less, but overall, as an average, we are basically there. Capital impact of the rate migration. Remember, we have 50% of the portfolio is standard model. The other 40% is mortgages that while rate migration is not significant, and this rate migration affect barely 10%-15% of the portfolio, that is related more with the kind of CIB business and some corporates. The impact should be relatively minor. We're going to have some, but relatively minor in our case, given the fact that the standard model still plays a big role in our capital numbers that we've been telling you. The third one is consumer. The third one was? Holidays, payment holidays. If we accrue, if we don't accrue.
We accrue in the majority of the case, although there are some cases that the government initiatives, the payment holidays, force us not to accrue for one month or two month or three month. It is not significant, but it has some effect in a limited number of cases, because it does not apply to the overall portfolio. It does apply to specific people that has a very, very low income or with vulnerabilities that we cannot accrue interest, but this is really, really minor. What this has, in the other cases, is the financial effect, because we are translating interest into the future principal payments, and thus has some financial advantage for the borrowers.
Thank you. Next question, please.
Thank you. The next question comes from Marta Romero from Bank of America. Please go ahead.
Thank you very much. I've got three questions. The first one on capital. You've mentioned you aim to be at the upper end of your 11%-12% target for fully loaded Core Equity Tier one. Given that 2020 is kind of a lost year, dividends are more or less banned, and you still have legacies from the previous crisis. Will it make sense to clean up as much as possible in 2020, i.e., would you be willing to bring your fully loaded Core Equity Tier one just in line with the MDA threshold, so around 9% after CRD V? The second question is on your ALCO strategy. How attractive do you think current sovereign yields in Spain, Italy, and Portugal are? Are you willing to increase your exposure to the periphery?
Do you believe the ECB backstop will be effective, and hence it makes sense to load up on periphery bonds today? Finally, on Santander Consumer Finance, thank you very much for the color you provided on recent activity levels. How that translates into revenue outlook for the rest of the year. Just to be on cost of risk, you've given us lots of details, and you've tried your best, of course, given the uncertainty, but where do you see the cost of risk in Santander Consumer Europe progressing over the next two years? Thank you.
Yeah.
Okay. Hello, Marta. It's José. I'll take the first question. I'm not sure I understand what you're saying about legacy issues from the previous crisis in terms of capital beyond the IFRS 9 transition period. We can take that offline and discuss that, but I don't think we have any legacies whatsoever coming from the previous crisis in terms of capital. Having said that, you have to remember that we no longer have a capital conservation buffer in the U.K., which gives us 20 basis points. The capital requirement has been lowered by at least 20 basis points. We have fully reached the AT1 and Tier two buckets. Any new issuance of AT1 we do will go against P2R. If we issue in the market this year, we will create more space and a higher MDA.
We would expect to demonstrate that our capital continues to be extremely resilient, even in the worst case scenarios. In the different stress tests that have been conducted by the EBA and the ECB, we've always come as the least affected bank. Those were paper crises. This is a real crisis. What we are saying is that our capital, which I would agree that it takes time for us to build up capital because of our model. Our model also is extremely resilient when withstanding the shocks of crisis. We will demonstrate that our capital will withstand this crisis again extremely well.
Okay. Second question was related with ALCO strategy. You say yes, why not? If we plan to buy Spanish, Italian sovereign bonds in order to hedge the current accounts. Well, this ALCO meets monthly. What I can tell you, we are probably at the lowest level in the last six, seven years in the portfolio of ALCO. You are referring to the parent company. We are at the lowest level in the last probably six, seven, eight years, I don't know, for a long time. Finally, revenue outlook for consumer finance. This is going to happen immediately affecting the fee income. You saw at the end of the first quarter, we mentioned, because fee income in the new origination plays a significant role there. Fee income coming from the loans and fee income coming from insurance business that we do at the origination.
This is going to be the main effect in the very short run. You mentioned the cost of risk. I already elaborate that we do expect much significant higher impact. We are relatively positive in auto lending. We expect higher impact in direct lending. Direct lending, the biggest portfolio is Germany and somehow Spain, but a smaller size, Nordic countries. Naturally, those are the portfolios. The business is one-third auto lending, sorry, two-thirds auto lending, one-third other business, credit cards, and direct lending. This one-third is where I do expect higher cost of risk. The portfolio by countries is, well, Germany is the largest, second is Spain. Italy, we have some lending, although it's guaranteed by the payrolls, the probability of default is relatively low. Nordic countries, where we have credit cards and direct lending, where I do not expect a significant increase.
Going forward, when you mention in the medium term, well, in our scenario, in the medium term, the cost of risk will go up, but not in a dramatic way.
Thanks, Marta. Next question, please.
Thank you. The next question comes from Ignacio Ulargui from Exane BNP Paribas. Please go ahead.
Yes. Hi, good morning. Just have two questions. One on the capital, coming back to how do you see the capital evolving in the coming quarters? Do you think that the 1Q has been a bit of the trough of the year? It's quite uncertain, but if you can give us some color on how you see the capital moving onwards. The second one is on the government reactions in Latin America has been a bit lower than what we have seen in Europe and in the U.S. How do you see this impacting the banks there? Particularly interested on your thoughts in Brazil and Mexico. Thanks.
Can I-
What?
See the capital.
Yeah.
In the first quarter, we had, as you could see, 15 basis points from regulatory and accounting charges and 19 basis points from perimeter changes. We wouldn't expect to see more significant perimeter changes in the coming quarters, and there might be some regulatory charges, but they are not going to be of the nature and the amount that we saw in the first quarter. Going forward, we would expect the capital to evolve in line with our capital generation, which we think could still be in the region of 10 basis points per quarter on average.
Okay. Government reactions, your question was if the reaction of Brazil and Mexico was lower. Well, this is probably the European view. You take into account where these societies in economic terms are, with the informal economy playing a very big role, and the resilience of the population in terms of the resilience to a confinement of these populations is much, much lower than it is in Europe. You will understand a bit better why in some countries, they've been reluctant to take strong measures of confinement. Having said that, they are taking measures, and if this is going to affect the performance because this is lower reaction of the governments, well, it will depend, basically, the kind of actions they will take in protecting or warrantying the lending to the SMEs. Having said that, you take the figures. The figures are pretty small.
When I look at the SME book in Mexico, that in our case is more than 50% already has warranty from the government, from a institution called Nafinsa, more than 50% of the book. We already bought warranty for this book at the origination time, when the book was originated. You see Brazil, the size of this book is relatively small. The governments are reacting. In Brazil, there is plenty of measures that the government, the central bank, already took, and we feel comfortable there. While in relation with how they are handling the health crisis, I am not an expert on this. There's plenty of controversy about how to manage this. Even in the Europe and the U.S., there has been controversy about this. I'm not in a good position to make you a analysis of this.
Thank you. We have time for one last question, please.
Thank you. The next question comes from Fernando Gil de Santivañes from Barclays. Please go ahead.
Hi. Good morning. Thank you for the presentation. Just a follow-up question on the ALCO portfolio. Just to get to the strategy on the ALCO portfolio, I see that the volume has come down quite significantly in the quarter. What should we expect in terms of size and the disposal on the TLTRO programs from the ECB? This is one. The other one is, on RWA inflation, you have disclosed on these pages 30, 31 and 32, the increase in loans in April so far. How does this affect on the RWA mix and inflation going into quarter two? Thank you very much.
The ALCO portfolio size, well, this depends on the decisions related with interest rate. We reduce the size of the portfolio. While it's up to the ALCO to decide if we want to increase or not. I cannot elaborate on this. TLTRO, well, the draw of the TLTRO depends very much on the overall liquidity in the market. At this stage, the overall liquidity is quite good. Our liquidity position, in fact, our LCR since we started the crisis had been going up. Deposits are growing fairly rapidly. Stable deposits coming from customers. The liquidity position is, as I said, is improving almost on a daily basis. Risk-weighted assets inflation, because the lending I show you there, the lending goes to corporates and CIBs. The lending going to SMEs, the majority of this has government warranties, so the weighting is very, very low.
It's maybe in the region of 5%, 10%, 15%, depending on the country, but it's very low, I don't see that much inflation there. The other growth that we had was in CIB, but was already in the first quarter. We do not expect another jump in the second quarter in the CIB companies drawing the committed lines. We expect a more normalized behavior. Overall, with individuals, I don't see in this quarter coming back to normalized levels in Europe. With the majority of the lending going to SMEs being warranted by the government and with CIB being fairly stable, I don't see a particular inflation in risk-weighted assets. Other some come from ratings. Some of your colleagues asked before, it's not that important. Here, the government warranties plays a role. Unfortunately, origination with individuals is fairly low.
Overall, I do not see, and we will stick with our targets, as José said before.
If I may compliment, we have relative to others, very limited market risk.
Yeah. That's right.
Okay. That will also not impact our risk-weighted assets significantly.
I'm afraid we need to leave it here, guys. Thanks very much for the time today. Obviously, myself and the entire team will be at your disposal for any follow-up from now on. Thank you. Keep safe.
Thank you, guys. Take care.
Thanks a lot.